Great article — did everyone catch the bit that in California in 2005, 1 in 5 (20%) mortgage loans were pay option while in 2003 the ratio was 8 in 1000 (.8%)? It’s classic late-stage bubble behavior where all of the weak hands rush in. Hold on tight, this is going to be a doozy…

One of the major reasons that there were so many option arms is that they generate HUGE HUGE paydays for the mortgage broker. From my understanding the mortgage brokers make 2 to 3 times as much on an Option ARM than on other products. I know of people that could easily have afforded more conventional loans that were put in them. There was a lot of greed on both sides of the loans.

I still wonder how many people with Option ARMs put any money down. Why would you put down 5% or 10%, and then reverse all that equity downpayment by increasing your debt every month? (Option ARMs allow you to pay only some of the interest, so the part that you don’t pay is added to your mortgage balance, and your mortgage balance gets bigger every month. So any downpayment made is eventually wiped out. Once the loan gets 15% – 20% bigger than the original loan, the payment schedule goes up, and the borrower has to start repaying the entire loan, including the past interest and the principal.)

Anyone who cares enough about building equity and paying down principal to make a deposit, wouldn’t blow it by going negative-am, would they?

Many are sold on the 2 conservative payment options of the Option ARM. I know people who were told it’s just like a 5/1ARM or a 30 year fixed payment. You can do whatever you like pay the fully amortized payment, the interest only payment etc.

My landscaper told me he refinanced into this great loan that reduced his payment in half. He had no idea what he was getting into until he realized it was a neg am payment. Sure he thought the lower payment was great but he had no clue what the loan really was. Now he’s stuck in it for another 18 months. He was in a 30 year fixed rate at about 6% before he got this great loan that cut his payment in half. He pulled out no equity. He was done in by an unscrupulous broker.

I have another client that got laid off by Qualcomm. He had an assembly/testing job and isnt the brightest bulb in the box. He could have easily pulled out a 25K HELOC for no cost and solved all his short term problems. Instead an unscrupulous broker refied him into an Option ARM knowing full well that he was looking for work out of the area. When he sold his house 3 months later he had a $15K prepayment penalty on a loan amount under $300K.

I’m a little surprised powayseller didn’t jump on the fact that he’s not a recent buyer of his home. He should have a nice equity cushion but has hit the house ATM a little too hard.

How many others are there like this guy? We all know many no-money-down recent purchasers are in trouble and they’re somewhat quantifiable.

Are there any figures out there that provide insight into the number of non-recent homeowners who have pissed away their equity?