Adjustable Mortgages Loom as Threat to Housing Recovery

[steven johnson]

There has been a delay in the doomsday scenario for option ARMs (adjustable rate mortgages) recently because interest rates they are tied to have dropped, so loans are going to take longer to reach their cap and will not be recast to a higher a rate. Now the future looks worse with interest rates are rising again.

But Barclays Capital, which expects 81 percent of the option ARMs originated in 2007 to default and projects that banks will lose $112 billion on option ARMs written from 2005 to 2007.

First American CoreLogic anticipates 600,000 option ARMS to reset within four years.

Option ARMs, which lenders stopped offering last year, gave borrowers four payment options: less than the interest, which increases the balance every month; just the interest; the equivalent of a 30-year fixed-rate mortgage; and the equivalent of a 15-year fixed.

"Everyone's been focused on subprime, but we're more concerned about this," said Todd Jadlos, managing director of LPS Applied Analytics, which analyzes data for the financial industry. "By the time subprime defaults had increased 200 percent, in June and July of 2007, option ARMs had gone up 400 percent. People just didn't notice because the overall numbers weren't as high."

"This was a loan meant for sophisticated investors, or people who expected their cash flow to increase over time," said Elena Warshawsky, ...



Adjustable Mortgages Loom as Threat to Housing Recovery

[Robb]

1. Good article.

All the problems were based on the notion real estate could only increase in value.

I dug out the fine print on my 2007 refi, it's just what is being talked about -- 6.5% interest-only until 2012, when it's LIBOR plus 2.25%. Cap set at 11.5%.

Indeed, if I had reset today, I'd be a happy camper. By 2012, it doesn't seem likely to still be so low, eh?

[tabatha]

2. Yes, but your interest decreases with any payments toward the principal.

[Robb]

3. Nope. nt

[tabatha]

4. Yep. Mine does.

[Robb]

5. OK, but mine doesn't.

Interest-only loan. The principal doesn't budge.

[tabatha]

6. Check that out.

I did not understand that until recently.

Which makes the interest only very attractive - when money is tight, one can just pay the interest, and when the money is there, one can reduce the principal just like a normal loan. And I could not get a fixed interest normal loan with a lower interest rate when looking at refinancing.

[AtheistCrusader]

7. You can pay more than the interest payment.

And that goes toward the principle.

If you have anything to spare, and if you're like me in an inverted loan/house value position and unable to refinance again, it's a good idea to slash down that principle, with whatever money you can stuff into it. Otherwise, you're along for the ride, and at the mercy of whatever the interest rate is, someday.

The loan payment might be set up so the payment paperwork is geared toward just paying the interest, but you can probably pay more. I haven't seen one of these loans where you couldn't, even if it wasn't obvious.

[Robb]

8. Yes, that can be done. nt