IN CHICAGO AND ELSEWHERE, Equity Crunch Strains Borrowers with Adjustable Rate Loans!
THOSE WITH "OPTION ARMS" OFTEN HIT THE HARDEST!
So-called "Option ARM's" were the highly-advertised darling of the housing boom for many home borrowers. In essence, each month, the borrower can either pay a specified minimum payment based on a 30 or 15-year amortized loan, or a smaller, minimum payment, or pay interest only in any given month.
Problem is . . . as rates readjusted, and monthly payments increased, many borrowers opted for the lowest payment possible. Equity paydown was reduced - it was originally based on the supposition that strong equity gains would go on forever, and a homeowner's equity would continue to reliably increase even if only minimum, interest-only payments were made for a while.
As we can all surmise, however, equity gains have not proceeded skyward, reliably, as predicted, and many Option ARM holders now have little or no equity in their home, yet are falling behind in their monthly payments. According to figures from Countrywide Financial, now a part of the Bank of America, who issued thousands of these loans, the average Option ARM borrower owes 95% of the value of his home. This figure has declined from a 76% average when these loans were originally closed.
At the end of June, 2008, Countrywide held $25.4 Billion in Pay-Option ARM's. Those at least 90 days delinquent on these loans made up 12% of total borrowers. 72% of Option ARM borrowers were paying less than the full amount due each month, instead opting for interest-only, or, in some cases, a slightly higher payment.
Other borrowers are feeling the heat with Option ARM's as well. Wachovia Corporation offered its "Pick A Pay" Program when such loans were popular. The average Pick A Pay borrower owed 85 percent of their homes' values at the end of June, up from 71 percent when the loan originated. In hard-hit California, those with this Pay Option ARM owed an average of 109% of their homes current market value. Wachovia's held loans on its Pay Option Program, Pick A Pay - over $122 Billion.
Today, most lenders have stopped writing these comparatively risky loans, although Wachovia still offers a form of them, but without the minimum payment option to borrowers. That's a big departure from the first nine months of 2006, when new Option ARM's were at their peak. During that year, 15% of all first mortgages issued had a Minimum Payment Option, according to the Mortgage Bankers Association.
Read Mary Umberger's column in today's Chicago Tribune for more information.
DEAN MOSS & DEAN'S TEAM CHICAGO
