The second wave of resets includes a large chunk of OptionARM loans
These loans give the homedebtor three options:
1. pay a fully amortized payment
2. pay an interest only payment
3. pay a minimum payment and add the unpaid interest to the balance of the loan (negative amortization)
Given what I know of the American consumer, most people holding these OptionARMs have used option #3 at least once and many of them have been doing so since the loan originated
Many of these homedebtors will be hugely underwater when reset day arrives and ‘mailing the keys’ will be the most sensible option for them to take (the sheriff will help them see the logic if necessary)
Prime or sub-prime isn’t really the issue – the issue is buying a house you can’t afford
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IMO, PerryChase painted an excellent picture recently of how this correction is likely to unfold – ie, things continue to be ugly through 2010 when general panic and capitulation sets in
I believe these OptionARMs are going to cause / contribute to the panic / capitulation because they will be coming on the market as must-sell inventory at a very bad time (for sellers)
Investors and buyers who can wait will have a field day in 2011/2012 buying distressed property – the $2 mil stuff with a view that people get so excited about will be readily available for $800K or so – entry level houses in Clairemont will be $275-325K
