Option ARMs Revisited

The Option ARM problem has not gone away. It serves as a testament to the denial of the lending industry, and it is the textbook example of extend, amend and pretend.

11 MILLBRAE Irvine, CA 92602 kitchen

Irvine Home Address … 11 MILLBRAE Irvine, CA 92602
Resale Home Price …… $749,900


I know that the prospects weren’t all that good
But they improved, and I’d have thought that you could
Have strived for that something we all have deep inside
Not let it vanish, along with your pride

Now with the aid of your new walking stick
You hobble along through society thick
And look mesmerized by the face of it all
You keep to the gutter in case you fall

Run of the Mill — Judas Priest

Option ARMs revisited

In case anyone thought The ARM Problem had simply gone away due to accelerated defaults, it hasn’t:

Moody’s Links Option ARM, Subprime Performance

December 4, 2009 12:46 PM CST

than $200bn of outstanding pay-option adjustable-rate mortgages (ARMs)
originated and securitized from ‘04-’07, according to market commentary
by Moody’s Investors Service this week.

This sector shows “dismal” performance, with more than 40% of
borrowers 60 or more days past due on payments.
And many of these loans
have yet to experience a recast event
, when initial minimum monthly
payments jump as much as 60%, according to sources interviewed by HousingWire for an upcoming issue.

“Even though borrowers with Option ARM loans have the option to make
monthly payments typically lower than the accruing interest on the
loan, many borrowers are choosing a different option–not making any
payment at all.”

Moody’s said the performance is comparable to subprime, despite the
trend of more acute negative equity among Option ARMs than subprime.”

It is not surprising that 40% of Option ARM holders are currently in
default. What is surprising is that there are still $200,000,000,000 in
outstanding Option ARM loans. This is the classic example of kicking
the can down the road, and here is the reason why:

“Negative equity is a key driver of weak performance — as well as a more predictive measure of default than unemployment — particularly among Option ARMs. Modifications would
have to be applied aggressively to have any lasting effect and keep
borrowers paying on their mortgages, Moody’s said.

As I demonstrated in the post Cure Rates, once people go underwater, they are far more likely to default. Lenders are praying the California bubble markets do not get pushed over the edge by a flood of foreclosure inventory, so they are pretending the $108,000,000,000 problem here in California will just go away.

High defaults might be mitigated only by as extreme a method as
principal forgiveness. Moody’s recommended a term extension to 40
years, significant interest rate cuts and some principal forbearance to
keep borrowers’ cash flowing.

In other words, it is hopeless without lenders committing the ultimate sacrilege in lending: forgiving principal:

“There is little hope that most of these [delinquent] borrowers will
start making payments again if no principal is forgiven,” Moody’s said.
“Forbearance does not eliminate the obligation to repay the loan
principal, it only delays it. And many delinquent borrowers are
potentially so far underwater that it would take close to a decade for
them to attain any positive equity in their home.”

The delinquency rate of Option ARMs is expected to rise as a wave of
these loans recasts after the initial payment period, according to
recent market commentary by Standard & Poor’s.

“Option ARMs are the most vulnerable to quick payment increases
because of the low payment options they offer borrowers,” S&P said.
“Upon full recast, option ARM borrowers may experience sudden payment
increases to varying degrees depending on the payment options they
chose to exercise prior to the recast.”

The recasts have not occurred yet, and these loans already have 40% delinquency! How can that be good?


As I noted in The Great Housing Bubble:

Equity is made up of several component parts: Initial Equity,
Financing Equity, Inflation Equity, and Speculative Equity. Each of
these components has different characteristics and different forces
that govern how they rise and fall. It is important to understand these
components to make wise decisions on when to buy, how much to buy, and
how to finance it. Failing to understand the dynamics involved can lead
to an equity graph like the one for the peak buyer who purchased at the
wrong time and utilized the wrong terms. Nobody wants to suffer that

Figure 8: Peak Buyer, No Downpayment, Negative Amortization Loan

The default rates on these loans will reach 100%. The only hope for these borrowers to stay in their properties is a loan modification, and that hope, IMO, is one of a series of Bailouts and False Hopes that ultimately serve no purpose other than to get borrowers to make a few more payments.

11 MILLBRAE Irvine, CA 92602 kitchen

Irvine Home Address … 11 MILLBRAE Irvine, CA 92602

Resale Home Price … $749,900

Income Requirement ……. $154,568
Downpayment Needed … $149,980
20% Down Conventional

Home Purchase Price … $750,000
Home Purchase Date …. 12/28/2004

Net Gain (Loss) ………. $(45,094)
Percent Change ………. 0.0%
Annual Appreciation … 0.0%

Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $3,206
Monthly Cash Outlays ………… $4,220
Monthly Cost of Ownership … $3,160

Property Details for 11 MILLBRAE Irvine, CA 92602

Beds 4
Baths 2 full 1 part baths
Size 2,477 sq ft
($303 / sq ft)
Lot Size 2,502 sq ft
Year Built 2001
Days on Market 4
Listing Updated 12/2/2009
MLS Number S597447
Property Type Single Family, Residential
Community Northpark
Tract Othr

According to the listing agent, this listing is a bank owned (foreclosed) property.

