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Location: Moreno Valley, CA

Friday, December 28, 2007

Jane Olson: Owning it

Defaults moving beyond sub-prime
L.A. Times

Delinquencies among holders of risky option ARMs are increasing as their minimum payments climb.

By E. Scott Reckard, Los Angeles Times Staff Writer
December 28, 2007

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.

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. 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.

One upshot could be 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.

"The only reason for taking [an option ARM] was to use the minimum payment to get more house or a bigger refi than you otherwise could afford," said Guy Cecala, editor of Inside Mortgage Finance.

To read more: http://www.latimes.com/news/local/valley/la-fi-optionarm28dec28,0,3717451.story?track=mostviewed-storylevel

Response: I recently wrote in my blog and to other folks in regard to the economy and why some folks think the economy is bad and so on. One of the points brought up is the fact that so many people with good and bad credit are in default of home loans, that A, they couldn't afford and B. didn't read the terms of their agreement correctly. With a booming housing market in which everyone involved benefitted from, one only has to think like I did, that the market is going to have to come down and folks who agreed to adjustable rates, would have to pay the piper.

I never thought that our federal gov't would ask me, a tax payer to bail them out. It seems like Joan Olson, the lady mentioned in this article, did something only a few have....

Owned it.

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