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Saturday, September 16, 2006

Option ARMS Redux

I have been trying to figure out why so many people have refinanced out of fixed loans to option ARMs, and I thought this SDCIA posting was useful. The poster is a subprime loan officer who is seeing very poor applicant credit quality:
My office of 7 loan officers takes +/- 100 loan applications per week, 90% of that coming from cold calls.
Of the last 100, I have taken some simple statistics and have found the following:
68/100 had LTV's over 80% at time of application
16/100 had LTV's over 100% at time of application
78/100 had back end DTI's over 55%
31/100 had back end DTI's over 70%
23/100 had FICO's under 500
81/100 had credit card debt above $10,000
54/100 had credit card debt above $20,000
18/100 had credit card debt above $50,000
66/100 had Pay-option ARMs
27/100 had Pay-option ARMs and mortgage lates
22/100 were either in forbearance or had been in forbearance within the past 12 months
In a later comment, he writes:
I will say this without any hesitation: 9/10 borrowers who currently have Option ARMs have no real understanding of what their loan is doing. I have had more than a few old ladies cry in my office when I show them the amount of deferred interest on their loan.

They were careless enough to sign a bad loan (ultimately the responsibility of the borrower to read the docs before signing), but it doesn't help that every hack broker out there is pitching the option arm just because the rebate is so high.

Almost daily I see 70-year-old+ borrowers who used to owe $50k on their home now owing $600k on option arms.
Some of this ought to be actionable.

You know, it would have been really helpful if some of the media had undertaken to warn people about these things, a couple of years ago. I don't remember reading *any* such articles until a few months ago.

It's the usual media herd mentality: hardly anyone wants to write about something that everyone else isn't already writing about. An interesting inversion of the normal business strategy of differentiation.
David - don't you think that this is why print media is suffering? There's little real news in it, so people read the papers less.

I agree, it would have been helpful. Two years ago it might have been a lifesaver. Early this spring, a lot of bankers in flyover country were surprised to hear about these loans. I remember one outraged post on Bankers Online by a man who had been asked by one of his relatives about the product.

We all knew about the LTV, DTI and IO problems, and that, combined with adjustable rates, was enough to make everyone worry. But the proliferation of neg-ams to this extent really wasn't generally known by the public, the agencies or many bankers.
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