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Payment Option ARM resets to explode with devastating consequences

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by Lorimer Wilson
Originally posted January 19, 2010

THE U.S. FEDERAL GOVERNMENT AND STATES ARE BEGINNING TO prepare themselves for the next foreclosure crisis in our housing malaise – payment option ARM resets are about to explode with devastating consequences. In further edited excerpts from the original article* Ian Cooper (www.wealthdaily.com) goes on to say:

Option ARMs are considered one of the riskiest loans made during the housing boom and have left many borrowers owing much more than their homes are actually worth. These underwater mortgages have and will continue to be the driving force behind defaults and foreclosures in 2010 and 2011.

The truth of the matter is that the amount of debt wrapped up in these Option ARMs is much worse than that of subprime and if the government or the banks fail to understand this, the second round we’ve been warning about will begin and banking instability will wreak havoc yet again. Option ARM resets will be tougher for the economy to handle than subprime and, as a result, we will see greater numbers of bank failures, job losses, foreclosures, delinquencies, and economic hardships. Honest.

Just as 2007 and 2008 were the years of subprime woes, this one will go down as the year of Option ARM resets (or adjustable rate mortgage resets). With billions in Option ARM resets scheduled to take place in 2010, this crisis is about to unleash a fury no one’s prepared for. This crisis won’t be as bad as subprime, of course. It’ll be worse because:

a) lenders created these ARMs with “teaser” features for borrowers, which included making lower minimal payments for the first few years before the loan reset to a higher payment schedule and

b) if that weren’t bad enough, there was another feature called “negative amortization,” which meant you weren’t paying back any principal. In fact, with negative amortization loans, your loan balance increased over time. Incredulously, every time you made a payment, you owed the bank even more. These are the loans that allowed consumers to buy houses they couldn’t otherwise afford.

What should concern you is that about $750 billion worth of option adjustable mortgages (option ARMs) were issued between 2004 and 2007 and will begin resetting shortly. Banks like Bank of America, JP Morgan Chase, and Wells Fargo are in for a rough ride as a result, given their exposure to option ARMs.

The next phase of the real estate disaster is upon us. It’s just shifted from subprime to Option ARM and with many economists predicting unemployment will stay in the double digits, foreclosures will only accelerate, which will add to bank losses, which will add pressure to the financial system and broader economy.


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