The Option ARMs Are Coming

Over and over this blog has warned about the upcoming hurt following the Option ARM recasts. When predictions are made that the worse is behind us, the housing crisis has bottomed out and the financial crisis has been averted we realize people do not see the elephant in the room. The upcoming pain from the widespread option arm recasts looks like it will dwarf the sub-prime and ARM problems we are currently experiencing.

Business Week are the Paul Revere's of the upcoming problem. They have been the only warning "The Option ARMs are coming! The Option ARMs are coming!" Over and over again with few others hearing the warnings. Today they are at it again with an article titled The Next Real Estate Crisis. Here are some important snippets -

With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due.

...
Many home buyers thought they could resell their homes before their payments increased. But instead, many of them got trapped.

...
William Purdy, a lawyer at Simmons & Purdy in Soquel, Calif., a firm that specializes in home refinance issues, said some borrowers with option ARMs are defaulting before the loans recast because they couldn't afford even marginal increases in the minimum payments.

"It's a ticking time bomb inside your house that you can't get rid of," Purdy said. "They can try to slow down the inevitable, but sooner or later their loan is going to cap. …This year is going to be a blood bath. Next year, we'll start out just about the same."

Remember a huge difference with the Option ARMs and regular ARMS is the money owed on the mortgage. Many of the Option ARM home buyers owe 110-125% of the original purchase price and now the houses are worth (depending on location) between 50-90% of hte original purchase prices.

For example a Merced, CA house that was purchased at $400,000 may have a mortgage that has grown to $500,000 with a real current market value of $200,000, add in the $50,000 for foreclosure costs and the lender loses $350,000. The owner could not afford the payments on a $400,000 property when the economy was strong and gas was affordable. It will be impossible to pay a $500,000 with a weak economy. How long can the lenders and our economy sustain losses on these levels?