Wikinvest Wire

Option-ARMs worse than subprime

Monday, July 13, 2009

The chart below was promptly whipped up after reading this report($) in today's Wall Street Journal about just how fast Option-ARMs are souring as compared to subprime loans.
IMAGE It's not so much that the default rates for Option-ARMs have exceeded that of subprimes loans for three months running, but that the absolute numbers are so high.

More than one-third of all Option-ARMs (called Pick-A-Pay loans below) are in default and most of these are likely to make it to the foreclosure stage eventually.

Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.

As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.

Payment-option mortgages are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making borrowers inordinately vulnerable to declining property values. The deepening loan turmoil could mean higher-than-expected losses for Wells Fargo & Co., J.P. Morgan Chase & Co. and the Federal Deposit Insurance Corp.'s own insurance fund.

"The realization of the issues related to option ARMs is just beginning," said Chris Marinac, director of research at Atlanta-based FIG Partners.
If memory serves, the wackiest thing about Option-ARMs a few years ago was that banks could book the interest and principal payments as income even though they weren't actually receiving the money - the vast majority of borrowers were only making the lowest payment that didn't even cover the full amount of the interest due that month.

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Anonymous said...

In other news, grass is green.

AJ said...

So that sub-prime loan might have gone to buy a reasonably-valued house, but for those hot areas where housing prices were completely irrational, the option-ARM became necessary to buy those McMansions.

It is not the number of option-ARMs that are defaulting that scares me. It's the total value of those defaulting mortgages as compared to the total value of the subprime market.

papahode said...

People will simply be walking away. I'm already seeing much of this with "prime" loans. Foreclose, rent for 2 years, keep your credit clean (except for the foreclosure) and buy the same home for 1/10th the price in 2012. This is going to make the "sub-prime" mess look like shallow water. There's a titlewave coming.

Anonymous said...

Will be interesting to see how the media spins the Option ARM meltdown, as this will hit the middle- and upper-middle classes. We all know what 'subprime' was code for. I can't wait to see what they come up with.

daveinfo said...

I think the nation's housing market is facing new downward pressure as holders of subprime-mortgage bonds inundate the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.

"Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.

"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va."

I think the Obama ADministration should come up with something like reverse mortgage plan which could actually help us.

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