How to make an Option ARM look conservative

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WINEX_IHB

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From <a href="http://mrmortgage.ml-implode.com/2009/01/07/wamus-new-1-million-5-year-1-balloon-loan-878-per-month/">http://mrmortgage.ml-implode.com/2009/01/07/wamus-new-1-million-5-year-1-balloon-loan-878-per-month/</a>



NEW WAMU LOAN MOD - THE 5-YEAR BULLET!



Below is an actual example of a recent WaMu loan mod with a 5-year $1 million bullet payment. This mod takes exotic lending to level I have never witnessed in my 20-years of mortgage banking. This makes a Pay Option ARM looks safe and cozy ? and puh-lease do not tell me this is great because it frees him up to spend money into the economy.



Banks offering and borrowers actively accepting this style loan mod will guaranty that the housing crisis stays will us for a long time to come. This borrower will lose his home in 5-years, I have no doubt. That is of course unless his house price goes up 100% AND great, low rate super jumbo money returns to the market so he can refi out of it - then again, many lenders won?t even refi a loan that has had a previous loan mod done.



Property Value: $800k



Note amount: $1 million plus deferred interest



New Mod amount: $1.053 million



First TWO years rate/payment: 1% and $878



Third year rate/payment: 3% and $2633



Forth year rate/payment: 5% and $4389



FIFTH YEAR PAYMENT - THE BULLET: ALL OUTSTANDING BALANCE DUE AND PAYABLE



All rights to future predatory lending claims waived.
 
Amazing. Is that for real?

Help me out here to see if I have got this straight.

I can buy the 800k home with no down payment.

I can make payments of $878 + 1% per month for 24 months. Is that 1% of $1mil or $833 per month for a total of $833 + $878 = $1711 per month?

And at the end of 24 months hand the keys to the bank and say, "Thanks for renting me a $800k home for $1711 per month"?
 
[quote author="awgee" date=1231563675]Amazing. Is that for real?

Help me out here to see if I have got this straight.

I can buy the 800k home with no down payment.

I can make payments of $878 + 1% per month for 24 months. Is that 1% of $1mil or $833 per month for a total of $833 + $878 = $1711 per month?

And at the end of 24 months hand the keys to the bank and say, "Thanks for renting me a $800k home for $1711 per month"?</blockquote>


I consider Mr. Mortgage to be a credible source. If you click the link provided, you can see the actual loan modification document with personal information blacked out.



But there are a couple of misunderstandings in your assumption.



The original note is for $1 million, so it isn't an 800k home. (800k is the current value, but the original loan was $1.07 million. It's 1.053 million with accrued interest)



And the wording of the text I ripped from the article is a little unclear.



You wouldn't have to pay $1711 a month for 2 years, you'd only have to pay $878 a month.



Here is the actual loan document.



<img src="http://mrmortgage.ml-implode.com/wp-content/uploads/2009/01/wm-mod.png" alt="" />

<img src="http://mrmortgage.ml-implode.com/wp-content/uploads/2009/01/wm-mod-1.png" alt="" />

<img src="http://mrmortgage.ml-implode.com/wp-content/uploads/2009/01/wm-mod-2.png" alt="" />
 
Thank you for the help.

So, depending on whether or not the home debtor is willing to walk, they can rent their home for two years at $878 per month. And then walk.
 
[quote author="awgee" date=1231567992]Thank you for the help.

So, depending on whether or not the home debtor is willing to walk, they can rent their home for two years at $878 per month. And then walk.</blockquote>
I think this would be considered a recourse loan, which means walking away carries consequences.
 
[quote author="Oscar" date=1231570887][quote author="awgee" date=1231567992]Thank you for the help.

So, depending on whether or not the home debtor is willing to walk, they can rent their home for two years at $878 per month. And then walk.</blockquote>
I think this would be considered a recourse loan, which means walking away carries consequences.</blockquote>


Because it is a refi? IIRC, banks have not been going after recourse walkaways. I guess that could change, but they have to have something to go after, and I think most rightly assume that if the borrower cannot make their payments, they do not have any recoverable assets. It is very expensive to squeeze blood from a rock.
 
After adjusting for taxes, probably cheaper than renting through all four years.



So... can you make your assets disappear in the first four years and then just walk away.



Looks like a good gamble for to me. You can default now, or the bank will make it cheaper than rent to stay and pray that the prices recover by 2013...
 
[quote author="No_Such_Reality" date=1231588505]After adjusting for taxes, probably cheaper than renting through all four years.



So... can you make your assets disappear in the first four years and then just walk away.



