These "PayOption ARM" loans quite frankly shouldn't have been legal, and if they were, they shouldn't have been made because nobody should have been stupid enough to buy the debt.
They allowed the sucker (or mortgage fraudster) to pay no principal, and less interest than what was due. And every month the idiot didn't pay up, the balance grew and grew and grew some more. What a deal! Until house prices crashed, and now nearly every one of these loans will go bad as the debtors simply walk away.
And just to make this "innovative financial product" one of the worst financial products ever invented, GAAP allowed the holding bank to recognize the shortfall in what was owed every month as NONCASH INTEREST INCOME.
You got it folks, when the homedebtor didn't pay the amount due, the bank could recognize the shortfall not as bad debt, but as FU*KING INCOME, making the banks who held the cancer look good (for awhile) and their management earned massive bonuses.
Yes, the world went mad. And now we all pay the price.
HP'er Extra Credit - go do some digging around and see what banks are holding this cancer. I saw reports that WaMu had $67 billion of these turds and Countrywide had $35 billion - and of course were recognizing income for the payment shortfalls. I'd like to know where banks stand today. And invest accordingly!
In finance, negative amortization, also known as NegAm, occurs whenever the loan payment for any periodic is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount (difference between interest and repayment) is then added to the total amount owed to the lender.
Accounting For Negative Amortization
Accounting for negative amortization is a perennial favorite amongst those who follow banks and thrifts with large Option ARM portfolios. It outrages a lot of folks that the neg am balances, which represent interest that has been earned but not paid, is considered noncash interest income.
February 23, 2008
You want the REALLY big debt bomb that is about to explode, pouring fuel on the banking panic fire? It's the "negative amortization" loan timebomb
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27 comments:
WaMu! I didn't even finish reading what you wrote when I realized they were the ones. It's worse than you think. I've been contacted before... it's just about to start. That's what the Virgin Money Thing is about. That virgin guy is pretty smart.
Good find, Keefer
This has given me an idea. In the future, I will now consider any of my financial losses as income, to make my financial bottom line look better. But, come tax-filing time, I will then consider this new "income" as a loss. I mean if it works for the banks....
Imagine going to the bank to borrow money with this mindset.
ME: I need to borrow some money on some of my vacant, rental houses.
BANKER: Well, Mr. Tater, your financial records show that you had a financial loss of about $35,000 dollars on these houses last year.
ME: No, that wasn't a financial loss; that was "noncash" rental income.
What do you think the banker would say about loaning me money with this mindset? Double-standard, anyone?
BTW, they might want to change the name from "non-cash" interest income to "non-existent" interest income.
And then BoA realized... HOLY CRAP
Read about their government bailout proposal and the amount of default they see here:
http://www.nytimes.com/2008/02/23/business/23housing.html?_r=2&ref=business&pagewanted=all&oref=slogin
The media loves to use the tagline "Subprime".
They attribute the entire housing downturn to "Subprime". It blows me away to hear such a stupid statement from a large media outlet especially when we are dealing with the greatest deflation of the greatest asset in everyones portfolio. As if an insane manic run up in prices isn't what has caused the resulting fall back to earth of home prices, no, it is all these subprime borrowers who were dooped and brought down the housing market.
Neg Am. is going to kill the banks, and that is why BofA is pushing hard for the GOVERNMENT to actually Buy this sludge. Makes me sick.
Another big one - Wachovia. They've done a LOT of these "Option ARMs" here in the Carolinas.
Household Finance is notorious for this. Why hasn't their name come up as a major player in all this? I've never read anything about them on this blog, yet they are the worst I think!
BINGO!
This GAAP allowed accounting method will wreak more havoc than anything anyone has contemplated thus far. No way a recession is coming. It will be a mild DEPRESSION overall, but very severe for many.
NegAM will be added to the vocabulary like Subprime, SIV, CDO, etc. . . .Keith - you are ahead of the pack again!
There will not be enough bailout money to absorb all these loans.
RE: Unpaid NegAm loan interest added to loan principle and counted as income.
This creative accounting technique was a great money maker, as long as the housing bubble was inflating. Commissions and bonuses could be paid on these phony profits, while millions of people realized the American dream of "owning" a home.
Foreclosures were practically unheard of during the bubble years. Most of the time, a foreclosed home would be sold for more than the loan amount, giving the home debtor enough money for first, last and cleaning deposit on a rental.
But alas, home values are getting smaller and home loans are getting bigger. Many NegAm loans are not getting paid at all as home debtors, who never had the ability to repay their loans, default on the teaser rate. Other home debtors who can afford to continue making payments are walking away from their upside down houses.
Insolvent banks are borrowing money hand over fist, using these worthless mortgages as collateral.
