The problem here is not the Option Arm, which has existed on the marketplace since the 1970s, but in the changing of the traditional terms of these loans. This change was generated by Washington Mutual (the largest opition arm lender over many years) shifting from holding all of these loans as portfolio product and viewing risk from a long term perspective, and the entry of Countrywide entering the opition arm arena with their jackal ripping at the carcass of the consumer approach to lending.

The critical changes were

Neg Amm rate;
Traditionally – start rate no lower than 3.5% with the neg amm calculated to fall under the 30 year average of home appreciation nationally.
Boom Market- start rate as low as .75% with the neg amm uncontrolled.
Consequence- Traditionally neg amm at worst kept the LTV stable as the market value of the home kept pace with max neg amm. Boom Market option arms are a time bomb with a short fuse.

CLTV
Traditionally-Max CLTV no more than 80% on a full doc, no more than 70% on a stated
Boom Market-100% of whatever the dumbest appraiser you can find calls the value at.
Consequence-Traditionally, even if neg amm exceeded market improvement in value there were many YEARS of buffer. Boom Market, most of the loans were actually upside down when originated.

Borrower Qualification
Traditionally-These were the last loans to NOT require credit scores. Not because they were higher risk acceptance, but because the qualifying parameters were so high. Borrowerers had to have lower DTI than prime loans, larger reserves than prime loans (3months of all payments fully liquid full doc, 6 months of qualifying income fully liquid on stated), longer employment history than prime loans, strict review of appraisal, etc.
Boom Market-scores over 680, can the borrower fog a mirror?
Consequence-Traditionally these loans went to reasonably sophisticated borrowers. Boom Market thes loans were being given to borrowers who belonged at the roulette tables in Reno.

Broker Training
Traditionally-Brokers and Processors had to be trained by WaMu or World Savings (the traditional Option Arm lenders) to be ALLOWED to submit loans.
Boom Market-If there are no real standards, why bother training?
Consequence-Borrowers were being pitched complex financial products by inexperineced salespeople who did not understand the product themselves. There was no concept of the risks of the loan.

In short, all of the protections for the borrowers and the banks both were stripped away in pursuit of profits on the secondary markets. These loans went from being a financial vehicle that allowed the prudent to shift cashflow from shelter into better performing investments to the payday lender for a ponzi scheme. The banks were complicit in this, WaMu and Countrywide died because of it. A large portion of the portfolios that they were carrying on their demise were Options Arms that were so obviously bad that nobody would buy them.

Brokers did not create this situation. The banks did. Banks define product and decide who can market it. When they removed all safeguards everyone paid.

your rational comments are welcome at PSGute@aol.com

On the other hand, I disagree with the rationale(s) as to why these loans will not qualify for the HAMP.

Equity position is not a pre-requisite qualification (and is loosely-weighted in the NPV test) and the income documentation requirements are quite flexible.

With that said, it is somewhat of a moot point, as recidivism rates are (reported to be) between 50%-70%.

A case can also be made that making a loan “affordable” is not a sufficient motivator to keep underwater notes performing.
There is a great paper written on the subject….
http://www.brokerexecutives.com/walking_away_by_brent_white.pdf

well worth the read.

You would be wrong. 20% down, 5 year adjustable interest only. 800+ credit score, and this is the third house I lived in and fixed up over the last 18 years. Never had adjustable before this. So…now I’m out my $100,000 CASH, cannot continue to pay mortgage rates 3% higher than my neighbor who bought 3 years before me. Oh yea…same job for 20 years. Now I’m a deadbeat to society? If I’m going to get defamed and labeled, I might as well be exactly what you said.
Expect another house stripped to whats allowable BY LAW. Expect to see me living RENT FREE for as long as I LEGALLY can.