Looks like a good gamble for to me. You can default now, or the bank will make it cheaper than rent to stay and pray that the prices recover by 2013...</blockquote>


For the buyer, it's a no lose situation. The modification is occurring because they couldn't meet their obligations. So the choice is whether you default and lose your house now, or if you want 4 years of below market rent before you default and lose your house. Of course, if we get into a hyper inflationary environment, then there is always the possibility that they won't be underwater when the balloon payment comes due and they can either refinance, or sell.



From the perspective of the bank, the only thing I can imagine is that they are desperate to show more non-performing loans on their books. This makes no sense from a financially. So there has to be a higher motivation. I realize this is WaMu, and they were one of the loosest lenders, but if this is indicative of the types of modifications happening elsewhere right now, then things are far, far worse than even the most bearish of those among us realizes.
 
[quote author="WINEX" date=1231591908][quote author="No_Such_Reality" date=1231588505]After adjusting for taxes, probably cheaper than renting through all four years.



So... can you make your assets disappear in the first four years and then just walk away.



Looks like a good gamble for to me. You can default now, or the bank will make it cheaper than rent to stay and pray that the prices recover by 2013...</blockquote>


For the buyer, it's a no lose situation. The modification is occurring because they couldn't meet their obligations. So the choice is whether you default and lose your house now, or if you want 4 years of below market rent before you default and lose your house. Of course, if we get into a hyper inflationary environment, then there is always the possibility that they won't be underwater when the balloon payment comes due and they can either refinance, or sell.



From the perspective of the bank, the only thing I can imagine is that they are desperate to show more non-performing loans on their books. This makes no sense from a financially. So there has to be a higher motivation. I realize this is WaMu, and they were one of the loosest lenders, but if this is indicative of the types of modifications happening elsewhere right now, then things are far, far worse than even the most bearish of those among us realizes.</blockquote>
Sure it makes financial sense to Wamu/Chase/JPMorgan. Here's how it'll look like their balance sheet and income statement...they keep the asset at par because it is not impaired because the loan is not in default (so no writedowns or reserve for losses are required) and on the income statement side they get to record a interest income using the 8 and change percent on the note even though they are only collecting 1%. They book the difference as a either a receivable or increase the loan balance on the balance sheet. They push the crap hitting the fan for a few years down the line when the borrower kicks the keys back to them. Financial engineering at its finest!
 
[quote author="usctrojanman29" date=1231593070][quote author="WINEX" date=1231591908][quote author="No_Such_Reality" date=1231588505]After adjusting for taxes, probably cheaper than renting through all four years.



So... can you make your assets disappear in the first four years and then just walk away.



Looks like a good gamble for to me. You can default now, or the bank will make it cheaper than rent to stay and pray that the prices recover by 2013...</blockquote>


For the buyer, it's a no lose situation. The modification is occurring because they couldn't meet their obligations. So the choice is whether you default and lose your house now, or if you want 4 years of below market rent before you default and lose your house. Of course, if we get into a hyper inflationary environment, then there is always the possibility that they won't be underwater when the balloon payment comes due and they can either refinance, or sell.



From the perspective of the bank, the only thing I can imagine is that they are desperate to show more non-performing loans on their books. This makes no sense from a financially. So there has to be a higher motivation. I realize this is WaMu, and they were one of the loosest lenders, but if this is indicative of the types of modifications happening elsewhere right now, then things are far, far worse than even the most bearish of those among us realizes.</blockquote>
Sure it makes financial sense to Wamu/Chase/JPMorgan. Here's how it'll look like their balance sheet and income statement...they keep the asset at par because it is not impaired because the loan is not in default (so no writedowns or reserve for losses are required) and on the income statement side they get to record a interest income using the 8 and change percent on the note even though they are only collecting 1%. They book the difference as a either a receivable or increase the loan balance on the balance sheet. They push the crap hitting the fan for a few years down the line when the borrower kicks the keys back to them. Financial engineering at its finest!</blockquote>


Exactly. It looks good on the books, but is a poor business decision. I'm very far removed from that industry (I work in defense) Is that the segment of the market you worked in your last job? Do you have any idea how prevalent those kind of loan modifications are?
 
[quote author="WINEX" date=1231593790][quote author="usctrojanman29" date=1231593070][quote author="WINEX" date=1231591908][quote author="No_Such_Reality" date=1231588505]After adjusting for taxes, probably cheaper than renting through all four years.



So... can you make your assets disappear in the first four years and then just walk away.



