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Tuesday, January 12, 2010

More on Option ARMs

by Calculated Risk on 1/12/2010 07:24:00 PM

From Mark Koba at CNBC: More Homeowners Struggling As Option ARMs Reset Higher

From Diana Olick at CNBC: Walkaways, Pay Option ARMS Hit Banks Bad

And from my earlier post: Option ARM Recast Update

This impact is still being debated, but the Option ARM fallout will hit the mid-to-high end bubble areas because it was used as an affordability product.

UPDATE: As Laurie Goodman at Amherst Securities noted yesterday, Option ARM borrowers were a self selecting group (people stretching to buy homes) and most have negative equity in their homes. The "payment shock" is unclear because of low interest rates and because of modifications. Many lenders will be willing to extend the term, and some lenders like Wells Fargo has reduced principal on a case-by-case basis.

Option Click on graph for larger image in new window.

On negative equity, this graph from Amherst shows the CLTV for various mortgage products. Note that subprime and Alt-A had a somewhat higher percent of borrowers with negative equity than prime - but Option ARMs (red) borrowers are mostly in negative equity!