Option ARMs Put Recovery at Risk

Option ARMs, which accounted for $750 billion in mortgages issued between 2004 and 2007, according to Inside Mortgage Finance, are at serious risk with at least 50 percent already in default.

Resets on option ARMS have doubled the payments for many holders.

“Everyone’s been focused on subprime, but we’re more concerned about this,” says Todd Jadlos, managing director of LPS Applied Analytics, which analyzes data for the financial industry. “By the time subprime defaults had increased 200 percent, in June and July of 2007, option ARMs had gone up 400 percent. People just didn’t notice because the overall numbers weren’t as high.”

Lenders have stopped offering option ARMS, but there are about 600,000 held by borrowers, three-quarters of whom are paying interest only. When the cap is reached – for most after they have held the loan for five years – they’ll face drastic increases.

Barclays Capital estimates that banks will lose $112 billion on option ARMs. Some banks are aggressively refinancing these loans, Barclays says.

Source: The New York Times, John Leland (08/26/2009)