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60 Minutes of Gloom and Doom "The Option Arm"

The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Fordeclosure sign

Last night 60 minutes did another gloom and doom report on housing. The report focused on the next waive of foreclosures. "The Option Arm" They reported that the fallout from homeowners with option arms will be much worse than the sub-prime fallout.

I felt the report was irresponsible. They never explained how an option arm works. All they did was report that when they re-adjust millions of people will be in foreclosure. Maybe that will be true. If someone bought more home than they can afford most likely they will run into trouble regardless of the loan product.

The report never mentioned that when the option arms re-set they are re-set to current interest rates. Interest rates are at all time lows. They also never mentioned the benefit of option arms and that they were designed for people who's income fluctuates such as business owners, independent contractors or those who are paid commission. The homeowner has the option of paying either a fixed interest only or a higher interest and principle every month. For responsible borrowers the option arm is a great product.

I'm pretty conservative financially and I always explain the risks involved with buying a home and financing it with my clients. There is always a risk involved. While I'm familiar with option arms I'm not familiar with any one so naive that they got an introductory rate at 1% and didn't know it would go up. Perhaps there are many of those loans out there and when they adjust to 5% the homeowner will be in trouble. IMHO that homeowner was never qualified to buy the home in the first place if they could not be approved at the possible future higher rate.

I bought a home in 1989 at the top of the last boom. The developer of the building that I purchased required buyers to be approved by their bank Citibank. I was approved by citibank at their prevailing rate of 10 1/4%. Once a buyer was approved by Citibank they were allowed to get financing elsewhere. I shopped around and found a bank that offered an option arm at an introductory rate of 7 1/4%. It readjusted every year and included the risk of negative amortization. I was fully aware of the risks but felt it was a good product for me. It turned out to be a great product.

During the early 90's real estate prices dropped about 30%. My home was worth less than I paid. Comparable apartments were being sold for much less. At the same time interest rates were rising and my mortgage payments increased. However, I had the 3 options every month. I could either pay the fixed rate (interest only) or interest and principle or fully amortized payment. There were some months that I only could pay the lower amount. I was happy to have that option. I enjoyed the apartment and wasn't very concerned about "the market" because I wasn't planning on selling. I was planning on living there. I enjoyed it just as much when it was worth 30% less. It was still a home that I enjoyed.

It turned out after a few years interest rates started going down. My mortgage payments became less and less over the years. My rate went from a high of 12% to a low of 5%. During this time period many of my friends and acquaintances refinanced and refinanced. I only planned on refinancing if rates starting climbing up. It never became necessary. I sold the place and paid off the mortgage. I'm now in the market to buy again. Since it has been two years since I owned I am considered a "first time buyer" and will be eligible for the 4.5% first time buyer rate.

Real estate is cyclical. It goes up it goes down. Interest rates go up and down. Know what you are getting into. A home is not a portfolio. It is a place to live and enjoy. It is something that should be held for the long term. Market conditions should not determine when to buy personal conditions should.

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Posted by Mitchell Hall NYC Real Estate Broker on 12/15/2008 09:01 AM

Comments (47)

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47 Comments on 60 Minutes of Gloom and Doom "The Option Arm"

DEC

2008

Mitchell - The problem with news shows is that they never fully explain a subject matter, gloom and doom I suppose increase rating.

What a wonderful time to be in the market and with a 4.5 rate you couldn't go wrong. Best wishes property shopping.

I too saw that story, and didn't appreciate the fact that the experts were saying it would be 5 years or more until recovery (blanket response). Also, did you see the interview with the lady who thought she was "misled",but then said she didn't read the loan papers...arggg!! That is so unacceptable!

Did you expect the media to say anything positive about mortgages or the housing market?!! :) Thanks for bringing this segment to our attention. It's always helpful to know what's being said, and it's impossible to watch all of the news sources.

It did seem like a one-sided story last night- However I think there is a lot of truth in it. I know many buyers that got Adjustable Rate Mortages- or Interest Only Loans that only lasted 3 to 5 years before they adjusted to current rates. The assumption was they'd either sell the property before the adjustment or refinance. They were right in the news article, most people thought real estate values would continue to increase! Worse case scenario, people thought prices would stay at least the same, not drop 30%+ in just one year alone. No one predicted the tightening of credit which makes it almost impossible to refinance these days. So I think they are right, and many will be a lot of people hit hard.

Whether it was the right thing to do for these investors or not, isn't the question now. Its how to deal with this upcoming wave of additional foreclosures.

Mitchell, you make a good point that the report was irresponsible. Option ARMS have different characteristics than subprime loans. In fact, many supposedly have payment caps of 7.5%, meaning that the worst case scenario from one year to the next is a modest increase in payment. In other words, if someone's payment is $1000, than the highest it can be the following year is $1075. The big risk in these loans was the threat of negative amortization, and supposedly there was a clause that the loans were to be reviewed and modified every 5 years to adjust for this. While there may be a threat down the road, these borrowers were better credit candidates than the subprime borrowers and are more likely to stay out of trouble.

Yes, I thought the 60 Minutes piece was very one sided and not particularly truthful. His assertion that we are going to see a new wave of foreclosures when ARMS hit is skewed because as a former ARM holder myself, I know that ARMS have been resetting for the last few years and that HAS caused a lot of what we are seeing now.

He MAY be a little closer to the mark on the Commercial side of things though!

Jennifer, Thanks, It is a great time to be a buyer. I just need to find time to shop.

Kristin, She didn't read the papers because she was too busy yet she bought 6 condos. IMO anyone who buys 6 condos needs to act like a real estate professional. Totally unacceptable! Her little hobby is not a little hobby but a serious financial undertaking.

Lee and Katherine, Thanks for stopping by. I should know better negative does better in the ratings.

Paul, Credit should have been tightened before some of these people bought. It is unfortunate for some of these people but interest rates are very low now. It could be a lot worse if interest rates were like they were in the 80's.

I've sold many homes to buyers who availed themselves of the option arm.

Not one default in 20 years.

The folks who did the report probably don't even know what an option arm is.

Mitchell, I saw this last night and it scared the begebers out of me! I was ready to start looking for another job for 5 years. Then calmed down after I realized our area is not experiencing this trend as bad. If I looked at his graph and we had just been through one of the worst times ...I still was selling houses as usual during those few years of forclosures. Just now did my first short sale. If I made it though all that, I can do the same for the next few years. People will always buy homes to live in. Thanks for writing about your positive experience. People need to see this.

Dan and Amy, My arm had a cap in both directions. However it went down so low the bank sent me a letter saying it will never go any lower. As long as rates are low many of these loan holders should be pleasantly suprised when they reset.

Ron, Good point many have already reset. Commercial might be another story.

Lenn, I don't know anyone who has defaulted. I might take an option arm again.

Lizette, I agree people will always buy and sell homes and will need a REALTOR. They need us more in bad times. I haven't done a short sale yet but thanks to ActiveRain I have knowledge of them. After 9/11 I thought nobody would ever buy in NY again. They did.

Re: CBS 60 Minutes "The Mortgage Meltown" aired on Sunday 12/14/08.

Scott Pelley's piece on the 2nd Wave of Foreclosures overlooked a critical fact. The next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the "Troubled" assets in TARP were marketed to the self-employed who fell prey to them.

An NASE survey,www.nase.org, was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis. The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008. According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012. These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.
The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners.

Professor Bornstein,

Thank you for your comment. The survey from NASE is alarming. Self employed and small business are more vulnerable to defaults. In my opinion the way to advert a second "tsunami" would be to call for 4% mortgages.

Realogy the parent company of Coldwell Banker issued a press release outlining its proposal to the government, calling for a short-term buy-down of mortgage rates in efforts to aid and stimulate the economy. The CEO of Coldwell Banker Hunt Kennedy, David Michonski also issued a press release last month. He argued 4% mortgages for 30 years with no prepayment penalty would solve our housing mess in 48 hours and that buyers would rush into the market and snap up bargains if they had a low enough mortgage. He wrote that if we solved the housing crisis we would simultaneously solve the financial crisis in America.

It has since been reported that the Treasury is lowering to 4.5% mortgages as a way to spur the housing market. The only difference is that we wanted to see the plan extended to all those who need to refinance. After all, those with adjustable rate mortgages about to reset are tomorrow's problem. Why not head off tomorrow's problem today?

Your survey shows that the Treasury and Congress should add refinancing.

DEC

2008

I can't tell you how many people asked me if I'd seen the 60 Minutes piece yesterday - - we talked about it in our office and prayed no one had seen it, but the Patriots tromping of the Raiders was on just prior so apparently everyone stayed tuned! Most people's next question was "what are Alt-A and Option ARM loans? The piece did a terrible job of explaining anything, threw unfamiliar and scary new terminology at viewers, and created yet more fear to fuel our economic downturn. Enter the puppet masters.

Your exchange with Prof. Bornstein should have been part of the 60 Minutes piece!

Terry, Thank you.

Media and academic types have a tendancy to use sensational terminology - buzz words such as:

"TOXIC Mortgages", "Troubled Assets", "Payment Shock" "At-Risk", "Mortgage Payments Skyrocket"

The scary terminology helps to sell their books and increase their ratings.

Mitchell,
You seem to be a responsible borrower and real estate professional that understands how these work and used it to your advantage. I too used this program for high net worth and sophisticated clients in conjunction with their financial planners as part of a comprehensive financial plan. The clients we worked with were qualified at the 30-year amortized rate and required to invest the difference between that payment and the minimum with their financial planner. Those that followed this advice are in very sound financial position today. In fact just yesterday I got an email from one of them thanking me for what we did for them. However, many people used the Option ARM product to purchase a house that they could not otherwise afford under the no-documentation or stated income provision and they were qualified under the 1% minimum payment option.

As others pointed out, yes these loans typically have a 7.5% annual cap for the increased payment so a $300,000 loan would have a $965 minimum payment in year one would go to $1,037 in year two. Assuming that the person was paying the minimum for 5 years, the payment in year 5 would be $1,288.62. A $300,000 loan would now have an outstanding balance in the range of $330,000 and under the 5-year reset provision of these programs the new minimum payment would be $1,873/month beginning in year six. That is almost double the payment they originally were making and a 45% jump over the minimum payment in the 5^th year.

This is what the report was referring to and these are the people that will be facing difficult times. Many of these same homeowners are now underwater due to declining real estate values and the increased loan balance due to the negative amortization of their loan and they cannot refinance. Also, keep in mind that many of these loans have a 110% neg-am cap (some had a 125% cap) and therefore the minimum payment option would contractually disappear before the end of the 5^th year for many. These loans were often misused by the person selling them and clearly not fully understood by both the professional as well as the consumer. Still today most loan officers don't know how to explain the cap provisions of a typical ARM and how the loan will adjust during the adjustment phase.

The excused used by most like the woman on the 60-Minutes segment was that they did not have enough time but most were acting greedy and just figured they sell or refinance to make a profit and did not think about worst case scenario. Of course this is a poor excuse and this is the 2^nd most common mistake of the top 10 that most make with their mortgages. If people would simply slow down to take the time to understand the programs they are choosing and how they affect their short term cash flow as well as the ramifications to their long term financial goals we would not be in half of the mess we are in today.

Dave Muti, author of Mortgages: What You Need to Know

I have been in the mortgage business for over 30 years and have been a big advocate of Option ARMs, having worked for two of the largest ARM lenders in the country, Savings of America and Great Western. The Option ARM can be truly beneficial so long as the buyer knows how it works. Too many loan officers and brokers NEVER explained the program properly to their clients. I always told my clients the risk involved and the benefits and downside to each and every loan.

I personally had the Option ARM on two of my homes and benefited from lowering interest rates both times. It is not the Ogre the media portrays it to be.

