Sunday, December 30, 2007

Double Bubble

I hit this earlier but it's worth expanding on a bit.

Why did borrowers like them? Simple: Option ARMs allow you to buy maximum house for minimum initial monthly payment. They are not particularly complicated or confusing. You buy now and pay later.

"... 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."


That was slightly misreported. It's actually 75% of option ARM borrowers who were issued their mortgages in 2006, not the entire universe of option ARM borrowers. Still it's unlikely that the numbers for 2007 are much better, though perhaps the numbers for mortgages issued earlier are.

But the point is that if people are paying only the minimum monthly payment, then the mortgage is negatively amortizing. People are losing equity month by month even as the market price of their home is falling. That situation can go on until they hit the tripwire - 115% of the original mortgage - and their payments shoot up.

Then they mail the keys to the bank.