OPtion ARM Meltdown has Potential to be 5-10 bigger than Subprime was

[JurisDoctorOfDoom]

This was pointed out last week in a Reuters article, I meant to call particular attention to it but moved on to other matters. The Daily Reckoning has a pretty good explanation though:

There’s "no bottom in sight" to Florida condo prices, says Barron’s. And Reuters warns that option ARM mortgages “are about to explode.” At least, that’s what the attorney general of the sovereign state of Iowa says. The option gives the homeowner the right to pay only the interest (or in some cases less than the interest) for the first few years. They’re sometimes called IO mortgages (interest only). And now these mortgages, written at the height of the bubble, are beginning to reset to more normal terms. According to Reuters, 128,000 people in Arizona alone will face reset IO mortgages next year.

How much more will these people have to pay? Between 5 and 10 times what they’re paying now. Almost all these homeowners are underwater. They bought at the bubbliest period. How many of them can afford a 400% increase in their mortgage payments? How many of them will be willing to pay?

Not many. That’s why a new wave of foreclosures is coming. And that’s why house prices are likely to keep going down; the supply is going to increase, while the demand (willing and able buyers) will probably stay steady.

Meanwhile, the California jobless rate has risen above 12%.

Full article: http://dailyreckoning.com/saying-goodbye-to-the-borrow-and-spend-economy/?ref=patrick.net

[picasso moon]

Matt, the article states that payments are gonna get 5-10 times bigger. How does that translate to the Option-ARM problem being 5-10 times bigger than subprime?

[TheDignityofStruggle]

The bubbliest period.  Ha!

[FireJack]

I know there is a big concern about the alt a mortgages too which were mostly assigned to small businesses.

And now what's happening? Well, consumers aren't borrowing anymore. Consumer credit is going the other way, shrinking rather than growing.

The feds are trying to counteract this major trend. This year, they're borrowing $1.7 trillion. Consumers won't borrow; no problem, the feds will borrow for them!

Can't help but wonder how long this government stimulus can go on for.  It's obvious they will just keep pumping more and more money into the system as long as possible but with the commercial real estate, these option arm and alt a mortgages coming how long can it last?

I don't see it saying anywhere in the article that it will be 5-10x bigger, just the payments will jump 5-10x. OF course this will be mixed in with the CE and alt-a mortgages so it probably will be 5-10x bigger.

[Doomerific]

Because it is 5 to 10 times more important that the public have faith in the government and their actions now.  

Burn me once, shame on you, burn me twice...

This next plunge will take a serious toll on the psyche of the general public.

[Arraya]

Delinquencies just set another all time high, as well.

http://www.reuters.com/article/GCA-Housing/idUSTRE58K29E20090921

[picasso moon]

Because it is 5 to 10 times more important that the public have faith in the government and their actions now.  

Burn me once, shame on you, burn me twice...

This next plunge will take a serious toll on the psyche of the general public.

Good point, i'm not sure confidence can be quantified, but good point indeed.

[Doomerific]

It's a stretch, I know what you're getting at and I don't think there's any quantifiable way to show that it's really 5 to 10X bigger. 

[kats]

It's a stretch, I know what you're getting at and I don't think there's any quantifiable way to show that it's really 5 to 10X bigger. 

I'd say we shall find out in the next year or 2.

[xyu]

The government, and all economist, are very aware of this pending problem.

That's why it's been so important to get home prices rising again, even at the expense of billions in tax credits.
If homeowners expectations are that prices are again rising, they are much more likely to not walk away from their home. Again, its all a game of confidence, one that absolutely cannot be lost, or we are all in sh*t. The next few years will be interesting indeed.

http://www.forbes.com/feeds/afx/2009/09/22/afx6915366.html

US home prices as measured by the Federal Housing Finance Agency (FHFA) rose a seasonally adjusted 0.3% in July after rising a downwardly revised 0.1% in June (was 0.5%).

[Jonathan_Byron]

"The newspaper estimates that there are approximately three million Alt-A loans outstanding with a value of $1 trillion."

http://www.mortgagenewsdaily.com/02112009_Alt_A_Resets.asp

[picasso moon]

That's why it's been so important to get home prices rising again 
Right, as if you can get them to rise in the face of everything driving them down, eg the coming new wave of defaults.  What would we do for entertainment without the likes of xyu and other visitors from Faux News?

[xyu]

That's why it's been so important to get home prices rising again 
Right, as if you can get them to rise in the face of everything driving them down, eg the coming new wave of defaults.  What would we do for entertainment without the likes of xyu and other visitors from Faux News?

Let me clarify my position, because obviously you did not understand it.
The government has worked hard, by giving tax credits to buyers, and by trying to get banks to modify loans, to stabilize house prices and to get them to rise again. I am not stating they have been successful. I am simply saying they have taken these drastic steps in an attempt to get house prices rising again, because the psychological effect of rising house prices could help those whose monthly payments are going up to suck it up and continue paying, because they expect their house to regain value.

If that makes me a "visitor from Faux news" then so be it.

[wordnerd]

I think everyone is getting a bit touchy
It really is becoming "us" and 'them" - and the distance between us is growing quickly

Of all the financial mistakes I have made (and I have made  a LOT!) I do not have an ARM. I have a fixed rate mortgage.

BUT... When all of the refiniancing was going on - for people who had ARM's - I called my mortgage company and tried to refinance to a lower rate. It seems that because I don't have an ARM I did not qualify for the loan assistance programs. If I had had an ARM, they could have helped me to get a lower rate with lower payments.

When I bought my house - I knew that an "adjustable rate" did not seem like a good idea. I didn't trust the bank that payments would ever go "lower" - as they tried to tell me could happen

I don't know what people are going to do who have a 5 x increase in their house payment!  To me that is just mind-boggling. I'm sure it is to them too

[Ming]

A Lot of the ARM people especially the "just interest pay" loans are the wealthy just making a quick buck on buying condos, some even before they were finished building, just to sell them when they were finished at triple the price.

Most of them made a ton of money and now they got caught in their risky behavior. 

No one said it wasn't risky and these are the educated people who should have known better.

I'm sure they will get bailed out where the sub prime haven't been given squat.