Thursday, June 11, 2009

Option ARMs, Coming Home To Roost

As my regular readers know, this blogger has a big ego when it comes to big fat I told you so's. Mind you, I don’t think its funny for someone to end up homeless, but having to rent your home is completely different from being homeless.

Bloomberg is running a piece that says the option ARMs that are going to be recasting next year though late summer of 2011 will be a threat to the current housing recovery. Now, I dispute that we're in any kind of recovery, but I guess that’s semantics. Bottom line, I have been beating this drum since March of last year, that there would be no true recovery until at least 2012, once we're done with all the recasts. So, throw another log on the fire, we'll be torching another $750 billion for the pay option ARMs. Also, keep in mind, that $750 billion number does not include the pending Alt-A carnage.

Pay option ARMs are especially insidious, since the monthly payments started so low. Disgustingly low if you ask me. The article cites two cases, where payments started under $100 and will jump to over $3500. Once again, the ignorant consumer gets painted in a favorable light, but its high time the ignorant or foolish consumer get called out for their role in the current debacle. If people would have looked at these loan products as fools gold, instead of some get rich quick scheme, we might not be nearly the trouble we are in. We all learned at an early age that if something is too good to be true, it probably is. Home loans are no different, especially since its everyone's biggest expense and everything is handed to the loan recipient in black and white.

The phrase of the year for 2010 will be negative amortization.
Negative amortization, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount (difference between interest and repayment) is then added to the total amount owed to the lender. Such a practice would have to be agreed upon before shorting the payment so as to avoid default on payment.
I just wanted to add this little nugget of info, because I so, despise the NAR and the cost added, faux innocent acting, constituency they represent. The NAR was well aware of the likely cave ins with option ARMs and Alt-A when they started running commercials this spring saying that "now" was a great time to buy. I find that highly unethical and self serving, but what else do we expect from an organization that pulls the strings on Lawrence Yun.

1 comment:

Anonymous said...

I just found out about some NEW Moratorium in California Starts June 15th I sure hope it only slows the banks a little as we need to get these homes (millions) cleared and on the market and get to a REAL CLEARING Price to think that CA. is worth 3 times the National avg. is crazy to me. I hope we get to Nat Avg of 100-120 and a Cal Avg. of 170-200 MAX