The new hybrid Option ARM was first introduced by Bear Stearns about 9 months ago and other lenders are now offering it (Loan City, Flagstar, Indy Mac, Dollar Mortgage) with several others following suite.
The problem with the standard Option ARM is people started seeing their index plus margin payment adjust upward every month and wanted something a little more predictable and stable concerning their rate and negative amortization. This is the solution for those that can't get into an interest only loan and don't want the old Option ARM.
They use the option ARM for a few reasons in my experience:
First, they just can't afford the interest only payment and are betting on a continual appreciating asset so they are willing to take the risk. Not good anymore, was good two years ago…..
Second, there are alot of self employed people in CA that have fluctuating income based on commission or by being self-employed. They have a 20,000 check one month and nothing for the following month so they want the option.
The tough thing for those in standard Option ARM's is that most lender's tied people up in a three year pre-pay to make bundles of rebate money (3% to 4% rebate) so these people are a little stuck unless they want to pay the pre-pay.
Believe it or not, most people that insisted on the Option ARM make more than the minimum payment every month as their interest only rate is in the mid 6's which would be where they would be today on a 7 year IO at WAMU or Wells Fargo.
My business is all over the place right now. I don't put harldy any people in a standard Option ARM, a lot of people in WAMU's 7 year Interest Only, and some people into the hybrid.
Not much cash out, just a lot of equity lines right now (they are free to my clients) to hedge against property value drops in the coming years.
