Option ARM Loan Modification Outlook Dismal

Posted by: Mara Der Hovanesian on July 27

Those nasty pick-a-pay mortgages, the ones that allowed borrowers to pay less than interest thereby adding to principal balances every month, continue to be among the most worrisome mortgages still going bad.

And modification efforts are going nowhere. Lots of folks, including The Motley Fool and a Mortgage Law Network blog continue to lament the failure of modifications so far. The problems seem to be particularly acute with option ARMS. About 40% of the option adjustable rate mortgages that were underwritten in 2006 and 2007 are already delinquent. But less than 10% of those loans, which have accumulated higher balances because borrowers were allowed to defer more than just interest, have been modified. The worry is that when the interest rates and payments eventually recast to higher payments (as the loan contract calls for) yet even more borrowers will throw in the towel and go delinquent.

New Barclays Capital research from Sandeep Bordia and colleagues shows that the recasts in the next year or so are expected to be a minor event. But by mid-2011, these borrowers are forecast to see payments that are 50% to 80% higher than what they are grappling with now. (Many of these option ARMS are concentrated in former hot-spot real estate markets, such as California and Florida.)

Modification don't seem to be working with these particularly noxious loans. In the face rising payments, borrowers don't have an incentive to keep up with their current payments for homes that are already so horrendously under water, i.e. the loan amount is far above the current value of the property. Bordia says that many of the option ARM loans that do get modified turn delinquent soon after anyway. They've crunched some numbers and forecast that 95% of the loans that are slated for modification will eventually default. If you think that sounds bad, get this: They say that 80% of the option ARM loans out there that are ok and up-to-date as of right now will eventually default, too.

Maybe that bit of new analysis will finally dispel any lingering notions that these loans were intended and sold to only the very best credit quality home buyer.

Reader Comments

Flea

July 27, 2009 05:17 PM

Ha ha! You gambled and lost. Now get out of my house. I am ready to buy. At the price it is really worth. Like it was before the banks, appraisers, builders and local governments started ripping people off.

Indrid Cold

July 27, 2009 05:23 PM

The ONLY way these mortgages are ever going to make sense is if lenders start modifying loan principle. No one is going to pay an inflated payment for an inflated home. This is why the ugly home market will continue to stay ugly.

Mark

July 27, 2009 05:28 PM

There is a graph created by Credit Suisse that's been making the rounds for a little while now showing how we're now (2009) in the 'valley' between the subprime reset mess (07-08) and the Alt-A Pay-Option recast mess (10-11).
Keep in mind that recasting can create MUCH larger payment shocks than simple rate resetting.

jwj

July 27, 2009 06:18 PM

As a former mortgage broker who never originated an option ARM mortgage or a sub prime mortgage, here is the bottom line. We got in this mess because of one thing GREED. From the mortgage brokers to Wall Street. Are we any where close to seeing the light at the end of the tunnel, Hell no.
Now we have the media declaring we are coming out of this recession. Have we drug tested these experts lately. Unemployment is over 10%, the housing market is still crashing and cosumer confindence dropped 4% last month.
My guess is that we won't see the light until 2011 or early 2012 at the earliest for housing. America seems to have finally gotten into a mess we won't recover from.
PS Just read today that if you total up all the debt the US government, state governments, consumer, commerical and mortgage debt it would exceed 150 trillion dollars. Thats trillion with a T. That why the dollars is going to be removed as the money standard for global commerce very,very soon

jwj

July 27, 2009 06:18 PM

As a former mortgage broker who never originated an option ARM mortgage or a sub prime mortgage, here is the bottom line. We got in this mess because of one thing GREED. From the mortgage brokers to Wall Street. Are we any where close to seeing the light at the end of the tunnel, Hell no.
Now we have the media declaring we are coming out of this recession. Have we drug tested these experts lately. Unemployment is over 10%, the housing market is still crashing and cosumer confindence dropped 4% last month.
My guess is that we won't see the light until 2011 or early 2012 at the earliest for housing. America seems to have finally gotten into a mess we won't recover from.
PS Just read today that if you total up all the debt the US government, state governments, consumer, commerical and mortgage debt it would exceed 150 trillion dollars. Thats trillion with a T. That why the dollars is going to be removed as the money standard for global commerce very,very soon

Dylan

July 28, 2009 03:31 PM

We are going to be in this mess for a long time. It will take a lot of sacrafice and coordination from Wall street to Main street.

We will hit our bottom when the medium home price is supproted by the median income.

Dylan

July 28, 2009 03:31 PM

We are going to be in this mess for a long time. It will take a lot of sacrafice and coordination from Wall street to Main street.

We will hit our bottom when the medium home price is supproted by the median income.

sharon ehrhardt

July 29, 2009 04:42 AM

My advice to the friend who bought a decrepit crackerbox in silicon valley at the height of the folly for over half a million - quit paying and enjoy free living until the bank kicks you out. Why spend the rest of your life trying to pay for that high-maintenance dog? You were swindled by the folks that sold you that loan.

I bought foreclosures in CA, at auction, on the courthouse steps, fixed them up and sold them until 2001 when things started to go nuts. Even then, the banks had to take big hits when they foreclosed. Of course, the banks need to reduce the principle and modify the terms to keep families in their homes... for the sake of the recovery and for the sake of the very fabric of our society.


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