Dave, Thank you for your comment and explanation. These loans are not right for everyone just as 30 year fixed mortgages are not right for everyone. I agree that many of these people like the woman on 60 minutes was acting greedy.

As Jim Cramer says "Bulls make money Bears make money but pigs get slaughtered."

Mr. Hall: It is GREAT to read a reasoned analysis of the situation here. Yours is a very well thought out and written post that I will save and refer to as appropriate. Keep it up!

Gene, Thanks for stopping by. My Option ARM was originally with Home Savings of America until it was taken over by Washington Mutual. I never had a problem although I was aware of the risk.

Thank you Mr. McCombs, I appreciate your comment.

I didn't watch the report so my comments will be general in anture and not specific to the report. Option ARMs will default in record numbers, in 2009 and into 2010 and drag the economies of CA, AZ, NV, and FL down even farther but the Option ARM wasn't the culprit; a culture of loose underwriting standards was.

Thes loans were peddled as stated an NINA loans. The "manana" culture of lending, in the 4 aforementioned states caused borrowers to reach farther down the payment curve, to maintain a lifestyle the wasn't commenseurate with their earnings. It was a case of mutual greed by both the borrowers and lenders.

Option ARMs are a very sophisticated (and powerful) financial instrument. We've thrown the baby out with the bathwater by eliminating them. When they eventually return (and they will), borrowers should fully understand the loan terms before borrowing and underwriters need to qualify borrowers based on a fully-amortized payment.

With all due respect, I too watched the 60 Minutes report. Our local bankers and some economist friends of ours have been saying the exact same thing as this report said. It may not be good news, but blaming the media for reporting what appears to be correct but not what you like to hear is becoming more and more of (IMHO) a cop-out.

Whether it's good news or bad news, as responsible professionals we should listen and evaluate it and use that to further our business as best we can. Hoping and wishing that the news were better, just isn't going to make it better.

No offense meant in this post.

Thanks Brian, I value your opinion. It seems mutual greed and non-qualified borrowers are the problem not neccessarily the option arm. So even if these loans reset at lower rates many will still default because they are un-qualified borrowers?

Certainly some homeowners are fine with ARMs. Like you Mitchell, we had ARMs for many years on investment properties and those worked out fine.

But it does concern me that so many consumers didn't seem to understand the risks invoved with the option ARM.

I know in our buyer's brokerage we never had a buyer take an option ARM after we discussed the true risks versus the benefits. Zero, out of thousands of loans.

It makes me wonder it we would even have this problem if other real estate companies worked as hard to inform their buyer clients.

Ok, whether we believe this new wave is coming or not, or why it happened, what can we do to be proactive to deal with this situation? I think we should be spending more time on solving and dealing with the problem then rehashing over and over again how we got here.

I also watched that 60 Minutes piece and wondered about the SAVINGS these owners had with the teaser rates. If your payment should have been $1500 and you knowingly took the 'teaser' rate so your payment would be $800 - DIDN'T THESE PEOPLE BENEFIT? Now when the payment is going to re-adjust they are getting ripped off? Give me a break already! Whine Whine Whine. That investor lady that said she didn't know what she signed. She knew what she was doing also. She rolled the dice with an investment and came up short - how is that anyone else's fault but hers.

Gabe, No offense taken. However, the report ofered no solution to the problem. I think lower interest rates including refinancing might advert the "second "tsunami" Although as Brian mentioned above the culture of greed and loose underwriting standards caused the problem.

Perhaps it is a regional problem since real estate is local. I honestly don't see this as a major problem in my market. In NY state both sellers and buyers of real estate are required to have an attorney. An attorney has a fiduciary responsibility to their client. The accupuncturist on 60 minutes would not have been able to buy 6 condos without legal advise explaining the risks.

Jon, I'm with you. I tell my buyers every possible scenario of risk that I am aware of. When they waive financial contingency I explain how they can possibly lose their deposit.

