Bloomberg: Forget about Subprime, Option ARMS are the "Neutron Bomb" of Bad Loans to come

[El Pinko]

http://www.bloomberg.com/apps/news?pid=20601109&sid=aFCgFMs3dlSk&refer=home


Exploding ARMs Roil Bernanke's Drive to Calm Markets (Update4)
By Bob Ivry and Jody Shenn


Feb. 7 (Bloomberg) -- Joe Ripplinger took out a $184,000 mortgage in 2006 and makes his payments every month.

Now he owes $192,000.

The 66-year-old Minneapolis house painter has a payment- option adjustable-rate mortgage. It allows him to write a check for $565 a month even though he owes $1,300. The difference is added to the mortgage, and when his total debt reaches $212,000, or after five years have passed, he said his monthly minimum could jump to about $2,800, which he can't afford.

(snip)

``We call them neutron loans because they're like a neutron bomb,'' said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. ``Three years later the house is still there and the people are gone.''

Once option ARM borrowers' loan balances reach a predetermined limit, called a negative amortization cap, usually 110 percent to 120 percent of the mortgage amount, their payment rates immediately increase. They also automatically shoot up after five years. Otherwise, increases typically are capped at 7.5 percent of a borrower's initial payment per year.





The peak of Option ARM resets hit the economy, in 2010 and 2011.

When real-estate hacks like NAR start talking to you about bottoming out in 2008 and recovery in 2009, DON'T YOU BELIEVE IT.

[DCKit]

1. Don't be surprised if someone hits the "alert" button and ...

complains about you being a terrorist. I'm having a fit. I knew the ARMs and Interest Only loans were bad, but dayum!

Even I would accuse me of being too cynical, but I predict any government bailout will be for the bankers and mortgage companies that (knowingly) made these horrible, doomed loans and not the people who fell for them. I see plenty of guilt and greed on both sides, and there's no telling how badly the fallout is going to affect the rest of the economy, but these loans are a direct result of deregulation of an industry that clearly never deserved deregulation.

Are the "prime" mortgages on the graph conventional ARMs based on the prime interest rate? If so, I would have thought there'd be far more. Then again, I'd have thought that the consumers of these loans would be better educated too and the whole scale of the coming disaster would look nothing like it does depicted in that graph.

I've always assumed people shopping for mortgages educated themselves and fully expected the whole mess to be exactly the opposite of what it is - far more conventional fixed-rate loans and ARMs.

[El Pinko]

2. The graph is quantifying the dollar value of the resets, not the actual loan balances.

My understanding is that while the total amount financed through prime ARM loans is greater than the total financed through subprime and option-ARM, the total amount of the resets is significantly more on the subprime and option-ARM loans.

Someone more educated on the matter than myself is welcome to correct or explain further, but that's how it was explained to me by my more savvy brother, so hope it made sense...

[DCKit]

3. I got that. That's why I'm sitting here shaking.

Thanks for posting, I think you just helped me to decide to make a serious life-change while I have the chance.

[El Pinko]

5. Sorry for any distress.

I hope whatever the life-change is, I hope it turns out to be one for the positive.


I'm not a homeowner (or a homedebtor) but the direction the economy is headed does not spell good things for my line of work.


I think things will eventually get better, especially if one of the democrats wins in Nov., but this one is going to be a lot longer and deeper than people are used to in recent decades, and there's a limit to what a president or the fed can do to fix it. Keeping these borrowers in their homes keeps home values artificially high and houses unaffordable to increasingly cash-strapped middle-class people. Letting them get foreclosed so that the market naturally corrects loses a lot of people a lot of equity and creates a lot of devastated neighborhoods in the short run.

Gee, if only someone had thought of something to prevent this mess, like, I dunno, GOVERNMENT REGULATION? Oh, no, that can't be... regulation is always BAD....

:sarcasm:

[El Pinko]

10. kick

nt

[dantyrant]

4. Looking at that graph...

The area of each color-shaded region would reveal the total value of resets for the corresponding ARM class over the given time interval. So for example, the size of the subprime sector is indeed considerably bigger than the prime sector in the above graph.

[soothsayer]

6. Yeah, but I think the headline means 'new wave of bad news coming'

[JCMach1]

7. The guys should be refinanced now... time to outlaw these exotic

mortgage swindles

[mvccd1000]

8. My ARM will go down 1.75% on March 1st.

However, it's not one of those exotic loans; it's just a straightforward 3/1 ARM. Started out at 5.875% in 2002, gradually made it up to 8%, and now it's going down 6.25%.

