ARMs: the second wave cometh

(Via Calculated risk and the WSJ)

Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance ... Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders.
...
As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics

[snip]

Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs

CR is pegging the Option ARM losses to lenders at $~200 billion or so, which is not collossal - compared to what subprime did - but this is just the .6 of the $1.6 trillion tsunami that Whitney Tilson told 60 Minutes about last year.

The other trillion was the Alt-A loans.

Here's Tilson back in December 2008:

...the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."

Tilson doesn't specify if his more than half prediction will apply to the Alt-A's as well, but it's a fair bet those people won't have it much better than the option ARM crowd.

It's one of the many factors that makes me suspect that there are a number of big banks who aren't fessing up to how screwed they are. We (by way of the government) are guaranteeing assets for CitiBank and BoA that are far more costly than the $40 billion (each) in cash they've received. If those assets turn out to suck hard, Uncle Sam is going to have to cough up many times that amount to pay for the next round of forclosures.

I don't pretend to know whether we should nationalize the banks, or do the "Bad Bank" approach - but I keep coming back to a Lincoln-esque separation of the national economy and the fortunes of individual banks.

If we can save the economy by saving the banks - we should do that.
If we can save the economy by killing the banks - we should do that

The idea that our economy is inextricably intertwined with the fortunes of these banks strikes me as limiting. Sure big banks go down and the ripple effect keeps on going, but we should be willing to discuss options where the bank's interest and the national interest part company.