August 29, 2006

One day we'll look back on this and say "what were they thinking?" The negative-ammortization timebomb (and WaMu bubble trouble)

I smell a systemic meltdown... Someone wake up Neil Bush and Charlie Keating...

From Barron's ("The No-Money-Down-Disaster", by Lon Witter, Aug. 19, 2006):

"The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option ARMS were in negative amortization ... At the end of 2004, the percentage jumped to 21%.

At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

Every month, these borrower's debt increases; most of them probably don't know it. There is no strict disclosure requirement for negative amortization.

This financial system cannot work; houses are not credit cards. But WaMu's situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million."


panicearly said...

can some one explain to me how neg. amortization is considered as earnings.

if it was an ordinary loan, then wouldnt it be considered as just late or missed payment.
an account recievable that has not been received is now revenue?

obviuosly im not understanding the logic here.
someone help me out here.

Anonymous said...

Whatever loans that they can sell to Wallstreet, they will do. Especially the negative ammortization loan, with a big margin rate like 3% or more. On paper, the stupid mortgage buyers are "compensated" for risks.

Anonymous said...

Be prepared for an avalanche of earnings restatements from lenders.

Anonymous said...

It's income because it's classed as "deferred" income, even though they will likely never get it.

WAMU has been laying off lately too in Southern California. What timing, consumer confidence figures were reported lower than expected today as well. If WAMU actually has 50%+ of their portfolio in neg-am loans, I don't see how anyone can lose shorting them. They are toast FOR SURE!!!

Anonymous said...

WAMU is ready to file Bankruptcy!

Yes, and the world is going to end soon!

All of the fools here will party in HELL with Mr. Karr!

Anonymous said...

Fifty years from now:

Grandma, where were you when the housing bubble went bust?

Anonymous said...

It gets worse. Visit

Lending standards will be tightened in the next 60 days!

That will have the effect on loan demand of a 300 basis point increase in rates from a 25-year veteran of Banking who knows!

To the critics who don't think WAMU can go under, you obviously weren't around at an adult age in the early nineties when some very large banks were taken over under less adverse conditions than those that face the banking industry today.

Anonymous said...

Great post Keith. I didn't catch that. That is really scary.

I guess they're going to switch to the "WaMu" nickname, like when Kentucky Fried Chicken changed to just "KFC". Holly shit that's retarded.

Anonymous said...

wamu has got no wamoola

Anonymous said...

So what's the consensus here? Should I quickly pull my checking account out of WAMU and try another bank or will most banks go under in the aftermath of the housing bubble bust?

Anonymous said...

Good point. I was wondering the same thing today.

Is any of our money safe, even in Mutual Funds?????

I keep 20k in my safe, just in case. Maybe I should up it to 100k.

Anonymous said...

Yes, any thoughts out there about this?

Anonymous said...

"I keep 20k in my safe, just in case. Maybe I should up it to 100k."

Man, are you Tony Soprano?

john_law_the_II said...

according to pretchter's latest edition of conquer the crash, two of the safest banks Cali are

Farmers and Merchants Bank
savings bank of mendocino city(or county?)

check weiss ratings, things may have changed or I may have the name wrong.

I guess weiss has ratings for banks in many states. I'm sure they're online if you search.

Anonymous said...

the Fed has interest in keeping the long term 15 and 30 year fixed rates low. it is interested in the bond market right now more than in the stock market.

the Fed will need to raise rates in order to achieve this (along with managing inflation). doing so will sustain demand in the dollar and treasury bills, which in turn will keep the long term rates low by providing a reason for foreign central banks to hold or acquire dollar reserves.

one of the Fed's goal is to protect the ARM borrowers facing readjustment of over $1 trillion in the coming years. keeping the long term rates low will enable these already financially challenged people to refinance with a rate that's realistic.

the Fed hopes to contain the snowball effect of the implosion already taking place.

so, when the Fed raises rates, it is in fact protecting home owners, and ultimately, the housing industry by preventing foreclosure units from accelerating price depreciation as more ARM debtors will have the option to refinance.

Will the Fed raise rates at its next session? Most likely. The NAR is interested in short term performance, so it does not want the Fed to continue raising rates, even though in the long term doing so will help the industry.

Will the Fed be successful in stopping the imminent implosion snowball? Unlikely. Just like the positive multiplier, the negative multiplier will create too many cracks in the system for the Fed the plug up. Eventually, the system will run it's due course.

Just my thoughts. Bank on higher short term rates, devaluation of the dollar, continuing inflation (especially if you throw Iran's potential effect on energy prices into the picture), and a resulting recession.