Gourmet Kitchen Award

Gorgeous Property in Prestigious North park. Beautiful home has Gourmet kitchen w/granite counters & stone backsplash. Huge Master Bedroom w/Fireplace and Retreat Room. Jacuzzi Tub in Master Bathroom. Lower level has tile flooring thru-out with the exception of vinyl in the laundry room. Custom Plantation Shutters & Vertical Blinds. Front patio and a small fenced, private rear yard. 2-Car Garaged. Guard gated community. Walk to Association Amenities-Pools, Spas, Parks, Gazebos, Award Winning Schools & Shopping/Restaurants.

I am convinced that Californian’s really believe that a mortgage is something people work to manage its growth. Mortgages are supposed to get smaller; people are supposed to pay them off. Even the “treading water” mindset of interest-only rests at the cusp of a Ponzi Scheme, but doesn’t cross the line. Day after day I find people who have increased their mortgages; some by a lot, and some by a little, but everyone is doing it. It isn’t hard to see why houses are so desirable.

The previous owner of today’s REO managed to obtain a $720,000 first mortgage and a $90,000 HELOC in January of 2007. That didn’t work out so well for the lender…

Foreclosure Record
Recording Date: 10/15/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 07/07/2009
Document Type: Notice of Default

(People with access to property records will get the joke about Jeopardy.)

75 thoughts on “Option ARMs Revisited

  1. winstongator

    I am still undecided whether it is better for banks to do a work-out with lower principal than to foreclose. I know the moral hazard arguments, and the even worse (for banks) prospect of modifying a loan and the ‘owner’ still defaulting. Thinking more, most of these occupants should be renting, and the bank will not want to be a landlord.

    Banks need to watch out about trickling out their inventory. Construction costs are low (less of a factor where land is a bigger cost than dwelling, but land values are falling too), and why would someone choose to wait for REO inventory when they could get to build new? Abysmal new home sales don’t give this theory much weight. In the one bubble area I’m most familiar with, they’re still building (and there is still too much inventory). This new construction IS selling, while existing homes are taking a long time and need price drops to move.

    1. Geotpf

      IMHO, the best choice might be to extend the length of the loan. Turn the adjustable rate into a 99-year fixed rate at current interest rates, with no prinicipal reduction. The payment will be small, although they will be paying it until they die, sell, or refinance-in which case the bank gets 100% of their money back. Win-win all around-the home debtor gets to keep their house, the bank (eventually) gets all of their money and plenty of interest on top. I haven’t heard of anybody actually going this route, so there may be something technical preventing this from happening.

      1. Geotpf

        I should note the bank would only get 100% of their money back when prices recover in five or ten or fifteen years. Those home owners who die or move before then would probably end up in foreclosure anyways, but that would be a much smaller number compared to the number that would give up otherwise. It solves both political goals (people get to keep their houses if they want) as well as there being a high chance the bank gets their money back.

        1. matt138

          The bank and borrower should be able to negotiate as long as the government does not subsidize or intervene in any way. This is an acceptable free market solution.

          1. Geotpf

            Absolutely, the government does not need to be involved in any way. The governments plans so far have all been mostly window dressing for the voters anyways, since arranging some sort of loan mod is frequently in the best interests of both parties.

        2. priced_out

          I object to your 99 year solution, Geotpf, for two reasons:

          1) People will die well before the loan is up. The debt burden would then be inherited by their kids as a final FU from the boomers to their children. (The other two FUs are in the form of the ever-increasing national debt that the boomers managed to ring up, and the enormous entitlement programs that they created which will have dried up long before we would recieve them — social security will be dead before I retire, and my generation has already missed out on the retirement programs that the boomers were offered.).

          2) Houses should not be kept by the people who agreed to pay obscene amounts for them! They should have to move out. It’s brutally unfair to the people who were smart enough to sit out of the bubble that the idiots that jumped into the middle of it should get 1) to be paid to live in houses during the bubble, 2) get to enjoy living in houses for the duration of the bubble and 3) should continue living in those houses after the bubble has popped. I’m talking pitchforks and torches unfair.

      2. tonye

        We could just enslave them. Figure we bring back indenture servitude for two generations (three for jumbos and four+ for anything in Turtle Ridge, Quail Hill and Woodbury).

        No right to vote.
        Color palette fixed to two colors -chosen by the bank.
        No BMW/Benz/Lexus/SUV/Boat. Just a nice Honda Accord LX.
        Costco account tightly controlled by the bank.


        And, hey, no right to vote otherwise these “victims” keep electing populist liars like Obamalosi.

        No more, “help me, help me, I’m a victim”.

