Option ARMS
The WSJ outlines a problem that is coming like a freight train toward us and they use FirstFed Financial Corp (FED) in LA as an example.
You know all about sub-prime loans and how they wrecked havoc in the mortgage industry. The Mortgage Lender Implode-O-Meter shows 272 U.S. lending operations have failed since 2006. That’s due to sub-primes. Now get ready for option ARMS!
Option ARMs typically carry a low introductory rate and give borrowers multiple payment choices, including a minimum payment that may not even cover the interest due. Borrowers who make the minimum payment on a regular basis — as many do — can see their loan balance rise, known as negative amortization. Monthly payments can increase by 60% or more once borrowers begin making payments of principal and full interest. That typically happens after five years or earlier if the amount owed reaches a preset amount, typically 110% to 125% of the original loan balance.
Click to enlarge.
You can see from this WSJ chart that we go from nothing to $32 Billion a quarter of option ARMS that will be recast at higher rates.
The numbers from First Fed are astonishing!
Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.
As of the end of June, nonperforming assets climbed to 8.2% of total assets, compared with 0.85% a year earlier.
Barclays Capital estimates that as many as 45% of option ARMs, as they are often called, originated in 2006 and 2007 could wind up in default. Another analysis, by UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans. Both studies looked at loans that were packaged into securities.
FirstFed was one of the conservative lenders. It dragged its feet to be involved, then got out of the option ARMS market in 2005, yet still the bank lost $70Million in the first quarter.
Two banks loaded with option ARMS are Wachovia (WB) and Washington Mutual (WM)!
Mover Mike.
I was a Loan Originator and refused to sell these loans. When clients asked me about them and I showed them what their payment would be in 5 years using a conservative interest rate, that was usually enough.
Realtors drove this market because when they sent a client to me and I would only qualify them for $250,000 but my competition wold qualify them for $400,000 guess who they sent their clients to? All the Realtor cared about was the size of their commission and if the homeowner lost the home, oh well, now they have another property to sell.
Of course the Realtors claim “ignorance” because they know nothing about the financing.
I have been telling people that this will continue through 2011 but never had the stats you provide here to support it. You are right on. Only question is, with all these failings now, what will happen in 2010/2011? Are we talking another major collapse?
good site wztnfi
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