Thursday, September 17, 2009

Option mortgages "set to explode"

AlphaNinja - Forget subprime - option ARMs, or "pick-a-pay" mortgages may be an even bigger problem.


"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
"That's the next round of potential foreclosures in our country," he said."

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy borrowers that fed the first wave of the financial crisis.

Among banks with big option-ARM portfolio's is Astoria Financial (AF). Gruesome details from their most recent 10k:

At December 31, 2008, $12.35 billion, or 74.4%, of our total loan portfolio consisted of one-to-four family mortgage loans, of which $11.85 billion, or 96.0%, were interest-only hybrid and amortizing hybrid adjustable rate mortgage, or ARM, loans and $499.3 million, or 4.0%, were fixed rate loans.

Here's more fun - "reduced doc" and "no doc" products. :(

Within our one-to-four family mortgage loan portfolio we have reduced documentation loan products. Reduced documentation loans are comprised primarily of SIFA (stated income, full asset) loans. To a lesser extent, our portfolio of reduced documentation loans also includes SISA (stated income, stated asset) and Super Streamline loans. Reduced documentation loans include both hybrid ARM loans (interest-only and amortizing) and fixed rate loans. SIFA and SISA loans require a prospective borrower to complete a standard mortgage loan application while the Super Streamline product requires the completion of an abbreviated application and is, in effect, considered a “no documentation” loan.

And now for total fiction. Despite the lack of documentation required for loans, and the inevitable troubles ahead for option-ARM borrowers facing resets, the bank only carries the loan portfolio at a slight 1.5% discount to what they think the fair value is:

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