AND NOW THE SH!T HAS HIT THE FAN!
V.L.
What I don't understand is how can all these "experts" think the worst is over?
Keith, don't you understand that if things get really bad economically in the U.S. then the federal government will step in and help everyone who is affected out? Why can't you see the big picture? You are so focused on gloom and doom all the time. Sooner or later the government and people from around the world will bail us out if things get really bad.
Keith,
Take a look at today's article in the NY Times about what BushCo might do:
http://tinyurl.com/2hhuod
Bank of America, and all the other mortgage companies that wanted government OUT of their business, are now arguing for a huge government bailout. Their argument is, the losses are so big, it will severely wreck the economy.
Notice none of these hypocritical son of bitches is volunteering to give back any of the millions they made in fees on these crap loans.
Of course the Bush administration is thinking this "bailout" is a good idea. They just will not call it that.
The leadership in our country are total losers. At this point, I think either of Barack's kids could win the presidency-in a landslide.
Would you explain what you mean re the Virgin Money thing. I wiki'd it and saw it was started by Branson, but what do you mean?
Grandma PKK
So non cash means cash not collected, but will someday? How about if I walked into a store and said, hey, I'll pay you someday...
There's a phrase which sums up the
mortgage ponzi scheme perfectly ...
"Fake it till you make it".
Everyone needs to accept responsiblity here, including house debters - who were not clueless about what they were buying into.
Unfortunately, I agree with ANON who feels the government will step in and do a massive bailout - the Bush administration has nothing to loose at the point - why not bail out all the wealthy banker/oil friends and Bush/Cheney buddies. . .no downside risk for them. . .so the $ will be worth 20% less, and oil will be $120. . .just shift the shit to the American taxpayer as usual. . .makes my blood boil. . .glad I have lots of Canadian/Swiss/Euro investments!!!
Wachovia and BofA are headquartered in the same town and are having a "whose weenie is larger" contest. Wachovia just came to California after having bought Herb and Marion Sandler's World Savings and Loan for upwards of $5 billion.
H&M got out while the getting was good. They ran an antiquated branch system (about 300) in California (BofA has over 1,000) and want to compete with the Three Big Boys, including Wells and WaMu. What they got in the World portfolio is anyone's guess, but I can't believe that it was a pristine one.
H&M ran a very profitable business in a very profitable time for real estate, and they closed a lot of loans. You can guess how many of them fit the qualifications discussed here.
I don't get it. BofA wants to sell these loans to the govn't on the cheap. Why not discount these loans themselves by 30-50% and pass the savings to home owner?
Somthing isn't right. If they wanted to sell the loans at market value, why not sell them to private investors? ... They're not telling us something.
No one has yet mentioned the big benifit to the borrower. The borrower gets to deduct the increase in the loan balance as mortgage interest paid. The tax laws allow the borrower to deduct the interest accrued, whether it is paid in cash or paid in increasing the loan balance. (I know of people who even got to get their property taxes [also deductable] and house insurance paid as part of their neg-am loan). I feel so stupid, these persons not only got to deduct the amount of increased debt, now when that increased debt, which resulted in less taxes paid, will be forgiven by the lender and the goverment will not tax them on the forgiven debt, even though it reduced the taxes. Oh yea, the 6-12 months that the person is living in the house without paying anything before foreclosure is completed, also results in even larger deductability because the the accruing interest is resulting in increased debt and some lenders will still send out 1098 forms, even though no cash payments are being made.) My head is exploding.
So the banks will have to reverse the false profits AND take markdowns on the loans themselves?
Wow
Dubya Shrub + Penis Shooter = "Little Boy" + "Fat Man"
This nation and its Americano citizen is as toasted as a snapper turtle skewered on a Chinese bamboo stick from mouth to ass all sizzling, sputtering, roasting nicely, juices dripping, fat popping over a bed of white hot charcoal grill.
Americano = Grilled Snapper Turtle
Heeeee... Haaaaa... Arrrrr...
So, tell me, does the average Americano take it enough in the rear orifice yet by the forceful penetration of "Little Boy" + "Fat Man", or do you want more "Enter The Dragon" ?
Americano = Being Entered By The Dragon up the Kazook
Heeeee... Haaaaa... Arrrrr...
And all of you retards, ass-head that voted for SHRUB and worshipped his ASS over the last 8 years, guess what, the chicken are coming home to roost on your head-ass. The ancient snapper turtle probably have more brain cell than you and your children combined together. Are you sorry yet ? Do you feel ashamed and stupid about your shallow thinking, narrow-minded love and swoon for DUBYA ? Do you, do you, do you ???
