Next Up: Massive Option ARM Defaults

Next Up: Massive Option ARM Defaults


Liquidity Crisis 2.0 is right around the corner.

From WSJ:

Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance … 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.

As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics … An additional 7% involve properties that have already been taken back by the lenders. … 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.

And here’s the scariest part…

Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs.

61% of $750 billion? What’s that math?

Oh yes, I’ve got it: this = really + bad

  • DW

    This really is a BIG problem–considering the state of our economy. However, I do feel that the blame rests on the shoulders of two groups: the issuers and the homeowners. I mean, to take advantage of homeowners in that way is inexcusable, but it is also true that many of the homeowners should make sure to take on a mortgage that is specific to their situation and financial status. There are some people who are defaulting, since they attempted to “overdo it” and enter into this type of agreement because it was available. Yet, did they take into account whether or not they actually should? Also, shame on the mortgage professionals that have taken advantage of people who would typically not have qualified for such a mortgage.

    I feel like there are lots of people laying the blame, but it should be distributed fairly, amongst the appropriate individuals, since SOME people can actually benefit from these option ARMs–those of us that are financially savvy and decided (correctly) to go with the option ARM.

    I honestly feel like you raised a good point in this article, and also feel that these two articles have contributed to my knowledge regarding this topic: