The Wall St Journal just nailed the Pay Option ARM story. It is about time the mainstream picks up on this. In my opinion, this is the big one. ‘The Subprime Implosion’ may have been only the ‘pre-quake’ with ‘The Pay Option/ALT-A Implosion’ being the ‘big quake’ and ‘The Prime Implosion’ being a long series of scattered aftershocks.
Don’t you love what the banks /ratings agencies consider ‘Prime’. I have said for a long time now that ‘the Pay Option Implosion will make the Subprime Implosion look like a bad earnings report because they cut across all socio-economic boundaries’. Now the data are proving my point. This bailout will be the mother of bailouts. At least with a subprime loan, the balance does not rise each month (before the loan defaults), thank goodness. Not so for Pay Options.
The Pay Option ARM never should have existed. Unless values continue to rise, most of these loans will fail. This loan was never intended to hold for any length of time or for a declining value environment.
I did the video a few weeks ago with real data from the Fed comparing the total subprime vs. ALT-A universes. Click here or the link below. The ALT-A universe is much larger than the subprime universe in the higher priced states like CA and even nationally, it is somewhat larger. But due to the sheer exotic nature of many ALT-A loans, such as the Pay Option ARM, the crisis will likely be that much more devastating. -Best, Mr Mortgage
Journal Story recap
-recent reports from mortgage securitizations suggest that subprime delinquencies have started going bad at a lower rate while delinquencies on option ARMs are speeding up.
-On Tuesday, Countrywide Financial Corp. said that 9.4% of the option ARMs in its bank portfolio were at least 90 days past due
-Unlike subprime loans, which went to people with weak credit, option ARMs were generally given to borrowers considered to be lower-risk.
–Washington MutualInc. reported earlier this month that option ARMs account for 50% of prime loans in its bank portfolio, but 70% of prime nonperforming loans.
–Wachovia Corp., non-performing assets in the company’s option ARM portfolio, which was acquired with the company’s purchase of Golden West Financial Corp., climbed to $4.6 billion in the first quarter from $924 million a year earlier.
Reference: Wall Street Journal