In New Jersey the Option Arms are between 5-10% of all the new and refinanced mortgages. With a good chance of upto 80% of those mortgages collapsing when the resets come we will have trouble. Although things will not be as California, Nevada, Washington, Arizona and Florida. Those areas will be devastated - everywhere else things will be bad, just not as bad. When this map is combined with the following graph from Mish's Global you can see the next few years is when the real problems start to occur.
These two graphs combined illustrate the problems of things to come. As you can see from the graph the resets really increase during 2010 through 2011. If we think things are better or calming down just wait until these massive resets take place. Just looking at the data makes me nervous about what is coming. Since 80% of Option ARMs pay only the teaser rates every part of the country will be facing problems. Many of these 80 percenters will end of facing foreclosure, short sale or walking away. And because they are only paying the teaser rate every month they are falling further underwater, the lenders will lose even more on every deal. Add in the falling employment rates and housing price and things will spiral down very quickly.
In 2006 Business Week had an article called Nightmare Mortgages (where the Map of Misery originates) which illustrated some of the problems that were heading down the pike. We are now facing the problems the article was eluding to. Here are some interesting parts of the article -
The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.People were given easy access to easy money for too long. Everyone thought they were profiting off the deal - the lenders, mortgage brokers and the owners. In the short term they were. But now the debt from all that easy money is coming due. We still have two years before the massive resets are due and already home prices are falling and foreclosures are skyrocketing. The easy money was too easy. We will just have to wait to see how big the upcoming collapse will really end up being. Depression 2.0 or worse?
... Most of the pain will be born by ordinary people. And it's already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down -- meaning borrowers' homes are worth less than their debt. If home prices fall 10%, that number would double. "The number of houses for sale is tripling in some markets, so people are not going to get out of their debt," says the Ford Foundation's McCarthy. "A lot are going to walk."
... In a May focus group, the [Consumer Federation of America] found that option ARM customers at all income levels said the loans were the only way they could afford their homes. While many recognized that their mortgages could increase, "they professed complete surprise that they could increase as much as they could," says Fishbein. That lack of diligence will cost them over time.
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