        There. I just fixed the problem.

        1. Geotpf

          Yes, that is exactly what it amounts to. But they get to stay in their houses, and the bank (eventually) gets their money. If they don’t like it, they can walk. But the whole “woe is me” bit is the banks “taking people’s homes away”. This wouldn’t happen under my proposal.

  2. Confused

    I’m confused. I thought people with Option ARMs had the opportunity to move into a fixed loan at any time. Since interest rates are so low, doing this would mean their monthly payments would go down.

    What am I missing here?

    1. AZDavidPhx

      The problem is not the monthly payment so much as the psychological pain of paying money on a depreciating asset.

      Paying off the debt was never a part of these borrower’s game plans. The house was supposed to go up in value and pay itself off.

      These loan mods are just the “borrowers” politically correct way of demanding principal reductions. They see Wall St getting bailed out and naturally feel entitled to tax payer money themselves. They want their bailout for “Main Street” in the form of principal reductions. They just sugarcoat it and say “Loan Mod”.

      When the value of your house is 1/2 what you foolishly paid and your monthly payment doubles – what is a spoiled American with an entitlement complex supposed to do? Why nothing. Just call yourself a victim and walk away.

      AZDavidPhx should have to pay it all back. It’s his fault.

      1. Chandler AZ CPA

        I agree…the monthly payment is not really the issue. The psychology of being upside down $100k or so is a problem. We can modify payments all we want, but what if the homeowner gets a job transfer, loses a job, gets a divorce? It’s foreclosure city.

      2. tonye

        And elect Obamalosi.

        Jeez… we need the likes of Generalisimo Franco to teach these morons a lesson.

        1. Craig

          What’s with this silly Obamalosi crap? Do you need to re-read IrvineRenter’s archives in order to remind yourself that the collapse of our economy is no more a Democrat than a Republican issue? Do you need to be reminded how often GWB droned on about the “homeowner society” from 2000-2008? Apparently so, since you have this tic that causes you to incessantly whine about “Obamalosi” throughout this thread.

          Grow up.

        2. Alan

          It was obviously not Obama or Pelosi who made this mess, and there is no easy or painless way out of it so any path chosen can be criticized.

          Check out what life under Franco was like before asking for it. Obamalosi is clearly preferable.

          1. he lived under Franco

            I think Tonye did actually live under Franco who was the epitomy of fascism and dictatorship. I don’t know if he liked living under Franco but that makes me wonder why he he keeps complaining about what he calls Fascist irvine police.

          2. tonye

            I grew up to teenage years under El Caudillo.

            My grandmother used to say that Franco was not good for politics but was good for business..

            And, yes, El Caudillo was a fascist, a true socialist. The Civil Guard, those guys with funny shiny black hats, went around with auto submachine guns and you didn’t mess with them.

            Speaking of the IPD, why does the IPD need a state of the art urban assault SWAT vehicle? That, to me, is as fascist as you can get.

            Obamalosi wise… those two are joined at the hip. And the RE bubble and lack of bank oversight was started by the Dems in the Congress. Bush was too busy running two wars to bother with what the Dems were doing in the Senate so long as the economy was (seemingly according to Greenspan) doing fine.

            One thing about Franco, though, he did mellow out during his last years and life under him- at least in Barcelona- was OK. The Catalans only were ruefully reminded of him whenever FC Barcelona would play Real Madrid at Bernabeu Stadium. Rumors were that El Generalissimo told the refs to make sure Real won. Now, thats’ the worse thing that you could do to a Catalan, but at least we all had nice houses, cars, TV and more dependable electricity than Edison in Irvine.

          3. priced_out

            Bush was too busy running his wars? Where do you get your news, man?

            Bush was too busy clearing brush at his ranch. He certainly wasn’t to be blamed for any of the multitude of things he did wrong in Afghanistan (tora bora) or Iraq (abu ghraib). He couldn’t think of any of bad decisions that he had made in his first term while debating with Kerry.

            And you think that during the Bush years the Dems were in control of congress? The Republicans held both house and senate for 6 years between 2000 and 2006. Pelosi and other Dems were sidelined.

            But Bush isn’t to be blamed any more than Clinton. And Clinton no more than Bush Sr. or Reagan.

            We’ve been deregulating this country for 29 years and now it’s time to pay the piper.

            So read a god damn newspaper once in a blue moon, Mr. Fascist. Bad stuff doesn’t only happen when the other party is in power.

          4. tonye

            Err.. time for you to read some history, huh?

            Fascists are socialists.

            The definitions are as follows:

            National Socialists (US progressives): fascists.
            International Socialists: communists.

            Since I’m basically an anarchist -meaning I won’t tolerate anything but the minimal government- I can not be a fascist.


            Read this -from Ralph Nader.


            You are right that Clinton was in on it… the whole mess started with the Congress in the mid 90s.

            Read Alan Greenspan’s book too, it’s scary what he thinks and what he did.

