From Bloomberg: Option ARMs Threaten U.S. Housing Rebound as 2011 Resets PeakShirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.And compare these two comments:
Her payments started at 3/8 of 1 percent, or less than $100 a month ... The 73-year-old widow may see it jump to $3,500 a month in two years ... She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.
[CR Note: the 145% recast level is much higher than normal. This is now a GMAC loan]
About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.
[CR Note: recast, not reset. This article uses the two terms interchangeably]
“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” [Cameron Pannabecker, the owner of Cal-Pro Mortgage] said. “The consumer had a product pushed on them that they had no hope of understanding.”
“The problem is, real estate values went down,” [Peter Paul of Paul Financial, the loan orginator] said.
We always compare these to reverse mortgages. They are both complex and new financial instruments where the vast majority of owners will not understand the details and get in trouble down the road. This is going to be a big mess since in the meantime the mortgages are increasing the property values are plummeting. We will see a wave of walkaways and foreclosures in the next few years.