Sunday, June 8, 2008
You think it's bad now
Credit Suisse just released a new updated chart for Option ARM type mortgages. The old chart was out of date because most of the people that have Option ARMs are only paying the minimum amount. By doing this they move up the date at which the rate resets. Originally most these loans were to reset between 2010 and 2012. But with people making the minimum payments that reset date is moving up as they are hitting the loan cap. As you can see the peak resets have moved up a year or two
If you don't know what an option ARM is you're not alone. An Option ARM (adjustable rate mortgage) is a mortgage that give you the option of paying several different amounts. You can pay the full amount of your interest plus some principal. Option 2 is usually to pay only the interest. Or option3, the one that over 80% of the people with these loans choose is to pay a minimum amount that is less than even just the interest owed. By choosing that last option, the lender then tacks on that shortage onto the balance of the loan. So the loan balance goes up each month. Most of the Option ARMs have a maximum amount that the loan can rise. Once the balance hits that amount (it can be anywhere from 110% to 125% of the original loan). then the loan resets to a regular ARM and you must pay the full amount of interest and principal. So a lot of these payments are set to go from something like $2000 a month to $4500 a month.
Option ARMs were very popular especially here in the IE, in fact they were the most common loan in 2005-2007. Most of these loans were No-Doc (liar loans) and they allowed people to buy homes that were far more that they could afford. Of course all these people are paying the minimum amount and have zero chance of affording the full payment. Once they hit the loan cap and it resets the chances of a foreclosure are close to 100%.