            Unlike David St. Hubbins from Spinal Tap who said:” I am different; you see I believe everything I read”, I don’t believe most of what the newspapers and news media say. And I read lots and lots of it. YOu got to understand that they are mostly PROPAGANDA.

          5. Craig

            Now you’re just being intellectually dishonest. Dems and Repubs were in on this together. Nice try attempting to make it seem like Bush was “too busy” with his costly wars, ignoring the Homeowner society crap he was spewing. Also amusing how you forget Greenspan was Reagan’s and Bush I’s and Bush II’s BFF (as well as Clinton’s–you’re the only who’s dishonestly trying to make this party-specific), and everything Greenspan did to spur on the housing bubble was completely embraced by Republicans and Democrats alike.

            Oh, funny also how you conveniently sidestep the fact that Republicans encouraged post-9/11 SPEND SPEND SPEND (also known as: HELOC, HELOC, HELOC!), pressed for ridiculously low interest rates, and basically orchestrated the housing bubble to pretend the recession of 2001 was just a minor annoyance. Now we see where that got us. Complete ruination.

            Your constant politicizing of this website with your Obamalosi trash is both intellectually dishonest and distracting from the focus on the housing and credit crash. Don’t expect to not be called on it.

    2. winstongator

      If you financed at 100%, you would not get an appraisal high enough to refinance, or you would have to bring hundreds of thousands to the closing to replace lost equity and amortized interest.

      Also, as AZD points out, it’s the investment angle, so highly touted 3 yrs ago or so playing the flip side. If you’re goign to tout homes as investments to get people to buy, expect them to treat them as investments and dump them when their value drops below 0.

    3. IrvineRenter

      “I thought people with Option ARMs had the opportunity to move into a fixed loan at any time.”

      People still have to go through an underwriting process, and most of these people simply cannot afford to make a fully amortized payment no matter how you modify the terms — and that is assuming they qualify for any kind of loan and have a job.

      The perception that this problem can be made to go away easily is part of the public relations job the Government is doing to convince everyone housing is OK. Housing is not OK, and no amount of extend, amend and pretend will make the problem go away.

      1. irvine_home_owner

        Actually, some OARMs have an option to move to a fixed rate by just paying a fee.

        No underwriting necessary.

    4. OrangeRenter

      …”I’m confused. I thought people with Option ARMs had the opportunity to move into a fixed loan at any time. Since interest rates are so low, doing this would mean their monthly payments would go down…”

      This is not correct, and the payment IS the problem (and it’s only compounded by having a higher payment AND being underwater).

      Here’s a simplified calculation: Go to an online mortgage calculator and figure the mortgage payment on $500,000 at 1-2%. This is roughly equivalent to the “Optional Minimum Payment”, which doesn’t even cover the monthly interest due, so the difference gets added to the balance.

      Now figure a new loan balance of $550,000 at 5% (current market rates), and you’ll see the ‘new’ payment IS the problem.

      AND, if 40% are defaulting on the minimum (1-2% payment), how will they ever make the normal 5% payment???

      How do you modify this to a “more affordable payment”… reduce the interest rate to less than 1%? Even if the bank was generous enough to fix your rate at 2% – fully amortizing – your payment will INCREASE.

      You can play with the balance and term (try reducing the principal balance and extending the term out to 40 years), to see what it would take to at least MATCH the 1-2% payment they current enjoy (but which 40% still can’t pay), and you’ll see it takes A LOT of principal reduction to get there.

      If you can’t afford your current loan balance at 5%, you should just go rent someplace because you could never afford the home to begin with, and the taxpayers shouldn’t be left to bail you out (especially when it would take such extraordinary measures to modify your loan to the same low/FIXED payment). It’s not fair!

  3. cara

    There are some borrowers who chose an option ARM because their credit file was thin, and always planned on refinancing into a 30 year loan once the 5 years was up. My friends are doing this, and it was always the plan. He was british (now a citizen) and so his credit didn’t count. So when they bought the place in 2004, all they had was one 12 month credit card and 1 car loan for an $8000 used car. Using the option-ARM allowed them to have a very low DTI, qualifying them for a reasonable interest rate of just under 6%.

    5 years into paying it (although they didn’t start paying principal until this spring) they now have the credit scores to qualify for the best rates. Which was always the plan.

    With this summer/fall’s bump in prices they should be able to refinance into an FHA loan, even if the appraisal comes back 5-10% lower than their purchase price.

    But in places like California, responsible folks who had a plan to pay the mortgage back out of earned income all along, can’t do so, because that whole refinance even if you’re underwater by 25% thing is a bunch of baloney.

    1. IrvineRenter

      Subprime lending was always conceived as 3-year bridge financing while borrowers repaired their credit scores or increased their savings enough to qualify for better conventional financing. Your friend was using an Option ARM like a subprime borrower. That is OK for the 2% of the general population who can execute this plan. 98% of people get used to the lower house payments and implode when their Option ARMs recast. Your friend is the exception rather than the rule.

