Some highlights from the Fitch Report on Option ARM loans released today:
– 94% are making minimum payments. Depending on the loan, that equates to about 5% negative equity per year.
– 37% are already at least 90 days delinquent or in the foreclosure process, and 46% are at least 30 days late.
– Loan to value ratios have declined from 79% at origination to 126% in todays market due to price erosion and negative equity accumulation.
– Expected loses from the original loan values are expected to be 35-45%. And remember, these loans generally required a 20% down payment. There are some moron banks that have issued 2nd loans or HELOCS behind these Option ARMS.
Sobering stuff. You don’t see Option ARMS in Smithridge Park, but you do see a lot of them in our tonier neighborhoods. Thoughts?
(hat tip to inclimejj for the article, and for keeping constantly amused and depressed)
PatentGuy
“moron banks” is redundant.
Reno Ignoramus
There is really no news here. Every real estate blog in the country, including this one, has discussed the option ARM timebomb. The only thing interesting about this is how long it is going to take to explode. Like almost everything else about the bubble’s collapse, waiting for the option ARM detonation is like watching the grass grow.
Stoops
Yes, the first option ARM stories and discussions were at least 3 years ago. And so far, the tonier neighborhoods have not been decimated by the predicted firestorm that was supposed to occur when all the lawyers and doctors and indian chiefs had their option ARMs explode on them.
I agree there is some destruction to come in the tonier places as no doubt some of these option ARM holders default. But Caughlin Ranch is not going to crumble into the Truckee River.
bob c
seems real estate has found a bottom and is
gaining confidence as the stock market continues
its 6 month run
because most have called this a ‘head fake’
or a ‘double dip’ the old axiom rings loud—
the consensus is usually wrong
its time to buy!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Wendy
I am one of those idiots who got a 5-1 ARM. I had a 3 year job here and didn’t plan on owning my house for more than 5 years. Turns out Reno is pretty cool, so here I am 5 years later and my rate just adjusted, down. For the next year at least my rate is 3.25%. I don’t know how many people are in my situation but my rate is pegged to the fed rate. Maybe that is why we ARM loan folks aren’t defaulting yet?
John Newell
Since a whole bushel load of ARM loans will adjust and a gaggle of interest only loans will come due in 2010 and 2011, I think it is premature to call anything yet. If interest rates remain low, then some ARM loans will adjust down, but some will also adjust up per the terms of the loans, many of which have an initial (current) interest rate (teaser rate) that is lower than the lowest possible rate on the first change date. And, alas, I cannot see anything short of a miracle saving those poor souls who have balloon payments based on 2005 and 2006 prices coming due in 2010 and 2011.
CommercialLender
Wendy,
Straight ARMs can turn out just fine at reset. Mine went from i/o at 5.38% to a 25 yr amort at 3.38%. Payment went up $90/mo but $420 ish of the payment is now amortizating to my balance sheet (ha! if i have 10 yrs to wait…). In my case, $90 more per month does not cause ‘distress’.
Issues arise when: a) the old pricipal of $X is now $x+20% or some greater than original number due to negative amortization or b) when the short end of the yield curve starts to go up again. Mine was not neg-am, but my 3.38% rate is good only a year at which time it could go up again.
Option ARMs, not to be confused with what I’m improperly calling ‘straight’ ARMs, were the ones with optional payment terms, aka neg-am. That’s the loan type the above article said where 94% of the borrowers were paying only the neg-am, min payment each month. You can only imagine how that story will turn out.