Paul, I'm not an economist but I would think keeping interest rates very low and let these borrowers refinance at lower rates might help. The problem seems to be that they reset at much higher rates. I think the government seems to be leaning in that direction.

Lyn, I agree some of these people can't be helped. If they got a teaser rate of 1% and expected to pay that forever I don't know what to say except they're idiots. I'm sorry but I have a nice bridge in Brooklyn I think I will sell her.

Mitchell, yes, in a textbook the ARM is suitable for some people. But from the numbers I've been seeing, the story was very accurate. According to a December 2006 Fitch Ratings report, almost 90 percent of people who got an Option ARM in 2006 used little or no documentation and more than 90 percent were suffering from negative amortization. A Jan 22 issue of "Mortgage Strategist" a research note from investment bank UBS, estimated around 80 percent pay the bare minimum. If you continue to make the minimum payments, a $600,000 loan can become a $750,000 loan within a couple of years with virtually no hope of refinancing. Most companies do not cap the reset.

I would agree that the media is sensationalizing a lot of what is going on!

Mitchell,

In a response above you mention "An attorney has a fiduciary responsibility to their client"

Any company that claims to provide buyer agency also has a fiduciary responsibility to their client. Just like an attorney.

So how did this many consumers take the high risk loans and not understand them?

I guess it is because most real estate companies don't take buyer agency very seriously.

There is no true journalism being practiced in any of the major media. Its all about negative news so they can boost their ratings.

Collectively, we as a nation can opt out of the news and not participate in the recession. This can be a great opportunity for us to all pull together and bypass the old traditional institutions that are falling apart.

Call it an underground economy if you will, but that is where real business will be conducted in the future.

Something that scares the hell out of the government controllers.

I hope you sent a copy of your post to the 60 Minutes editors.

Mitchell, thanks for highlighting the 60 minutes story. You should send a copy over to the show. I waited for the football game to go off, but I'm on the West Coast and the announcer said we wouldn't be able to see all of the 60 minutes show.

John Boyd, I agree with both of your posts above. Many people did not understand their ARMs. It doesn't really matter if it's the buyer's fault, many of their loans will likely default and the entire market will continue to be affected. The fact of the matter is in many areas of the country, prices escalated only because of the creative financing available. People never could afford their homes and shouldn't have purchased them. It disheartens me to say that, because I believe in home ownership.As a result of all all of the ARM's, values are falling and will likelycontinue to fall until we get to "affordable". I'm seeing homes that will only sell for about half of what they were once financed for. Prices wouldn't have soared without a product that would allow a person to purchase too much home. In 1999, when I purchased my 1st home, I had to "qualify" -credit, income and debt to income ratios at at 25%-33%. But that's another post for another time.

Jeff, Thanks for your comment. Perhaps the piece is correct and millions will be defaulting. The part that was not correct is that these borrowers are innocent victims duped into bad mortgages. Perhaps they should read the textbook or at least read the legal documents they signed. If what you say is correct - 90% used little or no documentation then basically they lied about their income and assets. They should call them liar loans. I had to qualify for my Option Arm with tax returns, pay stubs etc.

Jon, I don't get it. Maybe they didn't have real estate agents or their agent's only qualification is putting the key in the door and opening it.

Mike, The underground economy will be people who are debt free and have cash. CASH is KING!

Diane, Maybe I should. Thanks

SMP, I beleive in homeownership too. For people who can afford it.

Aloha Michell,

There is an erroneous presumption in this country that Media is here to tell the truth, a product of their own dishonesty no doubt. The Media has purposefully spread disinformation concerning how money is created in this country. Just about every media outlet has worked hard to make sure Americans are kept in total darkness about how our Fed and other financial institutions operate. There is a reason that CEOs and top execs in the banking industry get paid Billions of dollars in salaries, it's to keep their mouths shut.

Peace,

Mitchell, you are so right when you say: "Media and academic types have a tendency to use sensational terminology - buzz words such as: 'TOXIC Mortgages,' 'Troubled Assets,' 'Payment Shock,' 'At-Risk,' 'Mortgage Payments Skyrocket.' The scary terminology helps to sell their books and increase their ratings."

