Resets are not a huge problem as long as interest rates stay low, but recasts could be significant.

TO BE NOTED: From Calculated Risk:

"New Mortgage Loan Reset / Recast Chart

by CalculatedRisk on 5/20/2009 09:44:00 AM

Matt Padilla at the O.C. Register presents a new reset / recast chart from Credit Suisse: Loan reset threat looms till 2012

Credit Suisse is using recast dates for Option ARMs and reset dates for all other loans.

As Tanta noted: "Reset" refers to a rate change. "Recast" refers to a payment change.

Resets are not a huge problem as long as interest rates stay low, but recasts could be significant.

Note that Wells Fargo expects only a small percentage of their $115 billion "pick-a-pay" Option ARM portfolio they acquired via Wachovia (originally from World Savings / Golden West) to recast by 2012 (because Golden West had very generous NegAM terms). I'm not sure how that fits with this chart.

Posted by CalculatedRisk on 5/20/2009 09:44:00 AM "

"Reset Vs. Recast, Or Why Charts Don't Match

by Tanta on 8/13/2008 07:52:00 AM

My post yesterday featuring some rate reset charts from Clayton prompted a good deal of concern in the comments regarding the issue of Option ARMs and the differences between the Clayton chart and some others that have been published lately. Reader Greg kindly emailed me copies of two charts on Option ARMs that have been published in the WSJ and Business Week recently, with a request that I comment on the apparent differences between and among these charts in terms of the timing of "reset" problems.

As far as I'm concerned, a large part of the confusion here is that our friends in the media are not very careful about using the terms "reset" and "recast" consistently, like us UberNerds do. Take this chart from Business Week:



The chart title says "Reset Schedule," but the legends make it clear that what you have here is actually a "Recast Schedule." No wonder people are encouraged to use these terms interchangeably.

This chart from the Wall Street Journal doesn't use the term "reset" at all, which is good since it clearly explains that it is talking about "recast":



Do note, though, that the WSJ chart uses only "scheduled recast dates." The Business Week chart above contrasts "scheduled" recast with projected actual recast based on the rate of growth in actual negative amortization balances as of the chart date.

And, finally, we have our Clayton chart I posted yesterday that avoids the whole lingo problem by opting for the title "Loans With Rate Changes." Maybe the Clayton analysts got tired of the "reset vs. recast" confusion and just decided to go long-form. In any case, the Clayton chart, unlike the two above, includes but is not limited to Option ARMs; it is looking at the whole "Alt-A" pile which includes amortizing hybrid ARMs and lots of interest-only ARMs as well as OAs.

There obviously isn't perfect consensus here on terminology. All I can really do is make clear how I am using these two terms. I think my usage conforms to the way industry wonks talk, but I can't promise you that anyone outside the wonkosphere will be as careful with these distinctions. Caveat lector.

"Reset" refers to a rate change. "Recast" refers to a payment change.

On a normal fully-amortizing ARM, the interest rate resets on what is called the "Change Date" (five years out for a 5/1 ARM, three years out for a 3/27 ARM, each year thereafter for the 5/1 and every six months thereafter for the 3/27, etc.). The payment recasts exactly one month after the rate resets. Mortgage interest is paid in arrears, so first you reset the rate, then the following month you recast the payment. "Recast" is really just a shorter word for "reamortize": you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.

On an interest-only ARM with a rate change that happens during the interest-only period, the rate resets on the Change Date and then the interest payment is recalculated on the next payment date. I wouldn't tend to use the term "recast" here since with an IO, you aren't actually amortizing or "casting" a new payment, just adjusting the interest due given current balance and new rate. The big issue with IOs is the end of the IO period, when the payment has to be amortized over the remaining term. This date is what I would call the "recast" date of an IO. It may or may not coincide with the first interest rate reset date. Some 5/1 IOs, for example, reset and recast both at the end of five years. Some have a 10-year IO period, meaning they reset annually between years 5-10 but do not recast until year 10. If the rate resets to a higher rate in that period, the required IO payment increases, but not as much as it will when the recast hits and principal must also be repaid on a 20-year schedule.

On a typical Option ARM, the rate resets monthly beginning as early as the first month of the loan. The payment is adjusted, but not recast, annually; usually the payment increases by no more than 7.5% each year. It is that mismatch between rate reset and payment change that actually creates the potential for negative amortization; the "minimum payment" gets outstripped by the actual interest due because it increases much more slowly than the rate does.

Option ARMs do not "recast" until the sooner of 1) the loan reaching its balance cap or 2) the first "scheduled" recast date, which is usually 60 months from origination. What you see in the Business Week chart is the difference between the two: the recast projections come a lot earlier if you look at how close loans are actually getting to their balance caps, rather than just assuming they'll all recast on their five-year anniversary.