How to benefit? Acquire gold, energy and utility assets (excellent buying opportunity at the moment) and use the equity indexes as a hedge. You'll be sitting pretty well during the coming stagflationary period.

I'll be visiting this post next year and evaluate my analysis.


Anonymous said...

I note there are so many trolls on this blog dissing any accurate critical comments on the imprudent loan process and real estate speculation. Perhaps the real estate and mortgage parasites hate the writing on the walls! These social predators are validating the truth on these postings by flaming them, as if that sways opinions!

Anonymous said...

One frightening thought.

In this entire mortgage clusterfcuk, guess who is likely to be left?

Yes, it's Fannie and Freddie. Because they were forced to buy only "conforming" mortages.

Despite the noise against F&F and their own sleaze and greed, it will be good old Big Government Regulation which will save their, and our asses.

Anonymous said...

I'd get your money out of WAMU just because they'll screw you in the end. They have no risk tolerance with those "free" checking accounts. God forbid you deposit a returned check -- they'll freeze your whole account for days. (I know from personal experience.)

Most banks are safe. Wells Fargo is rated AAA for its debt and doesn't do Neg Am. Bank of America is safe, too. HSBC has most of its assets overseas. I'd just stay out of the heavy thrifts like WAMU.

Anonymous said...

Any opinions on credit unions? I know mine's covered by NCUA insurance, but it'd be nice not to have to deal with a failed institution holding my money.


Anonymous said...

wamu what a joke, who is leading this institution .stupid sounding street slang for a corporate name...wamu...unbelievable.

Anonymous said...

Some long established banks in San Diego are already shrinking in Assets.

You can compare quarterly financial statements for any FDIC insured bank at the FDIC link below and monitor how well or bad your institution is doing.

Anonymous said...

Washington mutual has a 6% 13 month CD. Any insight as to why they are offering so high a rate when most banks are around 5-5.25%?

Anonymous said...

anyone catch the story in today's Wall Street Journal about Washington Mutual's so-called mistake in analyzing the credit worthiness of the people they gave mortgages to?

Anonymous said...

I have alot of cash in liquid cd's at Washington mutual. Should I consider moving them to another bank? They are for the most part FDIC isured.

rookie said...

A representative from Washington Mutual recently called me to suggest I move my liquid cd's into a much higher rate 13 month cd. In the past we have requested them to inform us if the rates go up and they never did. Why now?
Why would they want to pay me more for the same cash deposit? Just to help tie up the money?

Anonymous said...

{{Anonymous said...
I have a lot of cash in liquid cd's at Washington mutual. Should I consider moving them to another bank? They are for the most part FDIC inured.}}

The FDIC might have enough cash on hand to cover 1% of the money deposited in banks. Savings and loans and credit unions probably have a similar amount of insurance. If enough banks fail, the losses won't be covered.

Instead of moving your money to another bank, consider investing in US government bonds. As far as I know, with the exception of American Indian treaties, the US government has never reneged on any of its obligations. Another option would be to convert all of your assets into cash.

If the US government remains solvent, US bonds and/or cash should keep you solvent during a banking collapse.

Anonymous said...

no gloom and doom. lots of jobs and people living better than ever.

Anonymous said...

Anonymous said...
Washington mutual has a 6% 13 month CD. Any insight as to why they are offering so high a rate when most banks are around 5-5.25%?

Easy one
1.They need the cash to buy back bad loans.
2.They need to sucker people into the longest locked in rate so when interest rates go to say, 9% in three months,they have you locked in at 6% for 13.

I have all my cds in three month.Pays less interest than a 6 or 13,but they will go up a lot quicker.Banker lady tried to talk me out of it.Hell, its my money.

Anonymous said...

WaMu has a clause where you can up the rate once your choice. also the term is 13 or 18 month.

Anonymous said...

OK, just a thought ...

If you had an 80% LTV option ARM and a 20% piggyback loan with a higher interest rate, wouldn't it make some sort of sense to make only the minimum (neg-am) payment on the first mortgage and concentrate on paying off the second?

Could that account for some of the epidemic of negative amortization in WaMu's portfolio?

I am a real estate bear. I am worried about cheap money and toxic loans. I just find it harder and harder to go about my daily business thinking that my fellow Americans really are that reckless / stupid. Too depressing.

Anonymous said...

the option ARMs are really great, they allow the buyer to budget their payment according to their needs. It may be true that sometimes their loan balance may actually grow if they choose the minimum payment option, however at any time they can switch to full amortization if they wish. Also, home appreciation of evn 7-8% a year on a high value home can offset any payment deficits that may accumulate. My advice go for the option ARM it is the best product out there right now if you want to fulfill your dreams of getting into a home.

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