Monday, July 13, 2009

Option ARMs - Deja Vu All Over Again?

Thanks Calculated Risk for highlighting this interesting discussion of the following Credit Suisse's chart:

This chart was apparently also used by the IMF:

The IMF chart looks like a great summary of the financial crisis with subprime resets peaking in the second half of 2008 when Lehman et al collapsed. After an "easy" 2009 the resets rise again with a new peak expected at the start of 2011, this time led by options ARMs.
Hence looking at the charts it appears that while subprime loans are slowly leaving the chart a big chunk of option ARM are expected to recast within the next three years. According to the charts these recasts should be over by September 2012. However this apparently does not fit with statements from WFC which does not foresee any major recasts before 2012.

Who's right? Will these recasts have the same impact on the solvency of the financial sectors? And if so when? Over the coming two years or the next five?

CR's conclusion: "this suggests that the problem will persist for some time (much longer than shown by the Credit Suisse chart)."

Healdsburg's conclusion: "The bottom line something doens't add up when Wells Fargo predicts virtually no Option-ARM recasts before 2012, while Credit Suisse predicts no recasts after 2012. While I would guess Wells Fargo is underestimating recasts assuming a flat rate environment, the bulk of recasts do look like they will be pushed out to 2014/2015. Surely, some of these recasts need to be reflected in the Credit Suisse chart. I’ll leave it to others what this means for the housing market, but what is clear is this needs more attention."

My 2 cents: I would go with the banks' statements since they made the loans. Optimistically this could leave them with more time to deal with the problems down the road.

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