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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: loantech who wrote (27661)	3/3/2005 8:29:08 AM
From: russwinter	Read Replies (1) \| Respond to of 110194

Tom, I correspond on occasion with "Prof. Piggington" who closely tracks the San Diego housing Bubble, piggington.com and right now we are trying to develop some data on the percentage of ARMS being reset in these highly leveraged locales. I wrote him back this AM in response to some questions he had about rates, and various ARM structures. Could you please confirm, add to, or correct anything you spot in this tome? I'm particularly interested in the length of these teaser rates? On subprime weren't they typically one or two years? Those 4.25% quotes you see are teaser rates which is precisely what I'm talking about. You can see them offered here: mlcc.ml.com There are usually two kinds, one is adjusted every six months, tied to the six month Libor (now 3.20), and the margin is typically 2.12 or 2.25. Those folks now get readjusted to 5.33-5.45 on the first reset. Then there are one months, adjusted every month. The one month Libor currently is 2.72, and the margin is 1.88-2.00. So those are still at 4.60-4.72 today, although that's the one that's been rising the most rapidly. That one is common with IOs. There is also a one year Libor and that's now 3.57%. Here's where you can track Libor, libor-loans.com the other most common index is constant treasury maturiy (CMT). It has a different margin (2.75), but works out about the same for the borrower. Net, net when you look at the various toxic mortgages out there: IO (interest only), Pay Options, and ARMs three years and under now, almost all the rates are being reset between 5.3-6.0%, and the fresh new loans are 5.0-5.88% . And it's even higher for the huge subprime cohort (a trillion bucks financed in 03-04) as they have higher margins markups. nationalmortgagenews.com I also understand many of the subprimers were set up with two year teaser rates. The heart of the enormous subprime mortgage boom occured in late 03-early 04, and clearly helped fuel a big price spike. Then the silly season crowd (foreigners,etc) piled in on top with their IOs, and highly leveraged ARMS. Many of these were 3,5 years ARMS which in turn will stress the lenders and security holders, and will no doubt serve to tighten lending standards. How many people checked "owner occupied" on their apps? Message 21094105 That's loan fraud isn't it, especially if you go and rent to someone else, or leave the place empty and live somewhere else? Perhaps overlooked now, but? So if you have a subprimer, using a one or two year teaser ARM with a big margin, stretching to buy a 500K condo (in early 2004, not 2002 or 2003 where he initially has a cushion) in places like San Diego, I think you have someone soon to be in deep doo-doo. And if he he lied on his app, and isn't even living there, he might even have problems with the legal if not the criminal system. 5.5% on avg may not seem like a high rate historically, but as you well know much of this speculation has been fueled at the margin, by people buying either "investment" properties (that often sit empty, or bring in poor cap rates and negative cash flow) or others getting overhoused relative to their true financial situation. Obviously every month in places like San Diego another chunk of these folks is now getting hit (reset) with another expense. The resets since Nov. (for January) have been 2% higher yoy. Therefore we now have three months of this under our belts. My suspicion is that in Bubble locales this cohort over the course of 2005 may be quite significant (10, 15% of all mortgages), and further what would another 50 bps do (the market expects 100 bps by fall). trendmacro.com If you locate something that confirms my suspicion, as it pertains to Bubble locales like SD, please let me know. RW