As a copywriter trained to use the persuasive power of words to sell products and services, it's sometimes hard for me to understand how the average consumer does not see straight through persuasion tactics. The problem of course is not that individual people are either idiots or "blind." It's that human nature is so predictable. And marketers have decades of consumer research at their disposal to know what emotional hot buttons to push when targeting particular audiences.

I have to remind myself that savvy though I am to the inner workings of persuasive copy, when I’ve been accurately targeted, I become a human consumer just like anyone else. No one is immune when s/he has been accurately targeted. It's a marketing fact: fear and doom and gloom sell.

If the 60 Minutes report had given just one positive example to balance their story or even just acknowledged the benefits for borrowers in particular situations... But then, I lost respect for the news media way back in 1968 when I saw on the 6:00 news a story about a conflict in Africa. Uniformed soldiers were shown attacking a village and pulling a man from a group. They surrounded him and beat him to death, then stabbed him with their bayonets, all the while making sure none of the soldiers blocked the camera's view of the slaughter. I was paralyzed like a deer in headlights as it dawned on me that this was not fiction ... that I was watching a real man being viciously murdered. And yet, it was so much like a performance for the television camera that I had to question if the media's presence had been the instigating factor in someone's husband, son, father being killed. I was young then, and for the first time I realized the length to which the news media will go for a story or to present their own view of things.

Thank you for speaking out against the news media's practice of presenting simplistic lopsided views of complex issues and the marketing tactics they use to attract larger audiences. A larger audience, of course, translates into more advertising revenue for their companies. (I apologize for this being so long, but I think you struck a nerve with me.......K)

Aloha Kimo, The media is here to sell advertising. The Fed is giving billions to preferred big banks so they can become even bigger, less competent and competitive while their billionaire CEO's become trillionaires. None of the bail out money is being used to stimulate the economy or lending.

Kay, Thanks for contributing. Persuasive copy certainly works and so does shock. No one is immune. Sensationalism sells.

The Medium is the Message: Marshall McLuhan

DEC

2008

Hi Mitchell,

Great description of the option ARM. I have always seen this as a great option for builders or short term investors (as it provides a minimum payment option). Unless people fully understand it, like you did, it's a recipe for disaster in the single family/ condo markets. Unfortunately, I'm working on a short sale right now that is the result of an option ARM. The mortgagor had no clue what they were buying and now their payments have doubled the original amount.

The best part: Thier original agent and mortgage broker told them that they could just keep refinancing, and the market would continue to appreciate (this was two years ago). They owe about $488K on a house that's worth $400K - they bought it for $460K.

Happy holidays,

Mike

Hi Mike,

Happy Holidays, Thanks for stopping by. You really have to understand the option arm. It is not right for most people. Living on commission I've learned to be disciplined financially. Putting aside for the IRS paying down principle when I got a big check, paying the minimum when I had a bad month.

It is horrible that an agent and mortgage broker would tell someone prices will keep appreciating. Their crystal ball must have had a crack in it.

The main problem is that without fail, there always seems to be so many within the industry that immediately defend Option Arms with the pie-in-the-sky scenario “well what if you are a doctor with a side business and don’t want to document your income? This product makes sense.” Yet that is the exception and not the rule as we are now painfully learning. I’m sure some of these people were sincere but the vast majority were simply delusional and licking their gluttonous chops for a fat commission. Never were they looking out for the client. To ease their conscience they tell themselves, “well at least I warned the client about the risks of the mortgage.” For the general public, Option ARMs are arguably the most toxic mortgage product on the market.

These loans were setup for that unicorn pie in the sky scenario of the wealthy business owner who simply does not want to document income but instead, became the primary product for many brokers in states like California and Florida for those who needed that extra pinch of leverage to buy that over priced home. Wachovia had specific quotas wherein there staff had to have atleast 40% of their mortgages Option ARMs.

