Interest Rate Roundup

Tuesday, September 02, 2008

The FT tackles option ARMs

Good Tuesday morning. I hope you all had a fine Labor Day weekend. I had to deal with some unfortunate family obligations early on. But I managed to get in some grilling time later -- which in the grand scheme of things, is all we can ask for on a three-day weekend, right?

Anyway, there isn't a heck of a lot of news to cover. We had another bank failure on Friday, Integrity Bank of Alpharetta, Georgia ($1.1 billion in total assets; total estimated cost of $250 million to $350 million for the FDIC). But other than that, the big story of the morning is probably the $7 plunge in oil prices. The catalyst was the weaker-than-expected strike from Hurricane Gustav.

Meanwhile, there was a nice FT story this morning talking about option ARMs and the potential fall out from the rate and payment resets they're going to experience over the next couple of years. Here's an excerpt with some eye-opening numbers:

"Late payments and defaults on such mortgages are already running as high as 24 per cent in some areas, said Fitch.

"It added that the potential average payment increase on recasting loans was 63 per cent.
In cash terms this amounted to an average of $1,053 extra due each month.

“The combined impact of payment shock ... declining home prices and restricted availability of mortgage credit may leave many option ARM borrowers unwilling to continue paying their mortgage,” said Huxley Somerville, analyst at Fitch Ratings.

“The current severe environment has left borrowers with few alternatives to foreclosure,” he added.

"Mr Somerville said the ARM market had the highest proportion of borrowers with limited proof of income at more than 80 per cent of loans. This increased the likelihood of default.

“Borrowers who used the [minimum payment] option to extend themselves into larger houses could easily be overwhelmed by the higher mortgage costs,” he said.

"The bulk of the $200bn of outstanding option ARMs will not hit their five-year anniversaries until after 2010."

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