Time bomb set for 2010, average option ARM borrowers owe 126% of home value

[Liberal_in_LA]

Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will hit starting in 2010, five years later.

Joey Amacker of Newark, who works as an account manager for a catering company, refinanced his home with an option ARM for $624,000 so he could pull out money to build an addition. The friend who sold him the loan assured him that an option ARM was a safe and affordable product, he said.

Amacker said he initially made only the minimum monthly payment of $1,800, which covered part of his interest and none of the principal. The amount he owed grew to $660,000 by November 2008, according to loan documents.

Meanwhile, payments that would cover both interest and principal also escalated above his reach, said Amacker, a single father of twin teenage boys. Although he wanted to pay more than the minimum, "it was a struggle, borrowing from Peter to pay Paul," he said. His 21-year-old daughter moved in to help out, and he rented out the addition he'd built. But he couldn't keep up with the payments. He's been trying to get his bank to modify the loan, but says it doesn't get back to him. The bank did not respond to a request for comment.

Between the negative amortization and his missed payment and penalties, Amacker's total debt has ballooned to $725,000, while the house is probably worth about $500,000, he said.

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'Significantly underwater'

"The average option ARM borrower is significantly underwater, so much that they don't think they'll get out," Sirotic said. On average nationwide, option ARM borrowers started out with loans for about 79 percent of their home's value (the other 21 percent may have been covered through a down payment, a second loan or a combination of the two). But now, on average, the amount these borrowers owe is 126 percent of their home's value, based on depreciation and not including the effects of negative amortization, Sirotic said. That means, for instance, someone with a $600,000 mortgage might have a home now worth only $476,000.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/20/MNOR19N2B1.DTL&type=business&tsp=1#ixzz0RfKehUPE

[AllentownJake]

1. Another Time Bomb

The decision to go with giving banks capital versus giving people relief on their mortgages is going to seriously bite us in the ass.

[exboyfil]

3. Except as an overall societal condition (ie huge blighted areas)

I have a real tough time being told to dig into my pocket to help someone who purchased a house four times the value of my house. I just don't think their is enough cash to help out in these situations (even if all the TARP money was used for this instead of what it was used for). I did not agree with TARP, but I have a difficult time having much sympathy for this man.

[AllentownJake]

5. So you'd rather a banker get the money?

If the federal government bought the loans like FDR did they could have negotiated payment terms for the loans.

Instead you hand a bank both the property and cash to cover the loan.

[exboyfil]

14. I never said anything about a banker getting the money

If you buy up the loans (actually it would have to be the securities that hold these loans), then a banker would get the money (or whoever is holding the paper now).

I don't agree with TARP either.

[JackRiddler]

6. All you're showing is you don't get what debt relief means.

There should have been writedowns. That doesn't mean subsidies, or bailouts. Writedowns. To reflect that the market was distorted for years by the strategy of the mortgage lenders and the banks, not by the greed of the house-buyers, who were merely suckers in the overall scheme, however distasteful you may find them personally.

Unlike TARP, writedowns would have cost nothing to you in taxes.

Stepping in and putting controls on the interest rates, or mandating interest forgiveness, would cost nothing to you in taxes.

[exboyfil]

13. The discussion was using TARP money

actually write downs are probably a much better solution in most cases (it would be in both parties interest). The biggest problem is securitization of the loans which prevents anyone being able to write them down. A mechanism for unwinding the security is needed.

I have heard lots of talk including another comment about buying up the loans (no, no, no unless it is done at a realistic market discount, and it would have to be the security and not the underlying loans). You can't get to the loans, and that is one of the biggest problems.

Don't know about mandating particular aspects of loans already sold?? Such rules would apply to everyone and could create lots of additional problems. It would tank the underlying securities (sorry Norwegian pension fund).

[FarCenter]

2. It's really a California problem -- screw California

"People think option ARMs (will be) a national crisis," he said. "That's not really true. It's just in higher-cost areas like California where you see their prevalence."

Of the 10 metro areas nationwide with the most option ARMs, three are in the Bay Area, according to Fitch Ratings, a New York research firm. They are the East Bay counties of Alameda and Contra Costa, the South Bay area of Santa Clara and San Benito counties, and the counties of San Francisco, Marin and San Mateo.

