“…interest-only loans accounted for about 31 percent of all new mortgages last year, but David Lareah, chief economist with the National Association of Realtors, says he is more worried about option ARMs than interest-only loans.
“They are a lot more dangerous,” he says, because “the borrower is giving away part of his equity,” sometimes unknowingly. – David Lereah, June 2005
option ARMs are 1/4 of all loans in Wyoming (from the 9/1/06 Business Week cover story)
“And while they made up at least 40 percent of mortgages in Salinas, Calif., and 26 percent in Naples, Fla., they’re not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51 percent of mortgages in West Virginia and 26% in Wyoming were option ARMs.
Stock and bond analysts estimate that as many as 1.3 million borrowers took out as much as $389 billion in option ARMs in 2004 and 2005. And it’s not letting up. Despite the housing slump, option ARMs totaling $77.2 billion were written in the second quarter of this year, according to investment bank Keefe, Bruyette & Woods Inc.”
UNQUOTE
So we’ve got about $1 trillion in option ARMs nationwide. Assuming a median US home price, slightly adjusted up for the higher prices in CA where they are more prevalent, let’s assume the average loan amount is $400K.
That is 2.5 mil homeowners in the US with option ARMs.
Does anyone care to take over from here? What is the impact of 2.5 mil homeowners faced with a mortgage increasing 50% to 100%, at a time the economy is slowing, they are possibly upside down on their mortgage or lost a job?