      1. cara

        If 60% of option-arm borrowers are still current, is it really fair to assume my friends are the exception? I know a 40% default rate is insane, but over half the borrowers can make their payments.

        People who still have jobs, should have gotten raises over the last 5 years, or moved up to more lucrative jobs. While 17% of the US work-force is un or underemployed, that still leaves over 80% of the population who may well be doing better than they were in 2004/2005.

        (of course my friends weren’t actually in an option-ARM just an I/O ARM)

      2. Dan T.

        I to am an exception to the rule. I have been in an option arm for 5 years now b/c I am self employed and have extremely variable income.

        In the lean parts of the year, I pay the minimum, (less than amortizing amount). In the fat parts of the year, I pay everything, incluidng knocking down a good % of principal.

        Either way, I am now so far above water that there is no chance for a recast.

      3. irvine_home_owner

        I’m not sure if 98% is an accurate number. I know many people (including myself) who used an OARM and are fine.

        My reason was I was self-employed but now our household is making more than double when we originally financed and can easily afford the payments. In fact, because rates are so low, our only payment options are fully amortized or 15-year amortized.

        I don’t know where people are getting 1% interest rate minimum payments. Those are only good for maybe the first month or so then it goes to an indexed payment which is usually some money market rate plus a margin. Every year, that payment goes up and usually by year 3, as long as rates aren’t rising, they’ll meet. Sure, there will be some neg am but depending on how you structured your payments (pay twice a month instead of monthly), the balance of the loan and your income, you can usually handle it if you were a reputable borrower.

        I think to get the true picture of how many OARMs will actually fail, we have to see what interest rates are they currently at, what balances are being carried, and what the property is worth. I don’t doubt many are upside down, but I don’t think 98% of them are.

        1. OrangeRenter

          Irvine_home-owner… You’re wrong.

          The ‘teaser’ rate (rougly equivalent to a 1-2% rate) DOES NOT GO AWAY AFTER 1 MONTH. You can choose to pay at that rate until one of two things happens:

          1. You pay the minimum payment (with the difference added to the mortgage balance) and the balance reaches 110, 115, or 125% of the original balance. This is called the neg am ceiling, and the loan will recast at this point to the index+margin you refer to.

          2. Of, if you never hit the neg am ceiling, it will recast in year 5 anyway.

          What you’re thinking of is that the ACTUAL rate IS AWLAYS based on an index and margin, and you are free to pay that fully amortized/fully indexed rate anytime after the 1st month. That’s why your monthly payment coupon has FOUR payment options on it (minimum payment, less than interest due; or interest-only payment, balance won’t increase; or fully amortized payment at fully indexed rate for 30 years; and the same for 15 years).

          The vast majority pay just the bare minimum optional payment that doesn’t cover the interest due and is equal to anywhere from 1-2% rate. AND, 40% OF THEM ARE DEFAULTING ON THIS EVEN WITH THIS OPTION!

          For those commenting here that you awlays paid at least the interest-only option or the fully amortized options based on the current index/margin rate – good for you!

          You are in the minority. Most people paid just the bare minimum, the balance kept increasing, and when the loan recasts (they hit neg am ceiling OR in year 5), they are in for a huge payment shock… and they should be forced-out – no bailout!

          1. irvine_home_owner

            I don’t think I’m wrong considering I had my own OARM to base my post on.

            There are several kinds of OARMs but the most common that I saw from Wells/WAMU/GlenFed/WorldSavings had an initial start rate of 1% to tease you. The minimum payment rate was actually like 4% (this was when rates were near 7-8%). That teaser start rate was good for 1, 3 or 6 months but then you had to pay the minimum payment rate and the difference between that and the fully indexed rate would defer.

            If that deferred interest hit the cap you mentioned, it would auto recast as you said (recast meaning the deferred interest would be included in the loan balance which translates to higher payments). This wasn’t a problem for us because we always put 20% down (I can see how it would be for those who did not).

            And the minimum payment rate would not stay that way. Each year, that it would go up but capped by some amount. So even if it started at 2% (as you are stating) it would be something like 5% by the end of Year 3 and would only be restricted by whatever the fully indexed rate was. As I said earlier, at one time, our payments went down because our minimum rate was higher than the fully indexed rate (as could be the case for some OARMs currently).

            But I have never seen an OARM that had a 1% minimum payment rate for the life of that loan.

    2. Geotpf

      There’s a self sustaining loop here. Prices have fallen, so more people can’t refinance, so more people lose their houses in foreclosure, so the supply of REOs increases, so prices fall more, so even more people lose their house to foreclosure, so even more people can’t refinance, so more people lose their houses in foreclosure, so the supply of REOs increases, so prices fall even more…

      You can see why the government and the banks have tried to institute a circuit breaker via foreclosure moratorums and loan mods to stop this cycle.

