Friday, August 05, 2005

Option ARMs are History

The second-to-last nail in the coffin of this real estate bubble is about to be hammered into place (the other "nail" being interest rates, which are rising). According to this article, option ARMs are going to be history very soon. Good riddance.

Some choice quotes:
"On Aug. 1, Standard & Poor's blew the whistle on option ARMs. After an intensive study of recent mortgage-backed bonds, it concluded that lenders are allowing credit standards to slip too far. And too many of the borrowers using option ARMs are paying the minimum amounts per month, thereby accumulating potentially toxic levels of debt — especially in markets where home values are likely to soften."

"A second development potentially affecting option ARMs is under way at the federal financial regulatory agencies. A task force headed by Deputy Comptroller of the Currency Barbara Grunkemeyer is preparing new underwriting and credit risk guidelines on option ARMs, interest-only mortgages and reduced-documentation loans offered by the nation's lenders. In an interview, Grunkemeyer said the new guidelines could be out “by early fall,'' but there is no specific target date."

"Bottom line: It's probably sayonara to 125 percent mortgages at 1 percent to buyers with marginal credit, insufficient incomes, minimal down payments and no clue whatsoever about the potential payment-shock monsters lurking over the horizon."


Anonymous Anonymous said...

I am expecting some preemptive credit downgrade due to exposure to Option ARM underwriting. This will send a big chill.

Aug 7, 2005, 2:42:00 PM  

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