Sunday, April 02, 2006
This L.A. Times story about a local lender contains some pretty scary statistics. It seems that First Federal Bank of California has been so enamored with Fannie Mae and their slogan "Our Business is the American Dream", that they've been emulating another Fannie Mae practice in addition to that of "dream enabler".
What other practice?
Making risky loans and taking advantage of accounting rules to bolster the bottom line.
You see First Federal Bank makes a lot of option ARM loans. These are the types of mortgages where not only are borrowers not required to pay any principle each month, but they don't even have to pay all the interest due.
"I think this spring you will see housing prices crack," said Richard X. Bove, a banking analyst with investment bank Punk, Ziegel & Co. That, he added, "is going to be terrible" for people with mortgages that let them pay less — sometimes a lot less — than the full monthly payment during the early years of the loans.It is the stats that were of interest in this story, but when Dick X. Bove of Punk, Ziegel, & Co. gets quoted, it must be excerpted. You'd think that maybe the reporter just made up this name and this quote, but, names like that?
After those payments are reset to their full amounts, "I think you're going to see a wave of defaults," Bove said.
They must be real, and they can't be ignored.
Here's the excerpt with statistics that caught our eye:
Of all the home loans that Washington Mutual held at the end of 2005, 52% were option ARMs, the company said in its annual report to the Securities and Exchange Commission. Golden West and Downey said more than 90% of their loans were option ARMs. At First Federal, 100% of residential mortgages were option ARMs.So, with only 52% option ARM, Washington Mutual is the choirboy here. The neat thing about these loans for the lenders is that the deferred interest not paid by the borrower is booked as revenue, thus bolstering the bottom line of the lender and making the financial statements smell sweet as a rose.
The proverbial win-win situation for both borrower and lender - a deal that First Federal Bank seems to have embraced completely. One hundred percent.
What will they think of next?
Surely, this will be followed to its logical conclusion of the borrower making no payments at all, while the lender books the entire non-payment as revenue. The popularity of these new "no payment" loans will result in an extension to both the real estate boom and the mortgage lending boom that will sustain our economy for years.
Robert Blumen, in his editorial The United States of Real Estate first put forth this theory last summer in a very entertaining way - it is worth re-reading.