Friday, January 30, 2009

Option ARMs blowing up

By Rolfe Winkler on Option ARMageddon:

The data below demonstrates how this blog got its name. WSJ:

Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance, an industry publication. Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders…

Option ARMs, which have been largely abandoned, give borrowers multiple payment options, including a minimum payment that often was less than the monthly interest due. Borrowers who made the minimum payment on a regular basis often saw their loan balances grow, also known as “negative amortization.” And with home prices falling, more than 55% of borrowers with option ARMs owe more than their homes are valued at, according to J.P. Morgan Securities Inc…

As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics, a data firm that analyzes mortgage performance. That compares with 23% in September. An additional 7% involve properties that have already been taken back by the lenders. By comparison, 6% of prime loans have problems. Problems with subprime are still the worst. Just over half of subprime loans were delinquent, in foreclosure, or related to bank-owned properties as of December. The nearly $750 billion of option ARMs issued from 2004 to 2007 compares with roughly $1.9 trillion each of subprime and jumbo mortgages in that period.

Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs, which assumed a further 10% decline in home prices. That compares with a 63% default rate for subprime loans originated in 2007. Goldman estimates more than half of all option ARMs outstanding will default.

This is news?

Large option ARM lenders like BankUnited, Downey, FirstFed, and GoldenWest (acquired by Wachovia) have all dropped like flies over the past few months. GoldenWest is likely to take down not just Wachovia, but also Wells Fargo, which, in a stupendously foolish move, acquired Wachovia without government support. The wild card, of course, is government. Will Obama establish a “Bad Bank” and if so how much toxic trash will it buy and at what price?


  1. You mentioned that WF, "in a stupendously foolish move, acquired Wachovia without government support". What would you consider the $25 billion in TARP money?


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