Jeff, I'm defending an adjustable rate mortgage as opposed to a fixed rate mortgage. I will not defend a no documentation loan. No documentation is the problem not the adjustable rate. I did not know the two were synonymous.

I qualify buyers everyday and don't work with un-qualified buyers. Most Coops and condos in NY require extensive documentation included in the purchase application. They also require down payments minimum 10% for condos 20-50% for coops and coops also require debt to income ratio below 25% with liquid assets left after close to cover 1 -2 years maintenance and mortgage payments.

A wealthy business owner who doesn't want to document income should be able to document sufficient assets to qualify. In my opinion any one who can not document income or assets and has not been able to save for a down payment should not be given a mortgage.

JAN

2009

The Media drives me NUTS !!! It appears good news doesn't sell - just bad news! ARM's are not terrible things at all!

Better yet - figure this: While there are TONS of different ARMs. About 5 years ago (at least in this area) many were around 4.5-5%. The most popular were 5/1 with a 2% cap based on the LIBOR rate.

The LIBOR rate is currently only 2%. If the loan terms say it will go up (typical MAX is 2%) If their rate adjusts: The new rate would be LIBOR + 2% for a total of 4%.

JAN

2009

I haven't read all of the comments but I have to chime in as the voice of respectful dissent on this particular matter. I was a loan officer for 6 years and have two properties with Option ARMs.

I think people need to distinguish between Option-ARMs and regular ARMs. Regular ARMS amortize normally; OptionARMs do not- they negatively amortize. Those 1% teaser rates come at the price of the other 4-5% being tacked onto the principle. Option ARMs are therefore very good for short term investments which will be sold before the adjustment. But as long-term owner occupant loans, they are deplorable and irresponsible products, and I have personally brokered short sales where the client had no idea what they were into- they were just mesmerized by the low teaser rate.

If you have an $800 payment with an option ARM and the teaser rate is 2%, you need to understand that when the rate does adjust up, you'll have to pay more than the rate hike to make the loan amortize. The spike to $1500 was not an irresponsible illustration.

In general, the media's reportage is cruddy and unhelpful. But in this case, 60 Minutes is right in my view. I am explaining this, Mitchell, because you don't mention amortization in your post.

Housing professionals would do well to understand the differences between regular ARMs and the Option ARM. WE ought not dismniss the danger they pose.

James, 5/1 was very popular and I beleive you have 5 years to lock in a fixed rate.

Philip, I beleive mine was an option arm. However, back in 89 my teaser rate was 7 1/4% with a 6% increase cap. At one point it went to 11 or 12% but it was gradual, prices were falling back then too but then rates started falling and prices started increasing. I built up equity.

If rates back then were as low as they've been in recent years I would have gone for a 30 year fixed.

JAN

2010

You are all whistling past the graveyard.

JAN

2010

At the risk of sounding redundant, I must repeat my often used comment: Risk is perception, and perception governs actions. At the time these "toxic" loans were originated, the greater risk was perceived as being the probability of being left behind in the sizzling real estate markets.

These very useful loan programs were valued by the self employed as well as by others, because it was possible to qualify for those loans.

When the economy tanked and real estate values dropped, many of the assumptions that led to acquiring property proved wrong.

The self employed have always been risk takers -- it's a job requirement. When they are right everyone benefits. Even General Motors started out as a gleam in someone's eye which turned out well -- at least until recently.

We keep hearing about "greed". If by greed we mean motivation to risk one's present financial wellbeing in the hopes of getting ahead, then we should hope that greed should become part of our national policy. It should be written into the constitution.

Most economists acknowledge that small businesses drive our conomy. Small business = risk/greed. Sometimes it backfires. Does that make it evil?

BTW: IMHO anyone who took out one of the "toxic mortgages" knew what they were doing and were willing to take that risk. It just did not work for many of them due largely to economic conditions that no one saw coming.

The media will always be able to find someone who will be willing to say whatever is needed in order to get their faces on TV.

This is an excellent post, containing some outstanding comments!

Akron, Ohio

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Mitchell Hall NYC Real Estate Broker

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