Together, these areas account for the second-most option ARMs in the country, although they are still far behind the greater Los Angeles area (including Los Angeles, Riverside, San Bernardino and Orange counties), according to Fitch data.

---

Thank California's own Herb and Marion Sandler -- scumbags who created option ARMs at Golden West -- and got out at the top with their ill-gotten gains.

Golden West sale might portend housing boom's end
Wednesday, May 10, 2006
By Jesse Eisinger, The Wall Street Journal
Herb and Marion Sandler have been running one of the best home-lending franchises in America for decades. Now, they're getting out.

Their decision to sell Golden West Financial to Wachovia for about $25 billion in mostly stock and some cash may turn out to be a harbinger of the end of the housing bubble.

Mr. Sandler pooh-poohs the notion that the couple's exit foretells the top of the market.
<SNIP>
Since the early 1960s, Herb Sandler and his wife have built Golden West carefully, mortgage by mortgage. Option ARMs allow customers alternatives of how much to pay each month, including the choise of making a minimum payment, as one might make on a credit card. They have accounted for 99 percent of what their bank has offered for the past 25 years. Its profits, which have grown at just under 20 percent annually for four decades, are the stuff of legend.

Read more: http://www.post-gazette.com/pg/06130/688947-28.stm#ixzz0RfQ2fXNQ

[Phoebe Loosinhouse]

9. Option ARMs were sold all over the country. I heard them touted endlessly on local radio in my area.

[FarCenter]

12. California has the lions share of option arms, see article and map

http://www.thetruthaboutmortgage.com/california-loves-the-option-arm-mortgage/

http://www.businessweek.com/common_ssi/map_of_misery.htm

[madrchsod]

4. my ARM went from 5.5 to 3.4

if it goes up next October it will 5.5 again. i`m lucky..i have a solid bank that will not sell my mortgage..

[exboyfil]

15. I like local ownership of my loan. I am refinancing with my

credit union who plans to keep the loan, but what difference would it make in what you actually pay? The terms are the terms.

You have done well with your ARM. I don't know what your highest interest is for it, but you might want to think about refinancing now. ARMs in general offer huge exposure.

15 year rates are looking particularly attractive. I can't believe that I am as good a credit risk as the Federal Mortgage Home Loan Corporation (they have a 15 year note at about the same interest rate which I am paying - 4.625% with only $1200 in closing costs. I will get my closing costs back in under two years, and I lower my payment by $100/mo. borrowing the same amount of money which I did on the original loan. Also I am getting some cash to go into the college fund. Granted I have stretched my time from repaying the entire loan from 8 years to 15 years.

[earth mom]

7. Meanwhile Obama & Congress fiddle. nt

[Phoebe Loosinhouse]

8. This person got: a house, equity cash and an addition

and made the CHOICE to pay partial interest payments.

I am completely unsympathetic to his situation. BUT, if I were Queen of the Universe, I would somehow FORCE the banks to re-finance crap mortgages like this which they made knowing full well in advance that thousands of people would be too GD stupid to use them intelligently (i.e. use the minimum payment option sparingly - maybe once a year at Christmas, for example)and that resulting foreclosures were completely predictable.

I would refinance the portion of the mortgage that a current appraisal supports at convention terms, the underwater part I would put into a second mortgage at a far lower rate, strictly to punish the bank for making the loan in the first place. All the easy mortgage money is what caused real estate inflation in the first place, so I have no issue with having a bank eat part of the inflated value that it created.

[onethatcares]

10. I agree.

If actuarity (?) tables can be used to classify everything an isurance company can expect, you can rest assured that they are used to figure out how many people will default on their mortgages.

The lure of easy money has a very strong appeal. Don Henley.

Peace

[glowing]

11. That's when you hire a lawyer to look over a contract. Let it go to foreclosure.

Check out how much the mortgage has been sliced and diced.. may take 2yrs to find out who owns the home.. seems to me that the bank is not getting back to him because the bank doesn't know who owns the many pieced of the home.. that large of a mortgage has got to be thrown accross a few banks to share in the risk.