My payment is dropping $200 a month, so I'm not complaining. :)

[Lorien]

16. That's what I have too. It only went back UP to where it stated over 12 years

ago last year. I got the mortgage when mortgages were headed down, so my payment dropped for about seven years before it slowly crept back up again. Now it's going to drop below the starting rate again. I never expected to be in this home for so long, otherwise I may have done a fixed rate mortgage...but so far it's worked out pretty well.

[Chimichurri]

9. Hat tip to you for an excellent post. Information is power.

[DemReadingDU]

11. morning kick

[PRETZEL]

12. There's alot of similarities with this and "reverse mortgages"

scam being played to seniors.

As with the housing meltdown in the 80's it's the ARM's that caused the burst. Whether it be a 3 or 5 year ARM, it's the index and caps that hit the hardest.

[jpak]

13. Alan Greenspan should get a Nobel Prize in Physics for this

What an asshole

[Mountainman]

14. People will walk away before they pay the high amounts. The value of their property is declining.

The amount they owe is increasing. The have no equity. Would you stay put in such a situation when you could rent and pay less and equity wise be in the same boat?

The homes will be bought up by some entity with money and be rented since no one can get a loan.


My house has been on the market a year now and I've reduced the price still no buyers. I'm thinking of renting it. Rentals will fill the need for providing shelter to those needing homes and those needing to protect their assets.

[CK_John]

15. Your problem is you still believe money is real, it's it is a concept. The concept can and

will changed to fit the situation.

A mortgage is so yesterday, leased housing is the new meme. It's a battle between believers in wait until you can afford it and pay your bills generation and I want what I can get generation (the monthly nut crowd).

I heard the same thing when cell phones came on the scene. Most said no one will pay to receive calls or 49 per month when land lines were regulated at about 10 per month.

Not to worry, if you are rich you will still be rich and if your not, you will still be able to pretend you are.

[UpInArms]

17. your post reminded me of an illustration by a friend

[bluestdogest]

18. Yeah, but interest rates are down, so this catastrophe can be avoided if people are smart.

I know, that's a helluva stretch (people being smart), but it is possible.

[El Pinko]

19. Exactly what smart thing can which people do to prevent the Option ARMs from resetting?

Maybe I'm just being dumb, could you explain it to me?

[Beetwasher]

21. Refinance To A Fixed Rate

n/t

[El Pinko]

22. Well, I sure hope that option is open to these people in this tighter credit environment...

nt.

[foxer]

24. They should issue "signing statements"

And say that shit doesn't apply to them

[Lone_Star_Dem]

25. Refinancing: Only for the privileged few

Sure, now is a great time to refinance - that is, if you can still qualify. Here is what lenders are looking for.

NEW YORK (CNNMoney.com) -- The good news: mortgage rates are down. The bad news: it's much harder to qualify for a refinanced loan these days.

What's more, the borrowers who need to refinance the most - because their adjustable rate mortgages (ARMs) are resetting to higher interest rates - are among those having the most trouble winning approvals.

"I'm turning away about 60% to 75% of the clients who come to me for a refi," said Bob Moulton, president of Americana Mortgage Group on Long Island, N.Y. "Some don't have enough equity and others have bad credit scores."

During the boom years, lenders approved most anyone with a pulse. Not so today. Mortgage brokers recognize this and are now being very selective about the clients whose applications they choose to submit to the likes of Wells Fargo (WFC, Fortune 500) or Bank of America (BAC, Fortune 500).

If an applicant has poor credit, or a home whose value is rapidly deteriorating, they're just not going to bother.

"If the person is Sweet Polly Purebread - good income, good assets, high credit score - there's money out there," said Moulton. "But if not, then it's harder."

http://money.cnn.com/2008/02/08/real_estate/who_can_refi/index.htm?postversion=2008020815

This is the reality that many people are now facing. Plummeting home values and much tougher qualifications will prevent most from refinancing.

[bluestdogest]

26. Simply replace the ARM with a low, fixed rate loan.

A 30 year fixed rate loan can be obtained for 5.25% APR or lower. And you can get it down to 4.5% for a 15 year loan.

[El Pinko]

27. Wouldn't a lot of these people be prevented from doing that by tighter lending standards?

You say it's simple, but this is 2008, not 2005, and the standards are much tougher now.


I'm sure that those who can will if they have any sense, but I honestly wonder what percentage of these homedebtors that is.

[slipslidingaway]

20. Kick n/t

[Dorian Gray]

23. I've never heard of that kind of loan

but what borrower in his or her right mind would EVER think that such a thing would be a GOOD loan. You end up owing MORE than you borrowed?

What the hell?