OptionARM Homebuyers See Monthly Payments Go From $95 To $3,500

Will the coming wave of OptionARM mortgage resets look like the wave of subprime defaults?

This Bloomberg piece paints a sobering picture of where things are at, and it’s clear right off the bat why the resets are going to kill a number of buyers:

Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.

Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its low minimum payments before resetting at higher costs later.

We’re not sure what the housing market is like in Galt, California, but if we had to guess, Ms. Breitmaier is pretty under water right now, and a refi is probably out of the picture. Now this might not kill the banks — after all, the chart below is well known and we’re guessing that much of their portfolio has been slammed accordingly. But in terms of flooding the market with foreclosed home, slamming prices, it’s too early to believe that it’s all priced in.

And generally, the effect that will have on the economy and consumer confidence will be brutal:

The delinquency rate for payment-option ARMs originated in 2006 and bundled into securities is soaring, according to a May 5 report from Deutsche Bank AG. Over the past year, payments 60 days late or more on option ARMs originated in 2006 have almost doubled to 42.44 per cent from 23.26 per cent, Deutsche Bank said. For 2007 loans, the rate has climbed from 10.1 per cent to 35.25 per cent.

“We’re already seeing much higher levels of delinquencies of these option ARM loans even before you reach the point of the recast,” said Paul Leonard, the California director of the non- profit centre for Responsible Lending.

The threat of soaring payments has counselors at Housing and Economic Rights Advocates busy.

There’s a level of hopelessness to the phone calls now,” said Brown.

Read the whole thing >

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