A New Wave of Short Sales Coming

New Wave Of Short Sales ComingThere have been a lot of articles written lately about the coming wave of option ARM resets that are set to occur mostly between 2010-2012 (investment bank Credit Suisse has a detailed research report available for clients). The Option ARMs that were underwritten on these loans occurred mainly on homes that were not conforming loans, but Alt-A jumbos.  If you add in another 6-12 months after the NOD, there could realistically be a healthy supply of higher-end short sale properties coming to market into 2014. Take a look at what Zacks analyst and CFA Dirk van Dijk had to say:

So you think we are out of the foreclosure woods? Don’t bet on it. Take a look at the chart below, created by Credit Suisse (CS; a larger version can be viewed at and  is available at http://www.calculatedriskblog.com/).
It shows the date of first reset or recast of various classes of adjustable-rate mortgages (ARMs). A reset refers to a change in the interest rate, a recast refers to a change in the payment.

For most “plain vanilla” ARM’s they are the same thing, but for Option ARM’s the payment can change without a change in the interest rate.  Option ARM’s (the yellow part of the bars) allow the borrower to pay less than the amount of interest on the loan early in the mortgage life, with the difference being added to the principal of the mortgage.  Even in a flat housing price environment, this would cause the loan-to-value (LTV) ratio to rise over time. In a falling home price environment, with both the loan growing and the value falling, it happens much more quickly.

Dirk goes on to say that the recasts are relatively small right now at about $1 billion per month, but that number is set grow dramaticially to over $8 billion per month in the fall of 2011.  So start saving your gunpowder for that down payment on your Laguna Beach short sale.

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