The Option Arm loan is causing trouble. The negative amortization loans, which typically see the amount of principal owed rise over the loan’s term, is seeing defaults rapidly rise.
There are ~$750 billion of option ARMs issued from 2004 to 2007; ~$1.9 trillion of subprime and $ 2 trillion in jumbo mortgages were issued over the same period.
J.P. Morgan reported that more than 55% of borrowers with option ARMs are underwater, i.e., owe more than homes are worth.
Even worse, they are defaulting in increasingly large numbers:
As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics, a data firm that analyzes mortgage performance. That compares with 23% in September. An additional 7% involve properties that have already been taken back by the lenders. By comparison, 6% of prime loans have problems. Problems with subprime are still the worst. Just over half of subprime loans were delinquent, in foreclosure, or related to bank-owned properties as of December. . .
Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs, which assumed a further 10% decline in home prices. That compares with a 63% default rate for subprime loans originated in 2007. Goldman estimates more than half of all option ARMs outstanding will default.
Go figure. Giving mortgages to people who can’t afford them — even with “affordability products” like NegAm loans — worked out poorly. Who ever could have seen THAT coming . . .
Option ARMs See Rising Defaults
WSJ, JANUARY 30, 2009