Tuesday, February 15, 2011

Update on Option ARMs

by Bill McBride on 2/15/2011 01:09:00 PM

My first post of the year was: What about those Option ARMs? (with those old scary option ARM charts)

2011 was supposed to be the year that the Option ARM borrowers defaulted in mass. (An "Option ARM" is an adjustable rate mortgage with several payment options including interest only and negatively amortizing options).

However, as I noted, "many of the loans have already defaulted ... and some of these loans were modified (Option ARMs and Alt-A loans were targeted by the banks for internal modification programs), and some of these borrowers have probably refinanced."

Prashant Gopal and Jody Shenn at Bloomberg have more: Option ARM Time Bomb Blows Early, Easing Damage to U.S. Housing (ht Mike in Long Island)

In a 2006 cover story in BusinessWeek magazine titled “Nightmare Mortgages,” George McCarthy, a housing economist at the Ford Foundation in New York, compared the looming resets to a neutron bomb.

“It’s going to kill all the people but leave the houses standing,” he said at the time.

What he and other analysts didn’t anticipate was that so many option ARMs would go bad before resetting, and that interest rates would stay low enough to minimize the impact of the adjustments on borrowers ...
And the banks have targeted Option ARM borrowers for modifications:
Terms on about 20 percent of option ARMs have been revised, sometimes with a switch to a fixed rate, said Michael Fratantoni, vice president of research at the Mortgage Bankers Association ... JPMorgan has reworked about a quarter of the $40 billion of option ARMs it inherited when it acquired Washington Mutual in 2008. The New York-based bank plans to adjust terms on an additional $2 billion to $4 billion before resets kick in ... Wells Fargo has modified more than 80,000 loans since the beginning of 2009. The company’s outstanding balance of Pick-A- Pay Loans fell to $54 billion on Dec. 31, 2010, from $101.3 billion at the end of 2008, primarily through payoffs and modifications. The company has forgiven $3.7 billion in principal, [Tom Goyda, a spokesman for the bank] said.
Although there will be more delinquent Option ARM loans this year, the feared "2nd wave" of defaults will be much smaller than originally feared.