August 26, 2009

Resetting ‘option ARMs’ loom as threat

More than 500,000 option ARM mortgages are scheduled to reset in the next four years, posing a looming threat to the U.S. housing recovery, economists say.

The resets will result in jumps in monthly housing payments higher than many holders of such option adjustable-rate mortgages can afford, The New York Times reported Wednesday.

Noting the default rates on option ARMs have surpassed those of subprime mortgages, analysts say many holders of those products remain at risk -- some $750 billion in option ARMs were issued from 2004 to 2007, the industry newsletter Inside Mortgage Finance reported.

Everyone's been focused on subprime, but we're more concerned about this, Todd Jadlos, managing director of LPS Applied Analytics, told the Times. By the time subprime defaults had increased 200 percent, in June and July of 2007, option ARMs had gone up 400 percent. People just didn't notice because the overall numbers weren't as high.

Residential credit analyst Elena Warshawsky of Barclays Capital told the newspaper she expects 81 percent of the option ARMs originated in 2007 to default, with many ending in foreclosure.