      1. alles_klar

        No need for the foreclosure moratorium and loan mods to stop the cycle. Letting prices come down to true affordable levels will stop the cycle.

        We have already seen evidence of this. Specifically, home prices that result in payments equivalent to rent receive multiple offers within minutes of going on the market.

        1. priced_out

          … and even then, these multiple offers are only affordable because the government has made interest rates so low.

          The Fed has been printing money to buy Mortgage Backed Securities so that the apparent demand pushes interest rates lower.

          The market is not standing on its own. The government puppeteers are marching it around like a necromatic marionette.

          1. IrvineRenter

            “The government puppeteers are marching it around like a necromatic marionette.”

            Nice selection of words and images…

    3. matt138

      A friend of mine just refinanced from an option ARM loan (rate 6% paying the interest only payment) to a 30 yr fixed payment at 5.5% and his LTV was 125%. GMAC. In a sane world, nobody lends at 125% of value. This is your tax dollars hard at work lending money on ludicrous terms.

  4. lowrydr310

    “But in places like California, responsible folks who had a plan to pay the mortgage back out of earned income all along, can’t do so, because that whole refinance even if you’re underwater by 25% thing is a bunch of baloney. ”

    Sorry, but that’s something that should have been considered when they made their decision to go with an option ARM. People need to be more responsible by considering all possibilities, and being prepared to deal with them. The simple solution would have been to go with a fixed rate fully amortizing mortgage.

    Part of me feels bad for the guy who bought a house that he could afford then loses a job and has to foreclose because he can’t afford payments, but if that guy had planned for possible unemployment and had cash reserves to cover an emergency then there wouldn’t be a problem (assuming he could find a new job before his reserves run out).

    This is part of the reason why I didn’t buy during the run up of the bubble; despite having sufficient monthly cashflow I wasn’t prepared for to handle the possible dangerous scenarios that could have played out.

    1. Geotpf

      I agree-that’s not being responsible. It was a “plan”, but one that could only happen if prices continued to increase or at least remain at their obviously inflated levels. That is, a significant aspect of the “plan” was completely out of the home buyer’s control-housing prices.

      If cara’s British friend was actually responsible, he would have simply rented until he had the credit to get a 30-year fixed rate loan. As a bonus, he would have paid less for the house since prices dropped.

      1. cara

        Ah, but that would have been 5 years later. They bought in 2004, got very lucky and paid a 2003 price (because of a combination of wallpaper everywhere, and the seller thinking a time limit of one week on the market was a good idea…). So actually given that only 2 townhouses in their development have sold for less than they paid (to date), and it’s not clear here in the DC area that prices actually will get any lower (nominally), that side-benefit you speak of may be illusory.

        Was it irresponsible of them to assume that with the wife getting a law degree they would soon make a lot more money? And factor that into their home purchase? It wasn’t conservative, but it wasn’t unreasonable either.

        What should have clued them in and didn’t was the fact that with their perfectly reasonable salaries they had to go with an I/O loan in order to get into a house. That should have been the sign that other people were doing things much worse. And thus that the prices would eventually have to fall.

    2. movingaround

      Exactly – anyone with half a brain considers both the negative possible outcomes of their decisions as well as the positive possible outcomes. People just brushed off the possibility of prices going down instead of seriously considering that as a possiblity.

    1. fight home foreclosures

      “Geithner said the extension of the Troubled Asset Relief Program (TARP) until Oct 3, 2010, would allow the Obama administration to use bailout funds to fight home foreclosures and boost small business lending.”

      It is for a noble cause which is “to fight home foreclosures and boost small business lending”. Those poor homeowners who cannot afford to rent….

    2. Serenity Now

      “…while the masses are out to lunch not paying attention.”

      do you mean the masses who draw their political and economic conclusions from Katie Couric each evening or the masses who never make any effort to educate themselves about the world that they live in? The American public is clueless and ignorant as a whole and that is why our country is so screwed up. If I was a politician I would laugh at how easy it is to shove things past the masses. The 20% of America out there who are concerned would not be enough to kick me out of office.

    1. tonye

      The really, REALLY scary thing is that FDR’s New Deal did NOT fix the economy. Indeed, the US Supreme Court rules that several of FDRs mandates were unconstitutional.

      What saved the US out of the Depression was WWII.

      Indeed, some of FDRs actions towards Japan and Germany could be seen as inciting the war. The actions toward Japan, in particular, pushed the Japanese Gov. to a full Pacific War (to the Japanese it was not WWII, but a 17++ year Pacific War).

      Unfortunately for Obamalosi (and good thing for us) is that currently there are not Big Bullies for Obamalosi and the Clintonistas to push around to war.

      1. Geotpf

        World War II, and all the government spending that that involved, most certainly did end the Great Depression. That is the proof that a government stimulus plan, if large enough, can end a depression.

        1. AZDavidPhx

          Unfortunately, we are a debtor nation. Doing makework on our roads doesn’t have much value to our Chinese creditors….

