CNNMoney Article By Les Christie: Option Arms: A poison Pill for homeowners
This is a comment about a article today in CNNMoney about Option Arms and what the affect it will have on the Las Vegas, Nevada housing Market. CNNMoney assessment is that it may be a killer for any home price recovery in Las Vegas, Nevada as the last of the Option Arms that were issued in 2004 are set to be recast. Some of the more interesting statistics that CNN reported is that relatively few of these Option Arms programs were used while they were being offered.
Unfortunately this is, I have some good news and I have some bad news which do you want to hear first! The good news is that only about 350,000 Option Arms were used, the bad news is that 60% of all Option Arms were in California, Nevada, And Arizona. These three states are in a bubble market and have already seen large declines in home prices over the last several years.
For those of you that are unsure how the Option Arms work I will explain. Most of the Option Arms had a starter teaser rate anywhere from 1% to 1.5% for three months to a year. The buyer was allowed to be qualified based on the starter teaser rate. They allowed the buyer to pick a payment plan each month
1.)a minimum payment (less then the Interest only option).
2.) Interest only payment.
3.) 15 years Principal and Interest payment.
4.) 30 year Principal and Interest Payment
I doubt that anyone one would be surprised that 93% of the people that had a Option Arms used the payment plan #1. The problem with using the payment plan #1 was that each and every month you took payment plan #1 you added the difference between Plan 1 and the interest only plan, this creates a negative amortization which increases the principal loan balance.
The lender to protect itself had written into the loan terms, if the principle balance increased more then 110% or 5 years (which ever trigger came first) then the loan would be recast with the remainder of the loan term converted to a fully amortized loan, but at a greatly higher interest rate then the current ARM rate.
CNNMoney reports that currently 25% of the Option Arms that were issued have already defaulted in the first 20 months into the loan. The people that have made the minimum payment plan, but are ready to be recast, the defaults are expected to jump considerably higher due to lower home prices values, higher balances leaving few alternatives for the homeowner.
The "poison pill" for owners of a Option Arms loan is 80% of these types of loans were stated income. While the lender allowed no verification of income then, the rules have changed as they are now known as the "Liar Loans". The owners of the Option Arms loans are unlikely to produce the necessary income to qualify for a new loan, but may be also held legally liable for falsifying the application by stating income that was untrue.
Add the wrinkle of an unstable economy, and high unemployment rate in Las Vegas, Nevada you have a very poor foundation of stabilizing the housing market in Las Vegas, Nevada.
I have never used the Option Arm product with any of my clients and have actually lost business because after explaining to the clients the pitfalls of this program the client insisted in having this, I declined to do the loan.
I have received a few calls from clients that went a head and proceeded with the Option Arms, asking me to help them try to get out of their loan and told me they had wished they had listen to me in the first place.
At least I can sleep at night.