Business Week has published an interesting article on option ARMs. The general thesis is that they will be the next wave of homes that are entering foreclosure in the United States.

With subprime loans wreaking havoc across the United States and world financial markets, the housing market has been suffering. The unsold inventory and foreclosures are forcing prices down while slowing down the economy.

But if the data from this article is correct, option ARMs Resets that will be triggered by low payments will create another wave of foreclosures. The option ARM allows borrowers to pay a lower amount than the mortgage would typically expect to pay on occasion. These loans are designed for the self employed who have flexible incomes.

However, some borrowers only paid the minimum which triggers a quicker reset on the loan. If they are unable to sell, and with lower prices on housing and a slow market this is much more likely, they could face the loss of their home to foreclosure.

This chart from Business Week illustrates the coming problems in accelerated Option ARMs coming due.

You can see that the blue lines are the schedule that would be followed if the borrowers did not accelerate the payback window. But the gray lines show how many billions in option ARMs have been accelerated and are coming due early. This is an indicator to me of homeowners that will be in distress. They will see payments double on homes that have very little or no equity.

As with the subprime resets, the wave of foreclosures will continue and that is not a good indicator for the overall housing market.

Tags: Option+ARMs, Subprime

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