Option ARMS. $500B-$750B going to "RECAST"

Discussion in 'Economics' started by S2007S, May 19, 2009.

  1. S2007S


    Started with a simple definition so that many can understand that this is the next problem banks, housing and the overall economy are going to face.

    What is an option ARM?

    The option ARM is an adjustable rate mortgage with "options." You can choose whether to pay on the principal. You can even choose how much of the interest to pay. Which means you can get a very low house payment. At first anyway. As with all such home mortgage loans, the introductory period ends and you eventually have to start paying on the principal (and the interest you have been putting off). This means that you mortgage payment goes up quite dramatically.

    The option ARM is basically another way for someone to "afford" a home that would be otherwise unaffordable. This is, of course, why the whole subprime lending crash thing is happening in the first place. And the option ARM could be the next thing to go. All of the problems associated with these "creative" home mortgage financing solutions is why I am fond of the boring fixed rate loan rather than the adjustable rate mortgage in any form.
  2. 30 year fixed rate mortgages should be the only type of mortgage that exists. Simplicity is usually the best option.
  3. jprad


    I'd restate that slightly; only fixed rate mortgages, with a maximum term of 30 years should be allowed.

    I like my 15 year fixed just fine, thank you, and wouldn't want to see the option of having a term shorter than 30 years go away.
  4. huh


    I'd have to disagree with that. I have no issues with my current fha ARM which now adjusts every year and a 7/1 ARM I have on my current residence. It is usually a better deal unless you are sure that you're going to live in your house for at least 10 yrs, if not then a 30 yr fixed is a rip-off.
  5. I have a 30 year fixed mortgage @ 8.22% and it's interest only, the loan amount hasn't decreased by even a dollar in the last 5 years

    I can refinance to 4.8%, but I don't want to, because the monthly fee is going to be higher, plus there is the refinance fee, and the time, and the headache because of all the paperwork they require nowadays

    there is no point in paying principal, because even at a steady inflation rate of 6%, $300K is going to be like $50K after 30 years, (300K&divide;1.06<sup>30</sup>=52.23K), actually we know inflation is going to be worse than that, mainly because of all the debt US is in and also because the baby boomers are going to reach the age of retirement in the next decade, http://en.wikipedia.org/wiki/2010s#In_the_population
  6. S2007S


    Get ready, get set, GO!!!!!!!!!!

    Option ARMs Threaten Housing Rebound as Resets Peak

    By Brian Louis

    June 11 (Bloomberg) -- Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.

    Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its low minimum payments before resetting at higher costs later.

    About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

    Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

    “The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

    Option ARM recasts will mean more pain for California, the state with the most foreclosures in the U.S.

    $750 Billion Problem

    More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008, according to data from First American and Inside Mortgage Finance of Bethesda, Maryland. California accounted for 58 percent of option ARMs, according to a report by T2 Partners LLC, citing data from Amherst Securities and Loan Performance.

    Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

    Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.

    ‘Pick a Pay’

    Such terms aren’t typical for option ARMs, which were also known as “pick-a-pay” mortgages. Interest rates on many payment option ARMS are “typically very low in the first one to three months” and can be as little as 2 percent, according to Federal Reserve data.

    Breitmaier, who has been in the home for 45 years and lives with her daughter, now fears she will lose the off-white stucco house that’s a hub for her family.

    “I wish the government would bail us out like the banks and the car businesses,” she said. “I’d like to go from here to the grave next to my husband.”

    Paul Financial LLC originated the loan and it was sold to GMAC, Pannabecker said.

    “This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” Pannabecker said. “The consumer had a product pushed on them that they had no hope of understanding.”

    GMAC is working with Breitmaier and will review all of her options, said Jeannine Bruin, a spokeswoman for the company. Bruin declined to be more specific, citing the firm’s customer confidentiality policy.

    Inexpensive Payments

    Peter Paul of Paul Financial, based in San Rafael, California, said he wasn’t familiar with Breitmaier’s loan agreement but disagreed with Pannabecker’s characterization.

    “The problem is, real estate values went down,” Paul said. Paul said he’s winding down the company and hasn’t made any loans since the fall of 2007.

    Option ARMs typically recast after five years and the lower payments can end before that time if the loan balance increases to 110 percent or 125 percent of the original mortgage, according to a Federal Reserve brochure on its Web site.

    These home loans were primarily marketed to people with good credit scores, said Dirk van Dijk, director of research at Zacks Investment Research in Chicago. They were also sold to the elderly and immigrants who were lured by inexpensive payments, said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, California.

    Tough to Refinance

    Refinancing is impossible in many states given the nationwide drop in prices. Mortgage rates are also rising. The average 30-year rate jumped to 5.59 percent in the week ended June 11 from 5.29 percent a week earlier, Freddie Mac said today. In California, the median existing single-family home price dropped 37 percent in April to $256,700 from a year earlier, according to the state Association of Realtors.

    “Once you start amortizing that loan, the payment is going to shoot up,” said David Watts, a London-based strategist with research firm CreditSights.

    The delinquency rate for payment-option ARMs originated in 2006 and bundled into securities is soaring, according to a May 5 report from Deutsche Bank AG. Over the past year, payments 60 days late or more on option ARMs originated in 2006 have almost doubled to 42.44 percent from 23.26 percent, Deutsche Bank said. For 2007 loans, the rate has climbed from 10.1 percent to 35.25 percent.

    “We’re already seeing much higher levels of delinquencies of these option ARM loans even before you reach the point of the recast,” said Paul Leonard, the California director of the non- profit Center for Responsible Lending.

    The threat of soaring payments has counselors at Housing and Economic Rights Advocates busy.

    “There’s a level of hopelessness to the phone calls now,” said Brown.