Option ARM Time Bomb Blows Early, Easing Damage to U.S. Housing

[Godhumor]

Source: Bloomberg

This was the year thousands of U.S. homeowners with option adjustable-rate mortgages were supposed to default as their payments spiked. Low interest rates and a surge of early delinquencies mean the numbers probably won’t be as bad as forecast, softening the blow to a housing market where prices have resumed falling.

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Monthly payments on option ARMs reset after an initial low- rate period, usually five years, and researchers at CoreLogic Inc. in Santa Ana, California, estimated in 2009 that such recasts would peak at 54,000 a month in August of this year. In a 2006 cover story in BusinessWeek magazine titled “Nightmare Mortgages,” George McCarthy, a housing economist at the Ford Foundation in New York, compared the looming resets to a neutron bomb.

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About $600 billion of the loans were made from 2005 through 2007, according to industry newsletter Inside Mortgage Finance. Of those packaged into bonds, some 20 percent have been liquidated at losses to investors, and almost half of the remaining ones are at least 30 days delinquent, in foreclosure or have been seized by lenders, according to data from JPMorgan.

“It’s not that option ARMs weren’t a bad way to finance homes, it’s just that the disaster already happened before the resets,” McCarthy said in a telephone interview last week.


Read more: http://noir.bloomberg.com/apps/news?pid=20601087&sid=a21jKRNsBdpU&pos=5

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This is the most odd double-edged sword in history. The reset is not going to be as bad as originally thought because, well, most of the loans that would have gone bad have already gone bad.

By the way, this is not really a positive article, despite the title. 70% of total Option ARMs outstanding (About 50% of all loans originated from 03 to 07 are still outstanding)are predicted to default. For those still actually paying on their loan, at some point monthly payments will probably increase 30 to 40%.