Wednesday, December 31, 2008

Option ARM Intervention in Ohio

We are not fans of the Option ARMs or Pick-A-Payment mortgages. Not even mention the tidal wave of foreclosures coming as they reset, it is a loan that most people can not afford nor understand. We know that many people can not afford the full payments (see here). We also wonder how many fully understand the financial consequences they are when when they picked this loan. And from this article in the Columbus Dispatch titled Mortgage plan could keep 8000 in homes - we are not the only ones. Lets take a look -

Countrywide was accused of misrepresenting "the true nature of escalating payment obligations inherent in (adjustable-rate mortgages), the diminished home equity resulting from its Payment Option ARMs, and its borrowers' financial ability to afford their loans and/or refinance their mortgages."

About 400,000 of the company's 9 million mortgages fit into these categories, Countrywide spokeswoman Jumana Bauwens said.

In some payment-option mortgages, Bauwens said, borrowers paid only the interest on their loan. Others paid even less than that, which meant their principal increased every month.

"These borrowers are eligible for the opportunity to write down the principal to 95 percent of the current market value,"
she said.

"There are two groups," [Columbus bankruptcy lawyer Scott Needleman] said, "the very intelligent who knew what they were getting into and thought they'd be selling their house for a profit in five years -- and the other half who had no idea what they were getting into, which is fraud through and through by Countrywide."

"Loans will be modified based on what people can afford," Bauwens said, adding that the mortgage will be no more than 34 percent of a homeowner's income.

While we agree with Mr. Needleman that there are two groups getting the Option ARMs - we do not think they are split evenly in half. We think a just a very small percentage really understood the full consequences of the loan.

Ohio is also going to make significant write-downs. Changing many from probably over 50% of income to only 34%. Are these going to be adjusted of current income figures? How will they take the newly unemployed into account?

We believe the Ohio program is only for Countrywide customers - so those unlucky Wachovia customers may still owe 125% of the original purchase value while their Countrywide neighbor gets a huge reduction. That is going to go over well.

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