This is a thread on “option ARMs” not simple ARMs. If you always make the minimum payment with your Option ARM (which is the option in option ARM) low interest rates will not stop a neg-am “recast”. Does not take much creative thought to imagine how many people may be paying more than minimum on drastically underwater homes.
From the link:
Let me be abundantly clear. We still have a Pay Option ARM and Alt-A mortgage problem. This will hit in full force in 2010 and we are already seeing many mortgage holders having trouble with actual recasts brought on by negative amortization. Yet there is a crew of people saying that Alt-A mortgage products will not bring any trouble because of the low interest rate environment. Unfortunately the low rate misses the bigger issue. Low rates are helping but the problem that we will be seeing is the massive onslaught of recasts, not resets that will be occurring over the next few years.
Now do some basic math here. If 58 percent of the face value of the active loans is here in California, we have at least $109 billion in option ARMs just in the state. Keep in mind this is the lower bound estimate since Fitch only looked at securitized option ARMs. If we look at the total universe of these loans, we will find nearly 900,000 loans – 92,000 currently in foreclosure and 139,000 that are seriously delinquent but that leaves the bulk out floating in mortgage purgatory:……………………………………………….
As of January of 2009, 73 percent of all active option ARMs are underwater. In other words, California has $109 billion in option ARMs that have no remedy in this current market aside from foreclosure which lenders are obviously balking at. I would argue that even more are underwater because many of these were made at the peak with low or no down payment. They started out with little to no equity and this was before the California housing market imploded.
So we have established that option ARMs are largely an isolated problem and the majority of these loans are here in California. Many of these loans are going to implode not because of rate resets which adjust to interest rates, but the actual recast volume. Many are entering this stage earlier because of negative amortization caps being hit. Over 90 percent elected to go with the negative amortization payment option and this has actually increased the balance of many of these loans. At least with many subprime loans the balance didn’t grow.
And most of these option ARMs will fail to even qualify for HAMP because they are severely underwater:
