For almost two years now, there have been serious rumblings and grumblings about Option ARM and interest-only loans that could put a number of buyers in default. I initially gave the issue detached interest, because our clients tend to be a conservative lot when it comes to borrowing. We deal with few real estate speculators and most of our clients are solid buyers of primary and secondary homes.
My interest in these "instant gratification" loans is no longer a detached one, because the fallout from these ARMs is contributing to market weakness. Our conservative clients are seeing their San Diego home values stagnate or decline, in part due to these lending practices. It has been reported that 7 out of 10 option arm borrowers are sticking to the minimum payment schedules--and in so doing, are stacking up substantial additional debt. Many now owe more than their homes are worth. In San Diego County, short sale advisories on listings are already appearing within our MLS, and will ultimately affect appraisals and valuations. In short sale transactions, the lender agrees to accept less than what is owed on the property (and obviously less than the prior appraised value).