The Option Arm Armageddon was supposed to strike in the spring of 2009. Across the country, option adjustable-rate mortgages (ARMs) were set to detonate and start a new wave of foreclosures.
But it never happened. We made it well past when this chart from Credit Suisse showed the option ARMs were supposed to begin to hit. And the crisis didn’t come.
Why not? Well, when interest rates dropped to historically low levels as the Fed fought the financial crisis, the wave of resets was held off. Unfortunately, low interest rates won’t last forever — they’ll now likely strike next year and continue well into 2011. Many borrowers who now have the option of making payments so low that they don’t even cover the interest are seeing their original loan balance grow, even as their home values continue to fall or remain flat.
The chart below shows that the option ARM reset problem is comparable to the subprime problem, and will likely last for quite some time. Armageddon may have been forestalled but it hasn’t been overcome.
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