option-arm

All posts tagged option-arm

Check out this 12 minute video from 60 Minutes. There’s another wave of mortgage defaults on the way, this time from Alt-A & Option-Arm (also called Negative-Amortization or Neg-Am) loans. As opposed to the subprime loans which were worth almost $1 Trillion, these two groups make up nearly $1.5 Trillion.  According to Amhurst Capital, they expect a 70% default rate on the Option-Arms based on the current default rate which is occurring at 3% interest rates!

Right now there’s a 3-5 year overhead supply of housing inventory on the market. Along with these coming defaults and the fact that 10% of Americans are behind on their mortgage, you should expect house prices to be depressed for a very long time. I’ll think we’ll have more clarity when home prices actually hit bottom, which might be another 12-24 months from today.


I’m sure glad I sold my condo in summer 2005! The bank now owns and I’m thinking of putting in a very low-ball offer. An offer so low, it’ll cashflow well and at least break-even if rents drop 50%!
(Check out these cheap real estate deals).

If you’ve been reading the news, you know that at yesterday’s FOMC meeting, Bernanke dropped the interest rates to an unbelivable 0.25% (a cut of 75 basis points). Apparently he thinks that cheap credit will solve the problems facing the US economy right now. Unfortunately, its not the cost of credit but the availability of credit that is the issue. Credit is drying up and making it cheaper isn’t going to make any difference.

Last Monday, the Treasury was able to auction $35 Billion worth of 3 month T-bills at 0%, which means there’s a demand for liquidity and safety. Return of principle is more important than return on principle!

However, the government is using this money (and another few hundred billions) to bail out bankrupt financial firms, insurance companies, and auto manufacturers. It is running printing presses around the clock creating pictures of dead presidents and is inflating the money supply at a 17% annual rate. This is inflationary in the long run and will cause the devaluation of the dollar.

In the long term, Bernanke (or Bernie for short) is more worried about saving the economy than fighting inflation. (He’s not really concerned about the devaluing dollar either). And while the price of everything may increase, he’s hoping that real estate prices will stay flat instead of tanking, and that’s how he’s going to engender “a soft landing for the real estate market”.

Looking at the dollar index over the past few days, the dollar has started showing signs of weakness. Now that the interest rates in the US are even lower than in Japan, maybe people will start using the US Dollar as the new currency of choice for the carry-trade!

You could sell the US Dollar and buy the Australian Dollar or the New Zealand Dollar, both of which have a much higher yield than the US Dollar. (Note: this is not a recommendation, just an example of how to execute the new carry-trade). I bought some Australian Dollar ETF (FXA) yesterday morning in anticipation of a rate cut for my retirement account. The yield on FXA is currently 8%! It’s up nearly 5% since then and I’m happy to say my retirement account is down only 4% for the year – if only all my investments had fared so well this year!

Anyway, with interest rates close to zero I’m reminded of an 80’s song called “Turning Japanese“! Enjoy.