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Saturday, June 14, 2008

ARMs: The Next Wave of Delinquencies

by Calculated Risk on 6/14/2008 03:27:00 PM

Mathew Padilla at the O.C. Register has an interesting piece on rapidly rising delinquencies in Orange County, CA: Orange County’s mortgage market distress could soon top the U.S..

The report said O.C.’s delinquency rate of 3.14 percent, was less than California’s 4.34 percent and the nation’s 3.23 percent.

But, unfortunately, the county’s delinquency rate is rising more quickly than for both the state and nation.
Here are some comments from Keith Carson, a senior consultant for TransUnion, on why the delinquency rates are rising quickly in Orange County:
In Orange County, ... the rate at which you are accelerating is reason for concern. I think that is probably a function of the number of adjustable-rate loans that were made in Orange County in the 2005 to 2006 time frame. Some of those have reset (the interest rate has increased) to the point where occupants can’t afford the payments.
I think it is mostly due to the price of homes in California. There were a lot more ARMs used so people could afford to get into a home. For a lot of people the only way they could get into a home was with an ARM.
This is not a subprime problem. The reason the delinquency rate is rising rapidly in Orange County is because homes are very expensive, and a large number of recent home buyers used ARMs, especially Option ARMs, as affordability products.

Now that the interest rate is increasing - and in some cases the loans are hitting the maximum allowed principal ceiling - these loans are no longer affordable. Since these same homeowners have negative equity, selling the home is not an alternative.

The important point here is that delinquencies are starting to increase rapidly in middle to upper middle class neighborhoods where buyers used "affordability products" to buy more house than they could really afford.

We are all subprime now!