Looks like a good gamble for to me. You can default now, or the bank will make it cheaper than rent to stay and pray that the prices recover by 2013...</blockquote>


For the buyer, it's a no lose situation. The modification is occurring because they couldn't meet their obligations. So the choice is whether you default and lose your house now, or if you want 4 years of below market rent before you default and lose your house. Of course, if we get into a hyper inflationary environment, then there is always the possibility that they won't be underwater when the balloon payment comes due and they can either refinance, or sell.



From the perspective of the bank, the only thing I can imagine is that they are desperate to show more non-performing loans on their books. This makes no sense from a financially. So there has to be a higher motivation. I realize this is WaMu, and they were one of the loosest lenders, but if this is indicative of the types of modifications happening elsewhere right now, then things are far, far worse than even the most bearish of those among us realizes.</blockquote>
Sure it makes financial sense to Wamu/Chase/JPMorgan. Here's how it'll look like their balance sheet and income statement...they keep the asset at par because it is not impaired because the loan is not in default (so no writedowns or reserve for losses are required) and on the income statement side they get to record a interest income using the 8 and change percent on the note even though they are only collecting 1%. They book the difference as a either a receivable or increase the loan balance on the balance sheet. They push the crap hitting the fan for a few years down the line when the borrower kicks the keys back to them. Financial engineering at its finest!</blockquote>


Exactly. It looks good on the books, but is a poor business decision. I'm very far removed from that industry (I work in defense) Is that the segment of the market you worked in your last job? Do you have any idea how prevalent those kind of loan modifications are?</blockquote>
Yup, but remember the executives are compensated on short term parameters. I worked on the commercial real estate lending side so I can't speak on what went on in the residential lending side of the bank. However, the key problem with the lending industry is that there is a misalignment of incentives to the employees/managers/executives versus shareholders/owners and a longer term stable company that is profitable. It was all about more and more and more profits over the past 5+ years so that's why certain lenders let underwriting standards loosen up because they knew their competitors were doing so.
 
[quote author="usctrojanman29" date=1231595049][quote author="WINEX" date=1231593790][quote author="usctrojanman29" date=1231593070][quote author="WINEX" date=1231591908][quote author="No_Such_Reality" date=1231588505]After adjusting for taxes, probably cheaper than renting through all four years.



So... can you make your assets disappear in the first four years and then just walk away.



Looks like a good gamble for to me. You can default now, or the bank will make it cheaper than rent to stay and pray that the prices recover by 2013...</blockquote>


For the buyer, it's a no lose situation. The modification is occurring because they couldn't meet their obligations. So the choice is whether you default and lose your house now, or if you want 4 years of below market rent before you default and lose your house. Of course, if we get into a hyper inflationary environment, then there is always the possibility that they won't be underwater when the balloon payment comes due and they can either refinance, or sell.



From the perspective of the bank, the only thing I can imagine is that they are desperate to show more non-performing loans on their books. This makes no sense from a financially. So there has to be a higher motivation. I realize this is WaMu, and they were one of the loosest lenders, but if this is indicative of the types of modifications happening elsewhere right now, then things are far, far worse than even the most bearish of those among us realizes.</blockquote>
Sure it makes financial sense to Wamu/Chase/JPMorgan. Here's how it'll look like their balance sheet and income statement...they keep the asset at par because it is not impaired because the loan is not in default (so no writedowns or reserve for losses are required) and on the income statement side they get to record a interest income using the 8 and change percent on the note even though they are only collecting 1%. They book the difference as a either a receivable or increase the loan balance on the balance sheet. They push the crap hitting the fan for a few years down the line when the borrower kicks the keys back to them. Financial engineering at its finest!</blockquote>


Exactly. It looks good on the books, but is a poor business decision. I'm very far removed from that industry (I work in defense) Is that the segment of the market you worked in your last job? Do you have any idea how prevalent those kind of loan modifications are?</blockquote>
Yup, but remember the executives are compensated on short term parameters. I worked on the commercial real estate lending side so I can't speak on what went on in the residential lending side of the bank. However, the key problem with the lending industry is that there is a misalignment of incentives to the employees/managers/executives versus shareholders/owners and a longer term stable company that is profitable. It was all about more and more and more profits over the past 5+ years so that's why certain lenders let underwriting standards loosen up because they knew their competitors were doing so.</blockquote>


It's a rhetorical question, but why are we even bailing these guys out? If the lessons of the last 5 years still haven't been absorbed, then we need to just let them collapse and let the magic of capitalism replace the stupid players with more intelligent operators.
 
There's no accrued interest. The current rate is eight and change but the agreement modifies it to 1% *charged*. Not a 1% payment, but 1% charged. There doesn't appear to be any provision ever charge higher rates.
 
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