CR is reporting on the
impending option ARM nuclear bomb that is set to explode over California.
Option ARMs were used as affordability products in mid-to-high priced areas of bubble states like California. Now most of the borrowers are significantly underwater, and this will lead to more foreclosures, and falling prices, in the mid-to-high end areas.
I said
months ago that this is not going to happen because many have already defaulted.
From the article,
"The average option ARM borrower is significantly underwater, so much that they don't think they'll get out," Sirotic said. On average nationwide, option ARM borrowers ... owe is 126 percent of their home's value, based on depreciation and not including the effects of negative amortization, Sirotic said.
So why would they still pay? A moral obligation?
That was tossed out the window a year ago.
6 comments:
Not just California! We just had one of those blow up on our street, sheriff's sale last Wednesday, I think. Housing in our area might become somewhat more affordable because they're they'll be the first foreclosure comp near us.
Sad thing is, this couple had owned the house 10 years. But when the easy money started being handed out in refis, they couldn't stay away. First a small HELOC, then another, then another.
Eventually, about three years ago, they refi'd the whole thing into one bundle: An option ARM with a teaser rate of 1% and low, low payment based on that.
They didn't worry that the interest rate reset IN ONE MONTH! Their payment was fixed for the year at $1070 or so, and the next year's payment was capped as well, at $1150. What a deal! Cash flow!
Problem is, that wasn't even close to paying the interest, and their "option" they chose was to pay the bare minimum. Their balance got higher and higher.
Then the slam: They hit the 110% cap on the amount borrowed. From then on, their payment had to be the usual minimum, plus any interest acrruing above that 110% max-owed level. Ouch!
Their payments went from $1150 to something they wouldn't tell me -- obviously, it was beyond their budget.
What were they thinking when they signed this back in 2005? And what were they thinking the first year or two when they saw their mortgage balance increase every month?
why pay after the reset when you can stay for free for a year or more?
and in Kalifornia the lender can't come after you for any deliquency.
They sold their house to the lenders years ago..hope they enjoyed the proceeds..lots of folks live for today and then act shocked when tomorrow comes around...feel sorry for the suckers who own the note they are the ones taking the hit...wonder who they are my pension plan or your insurance company or some foreign country...greed is an awful thing to watch.
"[Strategic defaulters]...tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line."
If you were willing to game the system you could have made a nice chunk of change in the bubble states!
http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story
Perhaps extending to fourty or fifty years...let the kids worry about it after you leave this orb. Kinda like a prepackaged reverse mortgage.
I am so glad I ditched my DC job and moved exurban.
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