In a wave cresting through the coming two years, most of the estimated 900,000 borrowers who have option ARMs will lose their ability to make these teaser payments, according to First American CoreLogic, a Santa Ana real estate research firm.
“Unless option ARMs are restructured proactively, large proportions of them could end in foreclosure, leading to a potential double dip in housing prices in many California markets,” said Paul Leonard, director of the Center for Responsible Lending’s California office.
In other words, it’s not just a matter of rates resetting. If it were, the coming wave of resets might not be a big deal since interest rates are low.
But, yes, many of these people were tricked into bad loans. Reporter E. Scott Reckard gets a great anecdote here:
That helped Coronado Fire Capt. Bill Toon, a single father.
He was delighted in 2004 when an adjustable-rate mortgage with a low-payment option enabled him to buy a house in El Cajon for himself and his daughter. The loan balance rose a bit each month, but Toon convinced himself it would eventually go back down.
Then in 2007, he learned about negative amortization, a feature in the option ARMs that tacked unpaid interest to loan principals. He saw that he owed nearly 110% of the original loan amount, and reaching that threshold would trigger a $3,000-a-month increase in his housing payment.
“I knew I was not going to be able to make the payments,” Toon said. “I didn’t read all the fine print. Shame on me, but I didn’t understand the loan.
It would be a great story to find out who brokered the loan, who lent the money, who packaged the loan into a mortgage-backed security, who packaged it into a collateralized debt obligation, who issued credit-default swaps on that CDO (and who bought them and made a killing) and created a synthetic CDO, who bought the synthetic CDO, whether it’s pledged as collateral to the Fed now, etc.
I don’t know if all that happend with this particular loan, though it’s hardly unlikely. And I don’t know if you could get all that information on any loan. But it sure would be fun if you could.