They’re gonna blow, Cap’n!
The Option Adjustable Rate Mortgages, that is:
That (the recent drop in mortgate interest rates) just postponed the problem, however, because most option ARMs have five-year automatic trigger dates. These loans were most prevalent in states such as California, Florida and Nevada, where home prices have sunk so far that many homeowners are underwater: They owe more than their homes are worth.
The bulk of outstanding option ARMs — a product no longer available to homebuyers — were issued between 2004 and 2007. Monthly payments on these mortgages are due to reset to a higher lending rate between 2009 and 2012.
In related developments, I listened yesterday to a discussion of Mr. Obama’s proposals for financial consumer protection. From the website:
The Administration plans the most sweeping overhaul of financial industry regulations since the Great Depression. The new rules expand powers for the Federal Reserve and change how mortgages are underwritten.
One of the guests, the one from the American Enterprise Institute, mouthpiece of the Ayn Rand school of business regulation, wiggled like a worm to blame the current financial situation on “predatory borrowing.”
The other guests did not let him get away with this. Neither did the callers. One caller who had worked for a mortgage broker called in and described the tactics the broker used to pressure persons into whifty mortgages. Another called to describe how, when he wanted a 30-year straight mortgage, his mortgage broker dragged the process out for weeks trying to sell him one anything but a 30-year straight.
Follow the link to hear the show or click here to listen (Real).
Customers didn’t create this mess. Bankers did.