        2. newbie2008

          Pre US officially entering WWII, the USA was sell real goods (food and arms) to both sides. The war was not just that the US spent, the US was selling to those govt and countries. US scrap steel to Japan, trucks and engines to Germany, rifles to Russian.

          Spending for spending sake never works in the long run. Large investment — dams, power plants, intrastructure and seed money works.

        3. matt138

          With all due respect, government intervention not only created the great depression but extended it. With a free market, the depression may never have even happened and if it did – it would have been nowhere near as severe in size and length of time. Modern economists justify government solutions to government created problems. The free market is its own protector.

  5. AZDavidPhx

    Jobless Professionals Vie For Holiday Sales Work


    Note how happy the stores are to get these ‘over qualified’ workers.

    This is the destruction of the middle class folks. The corporate elite are perfectly fine with hoarding the wealth for themselves and paying the rest of us to cook cheese burgers and run the cash registers.

    This is what you get when you sell out your middle class. I wonder how many of these unemployed folk fighting over chicken bones used to be Dittoheads and Sean Hannity water carriers. Of course we all know it’s always the fault of the ‘other’ team so you know the dumb ones at least are still drinking the kool aid.

    Wake up, people. You have been sold out by both of your championed political parties and made into wage slaves.

    1. jimfromJaxFla

      Look up and Watch “The Fall of the Republic”
      The New World Order is making it’s move…
      ….I wonder what’s on Opra today?

    2. avobserver

      can’t agree more on that.

      To substitute illusory “wealth effect” generated by countless asset bubbles for real income growth has been the MO of our gov’t, Fed and Wall Street for the past 30 years. Now after the last giant popping sound we seem to be running out of bubbles to keep this scheme going. All we have left is a fast shrinking middle class pie. And worse – a large slice of that shrunken pie is not even real. Factoring debt load into the equation a large number of the so called American middle have little or no net worth to speak of. Many of them are just a couple of pay checks away from living in the street and really are working poors dressed up like and tricked into actually believing they are “middle class”. We are facing the sad prospect that after dust finally settles in some not too distant future (after all the smoke n’ mirrors get cleared away) we will become a nation of its population consisting of a small group of super rich, a dwindling real middle class (<40% of population), and a large pool of working poor (greater than half of the population).
      Here is an article from Elizabeth Warren lamenting an America without a middle class.

  6. chris

    how do you figure geithner’s extension in 2010 of the bailout to stall foreclosures is going to play into all of this?

  7. upperlowerclass

    To help put the $108,000,000,000 in perspective, does anyone know the current outstanding mortgage debt in CA?

    1. LC

      Actually, I read that wrong. The Bay Area lost $233 billion in real estate worth last year. (I wonder how much damage a major earthquake would do? Don’t think that much.)

      Yes, I think the figure for Katrina was less than that.

      Costliest U.S. Atlantic hurricanes
      Cost refers to total estimated property damage. Rank Hurricane Season Cost (2008 USD)
      1 Katrina 2005 $89.6 billion
      2 Andrew 1992 $40.7 billion
      3 Ike 2008 $24.0 billion
      4 Wilma 2005 $22.7 billion
      5 Charley 2004 $18.6 billion

  8. LC

    Recently in the OC Register, it was estimated that a large earthquake could cause over $11 billion in damage to Orange County.

    Northridge 1994 $20 billion damage
    Loma Prieta 1989 $10 billion

    1. zovall

      The IHB forums were established to promote discussion of real estate related topics. As the forums grew beyond real estate, it became a great deal of work, and conditions developed in the forums that were incompatible with having real estate related forums hosted by Ideal Home Brokers. After exploring all options for changing the forums to a form compatible with our basic mission (including discussions with moderators and other interested parties), it was decided that closing them down was preferable to continuing in a format which was draining our resources and providing little recovery. If there had been an alternative that served our interests as well as the interests of the community at large, we would have pursued it. We may open the forums again in the future when we are certain we can focus the content and the conversation on real estate related matters; this will not happen soon. We apologize to those who are upset over the loss of the forums.

  9. IrvineRenter

    Blame Bernanke: The Fed chairman Ben Bernanke could have acted to burst America’s housing bubble – and yet he did nothing

    As the senate debates Federal Reserve chairman Ben Bernanke’s reappointment, it is striking how the media views blaming Bernanke for the Great Recession as being out of bounds. Of course Bernake bears much of the blame for America’s economic collapse.

    He was either in, or next to, the driver’s seat for the last seven years. Bernanke was a member of the board of governors of the Federal Reserve since the summer of 2002. He served a six-month stint as head of President Bush’s council of economic advisors beginning in the summer of 2005 and then went back to chair the Fed in February 2006.

    This crisis is not a weather disaster like Hurricane Katrina; it is a man-made disaster that was brought about by seriously misguided economic policy. And, after Alan Greenspan, Bernanke was better positioned than any other person in the country to prevent this disaster.

