While this is a good article in a national well-regarded paper, I feel that it was imcomplete in that it failed to describe, with an example, what an Option ARM borrower might face when his loan resets and has to be fully amortized.
Some quotes from the article:
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But the risk they took — that rates would not rise too steeply when the loans entered their adjustable period — now haunts millions of borrowers, who have seen their monthly payments skyrocket
The increases have caught many homeowners in a “can’t pay, can’t sell, can’t refinance” vise, in which their ARM payments are outpacing their incomes and their homes have not appreciated enough to help cover the cost of a refinanced mortgage or to allow them to sell and walk away. For them, foreclosure looms.
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Why is it when I wrote about this, I was “Chicken Little”? I believe someone said I simply don’t understand Option ARMs, that many people who take them out are sophisticated individuals using them as cash management tools, and I am too extreme and frustrating in suggesting that they are a problem. Now, the press is full of these stories, and the senators are having special hearings on the matter. The difference between my forecast and these media stories is that none of them made a specific forecast for the country or for any city. I am trying to get my hands for some data so I can make more accurate forecasts, but am not hopeful. NOT even the regulators at the Senate Hearing last week had any numbers on the number of Option ARMs out there! The only number they quoted came from a document we’ve all seen, Christopher Cagan’s report.
Calling an Option ARM a “cash management tool” is like calling a doggy door a “pet entry system.” I think Bill Murray said that locking the medicine cabinet was a “medication management strategy” in the movie What About Bob.
When in doubt, throw a bunch of fancy words together to fool the public, or should I say, “sophisticated individuals.”
When used by the savvy (or lucky) buyers with specific holding periods this type of loan makes sense. A lot of people have indeed made a lot of money using these to enable stretching their mortgage payments for the bigger/better house. The problem is, not everyone is savvy (or lucky) and market conditions do change.
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