Option ARMS were the hottest new trend when I bought my first house four years ago. They gave the borrower an “option” on what payment they would make. They had a choice to pay either a 15 year amortized payment, a 30 year payment, an interest payment or an interest payment. Good options right?
It was good for me as a real estate agent, because my income wasn’t exactly stable. Unlike most people though, I always paid at least the interest amount and usually the 15 year option. Apparently I wasn’t the norm. According to an article in CNN Money:
About 93 percent of option-ARM buyers chose to pay a minimum amount less than the interest due, according to a report released last week by Standard & Poors. That means that nearly all of the 350,000 option-ARM borrowers now owe more than they owed when they first purchased their homes.
Many of these loans were written in 2004 and are close to their five-year reset when the loans convert to a standard amortization. Some more recent loans will reset early if the accumulated interest has pushed the loan-to-value ratio above 110 percent.
In one example outlined in the S&P report, the payment on a $400,000 mortgage goes from $1,287 to $2,593.
The authors of the report say that many ARM borrowers aren’t good candidates for refinancing or modification because their loan-to-value ratios are too high for the government’s Making Home Affordable program. Also, about 80 percent of option-ARM loans were stated-income loans and borrowers could be held legally liable for deliberate inaccuracies on their original applications.
This is pretty scary. With option arm loans, the reason they were so inexpensive is because the people weren’t paying even the interest rate on a loan that was supposed to be amortized over 30 Years! Now, they not only have to pay all the interest (which is now more because of negative equity) but they also have to pay a fully amortized loan which is now just a 25 year loan rather than a 30 year loan. This could do some really bad things for Foreclosures.