Friday, December 28, 2007

EXTRA! LA Times discovers Option-ARMs!

Good to see today's LA Times discovered Option-ARM loans, and it's a good piece. But come on, once again the bubble blogs have known about their coming impact for a loooong time. My October bookmark was merely an update. The Times begins:

Thought the mortgage meltdown was just a sub-prime affair? Think again. There's another time bomb waiting to explode, experts say: risky loans made to people with good credit.

So-called pay-option adjustable-rate mortgages, or option ARMs, were the easiest and most profitable home loans for lenders and brokers to make for much of this decade. Last year, they accounted for about 9% of the volume of all mortgages made in the U.S. and were especially popular in California, Florida and Nevada -- states where home prices rose the most during the housing boom and are now falling most sharply.

An option ARM loan gives a borrower the option of paying less than the interest due, causing the loan balance to rise. If it rises too much -- say, by 10% or 15% -- the opportunity to make a low payment vanishes and the required payment skyrockets.

That scenario is becoming increasingly common. In fact, more than 75% of option ARM borrowers have been making only the minimum payments, analysts at Standard & Poor's Corp. said last week. As a result, the delinquency rate on option ARMs already is jumping and is likely to keep rising sharply, S&P said. Because option ARMS went only to "prime" borrowers, they aren't eligible for a much-publicized interest rate freeze that is part of a White House-backed plan to stem sub-prime foreclosures.

One upshot could be foreclosures growing more common in affluent neighborhoods. ...

"The only reason for taking [an option ARM] was to use the minimum payment to get more house or a bigger refi than you otherwise could afford," said Guy Cecala, editor of Inside Mortgage Finance.

The familiar chart above shows the coming bulge in resets through 2011.

Also on page 4 was the news that:

Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in bonds linked to the collapse of the sub-prime mortgage market, analysts at rival Goldman Sachs Group Inc. say in a new report.
Once again, industry reports that the problems are behind them are premature. So far, the bears have been calling this a lot better than the bulls.

3 comments:

Anonymous said...

option arms are the grease that drives the westside housing market. that reset spike is truly scary.

i don't know when nominal prices on the westside will bottom, but *real* prices probably won't trough until 2011, when we are through the bulk of the option arm recasts.

the last trough on the westside was 1994. the LT nominal growth rate of home prices is 6-7% (peak-to-peak, trough-to-trough). i suspect that if you take the average home price in various santa monica neighborhoods in 1994, and roll them forward at a 6.5% compounded rate for 17 years, you will get within 10% of the 2011 price.

Mr. Monica said...

LA Times derives the majority of its advertising revenue from real estate. Do you REALLY think they will be in the forefront of bursting the bubble?

Todays piece, "How a bank fell victim to loan fraud" is the very tip of the iceberg. There's appraisal fraud to cover too~! If the appraisers didn't provide the numbers required by the agents and mortage brokers, they would never work for them again.

Once LAT realizes that 'fessing up' about this outrageous cesspool is the only way to clear it out, and give lenders and buyersthe confidence to come back into the market--then maybe they'll get to work publishing more of this fraud. Otherwise, we're in for years of outrageously priced vacant shoddily remodeled homes languishing on the market in the thousands.

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