There’s news today of a new turn in the housing defaults mess. The L.A. Times reports, If you “thought the mortgage meltdown was just a sub-prime affair”… “Think again.”
There’s another time bomb waiting to explode, experts say: risky loans made to people with good credit.
So-called pay-option adjustable-rate mortgages, or option ARMs, were the easiest and most profitable home loans for lenders and brokers to make for much of this decade. Last year, they accounted for about 9% of the volume of all mortgages made in the U.S. and were especially popular in California, Florida and Nevada — states where home prices rose the most during the housing boom and are now falling most sharply.
The L.A. Times explains, “an option ARM loan gives a borrower the option of paying less than the interest due, causing the loan balance to rise.”
If it rises too much — say, by 10% or 15% — the opportunity to make a low payment vanishes and the required payment skyrockets.
That scenario is becoming increasingly common. In fact, more than 75% of option ARM borrowers have been making only the minimum payments, analysts at Standard & Poor’s Corp. said last week. As a result, the delinquency rate on option ARMs already is jumping and is likely to keep rising sharply, S&P said.
Adding insult to injury for homeowners in a mess, the L.A. Times reports, that “because option ARMS went only to “prime” borrowers, they aren’t eligible for a much-publicized interest rate freeze that is part of a White House-backed plan to stem sub-prime foreclosures,” and they predict we’ll be seeing foreclosures “growing more common in affluent neighborhoods.”
“Whether it’s a wealthy community or a sub-prime community, it all comes down to how much equity the borrower has and how much home prices fall,” said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co.
Option ARMs were originally offered in the 1980s by California savings and loans as a way to give some financial flexibility to self-employed people and others with variable incomes. But as homes became more expensive this decade, they became increasingly desirable simply because of the ability to make extraordinarily low payments for a good period of time.
Taking a look at the housing market crisis, Paul Krugman asks today, “Housing: How far is down?” Krugman contends that “the price-rental ratio will have to move most if not all the way back to historical norms. And that’s a long, long way down.”
A long way down indeed. Frankly, as renter, I would welcome a drop in rents. Here in L.A., like many places, rents are astronomical and after 15 years in a rent controled building, moving simply isn’t an option.