I’m not quite ready to say that the "sub-prime crisis" is over, but the majority of these loans were 2/28s and most have been flushed out of the system.  The early resetting sub-prime loans recast at death interest rates due LIBOR abnomally high rates, which have since subsided.  Late sub-primes (and early 5/25 Prime and Alt A) loans are resetting at rates pretty near their initial rates.  Most of these loans were for purchases for what were then sub-median price homes- how times have changed!

As huge as sub-prime was, the big brains are saying that the exposure to Option ARM defaults is about double the dollar value of the sub-prime defaults.  And this second wave is starting to lap on our shores.

Option ARM loans provided buyers with the option of paying off their loan based on an initial discounted interest rate, interest only, 15 year payoff, or traditional 30 year amortization.  There are a gazillion variations on this loan type, but in general, the initial payment is about half of the 30 year amortization payment, and the deficit goes to negative amortization.  Depending on the lender, maximum neg-am is capped at 110%, 115% if you put 10% down, or 125% if you put 20% down (Home Savings) of the initial loan amount.  Roughly speaking, if you are paying the minimum payment on your Option ARM loan, you will hit the neg-am limits two and  a half to three years into your loan.  When that happens, you are instantly jacked-up to full amortization payments based on you now reduced loan term and increased principal balance.  Groady.  Your required payment more than double overnight.  Ouch.

Option ARM loans hadn’t really been showing up too much on the new listing or NOD markets that I follow.  That is starting to change big time:

2340 Trail Ridge.  Purchased 11/21/05 for $1,085,674.  1st loan was a $813,750 Option ARM with a 115% cap, second loan of $162,750.  At minimum payments, this property has been going negative at about $3000 per month and now is hitting the cap.  Listed at $699,000.  I am pretty sure this is a re-listing and a short sale, so I don’t totally trust the asking price.  But wow.  Try selling in Somersett with this one as your potential comp. 

949 Apollo, Incline Village.  Purchase for $925,000 on 5/7/2003.  After various refinances, refied for  $1,406,250 on 12/19/2005, Option Arm with a 115% cap.  At minimum payment, this one has been going at about $5000 neg-am a month.  The NOD has been served.

I’ve got lots of others - these aren’t isolated examples, just what hit the market in the last few days.  The Option ARM loans that helped facilitate the run up in prices in the mid-to-upper end market are coming due and payable. The Emperor has no clothes.  Get hunkered down for the next wave.