By and large, the biggest danger for Option ARMs and IO ARMs is the recast date, not the first or subsequent rate reset dates. However, for any ARM borrower who qualified at the highest possible debt-to-income ratio they could manage, any payment change, even one not quite as shocking as the recast on an OA or an IO, can tip the balance. As we are talking in this specific context about Alt-A, I for one believe that most of these loans did stretch too far in the beginning, and so even first rate resets on IOs or fully-amortizing ARMs will cause a marked increase in delinquencies in the absence of the borrower's ability to refinance at reset into a new discounted ARM, which will be the case for some time.

I hope that clears it up a bit, at least for the next week or two.

Posted by Tanta "

"This is not a costless exercise in fairness."

David Merkel on the Aleph Blog:

"Cramming Down on Whom?

I favor cramdowns for now, becauseLike the recently departed Tanta at Calculated Risk, I also favor the concept of cramdowns in mortgage foreclosure proceedings. It would bring balance to the negotiations, and discourage banks from making bad loans. If a bank could be forced to compromise during a foreclosure (odd because it is secured lending), the result could leave more homeowners in their homes, and with mortgages where the principal balances reflect current conditions.( THESE ARE GOOD ARGUMENTS, BUT I DO NOT FAVOR THIS. )

In order for loan modifications to work, there has to be forgiveness of principal owed( I AGREE ), though perhaps by granting the banks a part of the upside if the property is sold at a gain in later days( I AGREE ). Forgiveness of principal allows the LTV ratio to remain whole, while reducing the payment at the same time.

But what does that do to the banks? The cramdowns cram immediate losses onto the banks. What if the actions of judges lead to the insolvency of banks? What if the possibility of future cramdowns lead mortgage rates to rise, in order to account for the risk? This is not a costless exercise in fairness.( I DON'T WORRY SO MUCH ABOUT THIS, BECAUSE THE JUDGE CAN REVIEW ALL SUCH CONCERNS. I SIMPLY DO NOT ACCEPT THE COURTS OR GOVERNMENT FORCING LENDERS TO TAKE A LOSS. IF WE, AS TAXPAYERS, WANT TO SOLVE THIS CRISIS OF LOAN MODIFICATIONS, WE SHOULD ALL PITCH IN BY HAVING THE GOVERNMENT BUY THE MORTGAGES FROM THE LENDERS AT AN AGREED DISCOUNT. IT WOULD COST THE TAXPAYERS A LOT OF CASH, AND MORE OR LESS MAKE LENDERS WHOLE, BUT THAT'S FAIRER THAN FORCING LENDERS TO LOSE MONEY FOR THE SOCIAL GOOD. I SUPPOSE YOU EITHER SEE MY POINT OR YOU DON'T. )

Articles on the cramdown proposal:

• Lawmakers set new mortgage bankruptcy bill
• Stimulus Package to Include Cram-Downs: Report
• Banks to Lose a Security Blanket
• Plan to Cut Foreclosure Rate Clears Key Hurdle

I favor cramdowns for now, because it can be a win-win for the borrowers and banks( IF IT IS, IT SHOULD BE POSSIBLE TO NEGOTIATE THESE LOAN MODIFICATIONS WITHOUT FORCE. ). Leave the homeowner in place, who values the home, while making him pay something close to maximum sustainable monthly amount.

It makes the system more flexible, and at this point, that is a good thing."

I agree with ends, but not the means, although I grant that it is well intentioned.

"it's a lot harder than she thinks to get successful mortgage modifications done on a wide scale in a very short period of time"

Calculated Risk on the failure of HUDs Hope For Homeowners:

"From the WaPo: HUD Chief Calls Aid on Mortgages A Failure

Secretary of Housing and Urban Development Steve Preston said the centerpiece of the federal government's effort to help struggling homeowners has been a failure and he's blaming Congress. ( OF COURSE HE IS )
...
The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike ( WELL DONE ), Preston said in an interview.
...
One of several federal and state foreclosure prevention initiatives facing difficulties, HUD's Hope for Homeowners program has been especially hamstrung. For instance, a program launched by the Federal Deposit Insurance Corp. on behalf of IndyMac Bank customers has modified more than 3,500 mortgages ( THE PROGRAM SHOULD BE COMPLETED BY THE TURN OF THE CENTURY. THE 23rd CENTURY ) in two months of operation.

I don't if Congress is to blame, or if the program was implemented poorly, but it is funny ( TRY TRAGIC ) that they hold up the IndyMac program (with just 3,500 mods) as being more successful.

Here was Tanta on IndyMac in October: IndyMac-FDIC Mortgage Modification Plan: Still in the Real World

I wrote a snotty post at the end of August after Sheila Bair's plan for "affordability modifications" of the former IndyMac loans was announced, the burden of snot wisdom of which was my prediction that Bair was going to discover that it's a lot harder than she thinks to get successful mortgage modifications done on a wide scale in a very short period of time. However, I did express the hope that the Bair plan would prove remarkably successful and indicated my willingness to eat my words should it prove necessary.

Looks like I'll have to stick to my usual dry toast and bananas after all.

Read it all! I think more people are discovering that successful mortgage mods are hard to do. "

I believe that borrowers and lenders are both holding out for better deals from the government. These programs don't work because they don't offer enough incentives, otherwise people would cut through the red tape with their teeth.