    The basic argument is very simple. The US had an enormous housing bubble. This bubble drove the economy ever since the last recession in 2001. It propelled the economy directly through a building boom that sent housing construction to record levels. Indirectly, it led to a consumption boom as people spent money based on the $8 trillion in housing equity that was temporarily created by the bubble.

    When the bubble collapsed it was inevitable that it would lead to the sort of disaster that we are now seeing. We lost close to $500bn in annual demand due to the collapse of housing construction. The building boom created an enormous glut of housing. There will be little need for new construction for several years in the future.

    The disappearance of trillions of dollars of bubble-generated housing equity led to a plunge in consumption. Annual consumption has fallen by close to $500bn. If we add in a loss in demand of close to $200bn associated with the bursting of a bubble in commercial real estate, the collapse of the bubbles led to a fall in annual demand of close to $1.2tn. The Fed has nothing in its bag of tricks that allows it quickly replace $1.2tn in demand, which is why the country is now mired in double-digit unemployment.

    In spite of the heroic efforts at obfuscation by many economists, there is not really much to dispute in the above story. Add in the fact that the bubble was both recognisable and preventable, and you have a very solid indictment of Bernanke.

    The bubble was easy to recognise, Bernanke just failed to do it. Nationwide house prices had already experienced an unprecedented 30% increase by the summer of 2002. Since there was nothing in the fundamentals of the housing market to justify this run-up, and no remotely corresponding increase in rents, Bernanke should have already been aware of the housing bubble by the time he joined the Fed in 2002.

    The Fed has a large arsenal with which to attack a housing bubble, but the first weapon is simply talk. If Greenspan and Bernanke had used their platform at the Fed to educate Congress, the financial industry, and the public at large about the existence of the housing bubble and the risks it posed, this likely would have been sufficient to pop it.

    This is not about mumbling “irrational exuberance,” it’s a question of using the Fed’s full research capacities to document the existence of a housing bubble (they actually did the opposite) and then disseminating this research as widely as possible. If this proved inadequate, the Fed also had substantial regulatory powers to curb the deceptive subprime loans that helped inflate the bubble in its later stages.

    If talk and regulation failed, then the Fed could have used interest rate hikes. A policy of raising interest rates with the explicit target of bursting the bubble – for example, a commitment to raise rates until house prices fall, – would almost certainly accomplish its goal in fairly short order.

    Bernanke and his sidekick, Greenspan, chose to take none of these measures. Instead they insisted everything was fine the whole time. Things were not fine and the country is paying the price. And yes, it is very much Bernanke’s fault.

    1. darms

      Sh*t, I’m a nobody yet I saw a housing bubble back in 2002. Worse, I’m in TX so I wasn’t looking at the prices you Irvine folk (Irviners?) were looking at, just the prices here which while tiny compared to yours were still nuts in my book. Or was it more like this?

  10. thrifty

    Irvine Renter: the Alt-A and Option-Arm chart may be very misleading. The bottom two categories are entities that have some type of mortgage including these two types. The top three categories are types. Do you have any idea how much the prime and agency bars should be reduced in height to eliminate duplication in the remainder of respective vertical bars?

  11. Chuck

    IrvineRenter, I have a question. I get one explanation for why banks don’t restructure, i.e., that they’ve sold the loan to someone. But assume for a moment that the bank, or whoever / whatever owns the loan is willing to talk. So that two rational economic actors, the lender and the buyer, are sitting down at a table.

    Why wouldn’t the banks want to refinance into an interest only loan? I can see why anything amortized would be impossible for some people to pay, but I don’t see why it wouldn’t be in the banks’ interests to permit the person to avoid foreclosure by just paying a reasonable interest rate for the foreseeable future. If the person defaults in a year or two, that just means that the banks got a couple years of interest, and the house when it’s worth the same or more. If the homeowner hangs on for 5 years, and manages to eke out a small profit when selling the house (or perhaps to refinance at that point), so much the better for the bank, right?

    I can see why the home debtor wouldn’t like this solution – i.e., they have to choose between paying big interest payments and staying underwater, or giving up their house and their credit – but it wouldn’t seem unfair in most senses.

    And the follow-up question is this. Assume that this is what two rational economic actors would do, but that the lenders are unable to do it because they’ve chopped the loan into so many little parts. Why couldn’t govt step in and mandate that at least this deal be offered to people at the end of their option?

    1. tacoshark

      Your main assumption is that the banks believe the house value will eventually rise. Maybe the banks know the house will never be worth what it is today, therefore they want to get out from under it while they can.

  12. LC

    Dammit, Irvine Renter, I was just about to become optimistic and bullish, and then you have to break out your charts and stuff.

    1. IrvineRenter

      LOL! Everyone seems to think I have gone bullish, but as you can see, there are plenty of problems for the market. The data is what it is.

Comments are closed.