Comments on: Option ARMs for Dummies: Why 4.5 Percent Mortgages Rates will do Absolutely Nothing for these Toxic Assets.

By: Biren

Biren — Mon, 08 Mar 2010 02:00:46 +0000

I currently have a PAY Option Arm and have being paying interest and little of the principal for 3 years now. My property value is down and I’ve pretty much lost the 25% down and then some. My intent was to refinance in a couple of years to a fixed or sell. I love my property and would like to continue to own it. I’ve review the financing with couple of agents and they told my best option is to go back to the lender. The lender Countrywide/Bank of America and encourages me to miss a couple of payments before they will talk to me. I’m just tired of calling them and spending days on the phone with them talking to various departments. Each time have to explain what I want. Oh I continue to receive the junk mails encouraging me to call them to get out the Option Arm loan. One thing they are not able to tell me is what my interest rate will be fixed at after 5 years. My documents seem to indicate 9.5% but I think that is the CAP. Anyone have any thought on what I should do, stay with it for 5 years and then hope to convert it to a fixed.

By: Dee

Dee — Mon, 09 Mar 2009 11:07:31 +0000

Don’t forget to consider that treasury yields and LIBOR can go much higher. When I figure out my worst case, I look at the rate cap. I think we have at least 1 year before we’re at higher rates than we are today. I expect that in 2 years, we’ll be back at 5%. In five years, I think we’ll be at 8%. Now is the time to send a couple hundred extra per month to knock down principal.

By: Sten

Sten — Mon, 22 Dec 2008 23:52:34 +0000

Robin,
Per your comment about hyperinflation; I am pretty sure that is what the government thinks the solution is. If the government does manage to prop up housing prices (which I doubt they can), this does not solve the problem that the majority of Americans can then no longer afford a house using “normal” lending practices. The government would have to find a way to increase the median household income to a level that would be able to afford the subsidized/inflated home prices; and I am afraid that inflation is their answer.

Not to mention that inflation would also make it a little easier to pay off all the $trillions that they are adding to the national debt to prop up housing in the first place.

By: MN

MN — Mon, 22 Dec 2008 22:49:53 +0000

Doctor,

Great blog, I read it constantly. One thing I would love to see is an article aimed at the higher end of the market. Homes in $3-$5 Million range in West Los Angeles have been pulling in but at a much slower rate than the low and midlevel markets. Will the ARMs fallout have a greater effect on this market? I know that in time the price of more expensive homes should drop in accord with the prices in less expensive neighboring markets, but will the ratio be the same? I would love to know your forecast for the West LA market.

Thanks and keep up the great work!

By: AnnS

AnnS — Sun, 21 Dec 2008 23:36:02 +0000

Comment by printfaster

December 20th, 2008 at 5:25 pm

I am beginning to think the option ARM problem is overblown.

Right now, ARMs resetting to LIBOR are coming out to 1.75%. This is beginning to look like a vindication for Greenspan who told everyone to take out variable rate mortgages.

The whole operation of the Fed for the next 4 years will be to hold down mortgage interest rates to ridiculous levels, even if they have to buy every piece of mortgage paper in the US.
______

Sigh…..there is a HUGE difference between an ARM that is fully amortizing and an option ARM or hybrid Option ARM.

>>> In a fully amortizing ARM, the borrower is ALWAYS paying back principal and however much interest is accruing. The only thing that varies is the rate of the interest that is accruing each money and that they have to pay.

>>>> In option ARMs they can pick the payment. 80% do NOT even pay an amount equal to the interest that is accruing. And yes, while the amount of interest that accrues can change, they are typically still not even covering that. It would be highly unusual for the accruing interest to drop below the minimum payment level. Odds are on that their mortgage has grown since they took it out.

>>>> Sooner or later, they will have to start repaying principal as well. And that is what will break most of those borrowers. If they can’t pay principal and interest now, they won’t be able to do so then. The loan may reset earlier if they have hit a cap on LTV. The loan may reset after a certain number of years. It may be a ballon with all principal due at one time which means refinancing (Good f’ing luck on an appraisal and more borrowing.) But reset to include principal it will – and then the borrowers are sunk.

Hybrid Option ARMS are loans that are Option ARMs for usually the first 3-5 years and then reset to a fully amortizing ARM. A lot of those are due to reset from options to amortizing ARMs for 25-27 years. And now those borrowers will have to ante up the principal as well.