Posted on June 13th, 2008 in Daily Mortgage/Housing News - The Real Story
Downey Savings can be used as a Pay Option ARM proxy and the news below just released is very bad for the firm. Data available through our subscription service, which tracks on a per bank level, all Notice-of-Default, REO (loans coming back), wiped-out second mortgages and estimated losses, also confirms that Pay Option lenders are among those presently experiencing the largest acceleration of REO.
As a matter of fact, I will throw you all a DSL freebee. As of 5/15/2008 the total loans (REO) that came back to banks was already equal to all of 2007. Many individual banks followed the trend and were also equal to all of 2007 by 5/15. However, banks that specialized in or hold the most Pay Option ARMs are already at 200% of their 2007 totals.
Our report shows DSL has taken back $337 million in loans through 5/15/08 and only took back $186 million in all of 2007. More facts… DSL may recover 40%-50% of the original note amount by selling the REO if they are lucky; DSL has booked shadow income (negative-amortization/CINA/deferred income) that now must be taken as a loss somewhere on their balance sheet; an estimated 80% of all Downey’s REO are from Pay Option ARMs; finally, loans taken back through 5/15 were from Notice of Defaults 4-5 months earlier… yet the Notice of Defaults have surged since. The Pay Option ARM Implosion is upon us indeed.
Downey Savings news… http://ml-implode.com/ailing/lender_DowneySavingsandLoan_2008-05-31.html
Update – 2008-06-13: In their press releaseof “Thirteen Month Selected Financial Data” today, Downey Financial Corp. reports total non-performing assets (NPA’s) have hit a new high of 14.3%. The percentage has been steadily increasing every month, most sharply since November of 2007 when it began jumping up by as much 2% each month.
The Orange County Business Journalsaid “Concerns about mortgages at Downey have driven down the company’s shares some 90% in the past year.” Reutersnoted NPA’s amounted to “one seventh” of Downey’s total assets, a “nine-fold rise in bad loans for May from a year ago.” Assets were reported at $12.78 billion, also down from $15 billion in May of 2007.
About 6 weeks ago, The Wall Street Journalabsolutely nailed the Pay Option ARM story. It is about time the mainstream picks up on this. In my opinion, this is “the big one.” The “Subprime Implosion” may have been only the “pre-quake” with The Pay Option/ALT-A Implosion being the “big quake” and “The Prime Implosion” being a long series of scattered aftershocks.
Don’t you love what the banks /ratings agencies consider “Prime?” I have said for a long time now that the Pay Option Implosion will make the Subprime Implosion look like a bad earnings report because these loans cut across all socio-economic boundaries. Now the data are proving my point. This bailout will be the mother of bailouts (if it comes… if its possible). At least with a subprime loan, the balance does not rise each month (before the loan defaults), thank goodness. Not so for Pay Options.
The Pay Option ARM never should have existed. Unless values continue to rise, most of these loans will fail. This loan was never intended for holding for any significant length of time or in a massively declining value environment.
Pay Option and ALT-A loans are defaulting at an accelerating pace in recent months. A couple of months ago, I made an ALT-A video with real data from the Fed comparing the total subprime vs. ALT-A universe’s. Click here or the link below. The ALT-A universe is much larger than the subprime universe in the higher priced states like CA and even nationally, it is somewhat larger. But due to the sheer exotic nature of many ALT-A loans, such as the Pay Option ARM, the crisis will likely be that much more devastating.
In related news, Wachovia Bank shares hit a 16-year low. WB is one of the largest Pay Option ARM holders in the world. -Best, Mr Mortgage <>
Journal Story recap
-recent reports from mortgage securitizations suggest that subprime delinquencies have started going bad at a lower rate while delinquencies on option ARMs are speeding up.
-On Tuesday, Countrywide Financial Corp. said that 9.4% of the option ARMs in its bank portfolio were at least 90 days past due
-Unlike subprime loans, which went to people with weak credit, option ARMs were generally given to borrowers considered to be lower-risk.
–Washington MutualInc. reported earlier this month that option ARMs account for 50% of prime loans in its bank portfolio, but 70% of prime nonperforming loans.
–Wachovia Corp., non-performing assets in the company’s option ARM portfolio, which was acquired with the company’s purchase of Golden West Financial Corp., climbed to $4.6 billion in the first quarter from $924 million a year earlier.
Reference: Wall Street Journal