Option Arms were heavily pitched at RE office meetings for agents to introduce to their clients. It backfired. Agents went wild and refi'd their own homes and their investment properties before telling their clients about them.
I was an agent from '97 to '03 and fortunately got out just before it got slimy but still am probably one of the few that can afford to pay the dues to remain in the loop. I saw agents lining up with lenders to get that loan where they didn't have to make even the full interest payment. They even skipped lunch to sign the papers. Unheard of. It was always the agents without a steady business that went for that stuff. Here's one to chomp on.....Capital One slapped a lien on a Seller who was in a successful escrow with a good buyer, bank approved short sale (rare), about to close and oops, Seller had missed a few credit card payments to Capital One so here comes the lien, and the brakes. Nobody had the money to pay up. Capital One said the agents could pay down a portion and they would let the deal close. However, it had to be cash, up front, none of this credit at the end of escrow via the commission. Cash, now. The agents didn't want to front cash to Capital One so the deal crashed and everybody walked away, at the 11th hour.
Somebody asked why short sales are so tough to get info about and to get closed. It's been my experience that the loans that carry mortgage insurance won't pay the insurance on a short sale, only on a foreclosure. I've seen time and again where the bank turned down a decent offer on a short sale, only to let it go into foreclosure then relist at an even lower price. But, they get the mortgage insurance.
Blogger Andrew Hac said...
Dubya Shrub + Penis Shooter = "Little Boy" + "Fat Man"
This nation and its Americano citizen is as toasted as a snapper turtle skewered on a Chinese bamboo stick from mouth to ass all sizzling, sputtering, roasting nicely, juices dripping, fat popping over a bed of white hot charcoal grill.
Americano = Grilled Snapper Turtle
Heeeee... Haaaaa... Arrrrr...
So, tell me, does the average Americano take it enough in the rear orifice yet by the forceful penetration of "Little Boy" + "Fat Man", or do you want more "Enter The Dragon" ?
Americano = Being Entered By The Dragon up the Kazook
Heeeee... Haaaaa... Arrrrr...
And all of you retards, ass-head that voted for SHRUB and worshipped his ASS over the last 8 years, guess what, the chicken are coming home to roost on your head-ass. The ancient snapper turtle probably have more brain cell than you and your children combined together. Are you sorry yet ? Do you feel ashamed and stupid about your shallow thinking, narrow-minded love and swoon for DUBYA ? Do you, do you, do you ???
February 23, 2008 11:09 PM
If I were you Mr. Hac, I would worry more about my own backyard than someone elses' back yard. China has more problems than America. Problems like hundreds of millions of people living on less than $2 per day, lack of sanitation facilities, extreme poverty, etc.... But no, you want to focus all of your energy on "let's blame America" game. Well the game is up, worry about your own country Andrew Hac and let us Americans worry about ours!
I've seen time and again where the bank turned down a decent offer on a short sale, only to let it go into foreclosure then relist at an even lower price. But, they get the mortgage insurance.
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thats what i call good info. thanks 'jaws'.
"The leadership in our country are total losers. At this point, I think either of Barack's kids could win the presidency-in a landslide.
February 23, 2008 5:17 PM"
Yeah and what makes you think Obama would do anything differently? You people talk like all we have to do is elected Obama and allwill be well. Wake the fuck up. Obama will dothe bailout as well. And raise taxes. And give amnesty to illegals. And propose yet more spending.
Get your heads out of your collectives asses and realize what Obama means. He is the most liberal senator. Think about it. Compared to him, Ted Kennedy is considered a fiscal conservative.
Any bean counters out there that can give a rational for letting bank claim the payment shortfall on a negam loan as income? what is so special about negam vs a fixed 30 that the borrow stops paying on? why can the lender claim the non payments on a fixed 30 as income too?
BankUnited out of Southern Florida
I remember an article in Businessweek entitled "How Toxic is your Mortgage" and towards the end of the article the had a portion that discussed NegAmARMS and how deferred interest can be booked as current income/assets/revenue or something like that. They highlighted BankUnited because in the most recent quarter BankUnited reported a profit, but if you stripped out the NegAmARM deferred interest they were actually slightly in the red!! So add to that the fact that Southern Florida's RE market is getting hit very hard when all this toxic waste hits the debt ceiling and is recast then you will have a massive wave of defaults. BankUnited will take possession via foreclosure forking over thousands in transaction costs that will hit the bottom line. They will be the only one willing to bid the doubly inflated mortgage balance (double because it was inflated to begin with then 10-25% tacked on via the toxic loan). Then when they try to sell it as a REO it will have to be sold way below the mortgage balance. Voila not a nickel of this reported profit will ever be collected and the bank goes under!!! Justice Sweet Justice!!!
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