[quote=esmith][quote=peterb]Someone needs to go out on a limb here and call for a market bounce in early 2009!! [/quote]
OK, let me play devil’s advocate.
– Option ARM payments reset every year. Much-hyped reset charts refer to the date of final reset to fully amortizing. In reality, payments go up bit by bit (maybe 10% a year) and then jump when the principal cap is hit. For a distressed borrower who had to lie about his/her income and get an option ARM just to afford the house, every reset has a potential to overload his/her financial capacity and cause a delinquency.
– There was a study by First American Loan Performance that found that a “double-digit percentage” of all option ARMs in San Diego area were 60 days delinquent as of October 2007. What’s the delinquency rate today? No one knows for sure.
– How many option ARMs were there in San Diego to begin with? We had 22 thousand defaults in the county in 2007 and 31 thousand thus far in 2008. How many non-delinquent ARMs are left?
– Is it possible that the impending Alt-A tsunami might turn out to be a fizzle?[/quote]
The other point that folks who are afraid of the reset monster forget is to consider what the rate will be at reset.
Your typical alt-A 5/1 ARM that originated in 2005 at 5.5- 5.75%, is tied to 12-month Libor with a margin of 2.25%.
Currently the 12-month LIBOR is under 2.5%.
This means that these loans, if resetting today would reset at or below their original rate. Perhaps as low as 4.75% !!!
Don’t get me wrong, The option ARMs are toast already because of negative amortizaiton. The Alt-A interest only or “traditional” ARMs are not nearly as deadly.
