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Some Info On Option Arm Mortgages

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I'm sure most of us on here have heard of these types of mortgages which were available in the U.S right up until the top of the market actually. I've been looking into them since I first saw that now infamous mortgage reset chart late last year. Anyway, if you have only heard of these and do not understand what they actually were then I thought I'd help you out.

Basically, the Option ARM mortgage which allows the borrower to get a mortgage at an initially very low teaser rate which lasts for a set number of years. Great right?? Well no, say the full rate is 6% (that is the full interest and principle rate) and the teaser rate is 2%, that remaining 4% is actually added on to the principle (ie, the principle goes up during the teaser rate period). Now, as soon as the teaser rate period is over, say 4 years, you then have to pay the full 6% rate on an already increased principle. Therefore, a monthly payment on a teaser rate could be $1500 per month but when the rate resets it can shoot the moon to double or even treble that amount. According to Fitch, 80% of all option ARM borrowers only make the minimum payment each month.

Some info:

http://www.doctorhousingbubble.com/wp-cont...-option-arm.png

A great youtube videos explaining the numbers:

Yeah so basically I just wanted to give any newcomers some basic info about this type of product.

Edited by self

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I'm sure most of us on here have heard of these types of mortgages which were available in the U.S right up until the top of the market actually. I've been looking into them since I first saw that now infamous mortgage reset chart late last year. Anyway, if you have only heard of these and do not understand what they actually were then I thought I'd help you out.

Basically, the Option ARM mortgage which allows the borrower to get a mortgage at an initially very low teaser rate which lasts for a set number of years. Great right?? Well no, say the full rate is 6% (that is the full interest and principle rate) and the teaser rate is 2%, that remaining 4% is actually added on to the principle (ie, the principle goes up during the teaser rate period). Now, as soon as the teaser rate period is over, say 4 years, you then have to pay the full 6% rate on an already increased principle. Therefore, a monthly payment on a teaser rate could be $1500 per month but when the rate resets it can shoot the moon to double or even treble that amount. According to Fitch, 80% of all option ARM borrowers only make the minimum payment each month.

Some info:

http://www.doctorhousingbubble.com/wp-cont...-option-arm.png

A great youtube videos explaining the numbers:

Yeah so basically I just wanted to give any newcomers some basic info about this type of product.

The scandal of ARM mortgages is that variable rate mortgages are the norm in the UK, but I gather more or less unheard of for many US borrowers who believed they were getting the normal fixed-rate mortgages. Like many people the financially inexperienced don't really appreciate the impact of a 2% increase in rate until they see the numbers.

The joy of the ARM of course as you point out is that the unpaid debt is added to the principle.

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The joy of the ARM of course as you point out is that the unpaid debt is added to the principle.

...no ..no ..that is normal for unpaid debt to be added to principle......the real sting as quoted above is that the difference between the teaser interest rate and the final interest rate is added to the principle during the teaser rate period ....i.e. from day one....I was not aware of such products and would think unless this was made really clear during the 'sale' ... it could be a 'missell'...... <_<

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Yikes :blink:

Is that brown organic waste I see heading towards the spinning air circulation device ?

I think you may be right.

Some info from a WSJ article:

-San Francisco-based Wells Fargo holds a mountain of Pick-A-Pays, having acquired $115 billion of the loans in its purchase of teetering Wachovia Corp., which it agreed to buy late last year.

-JPMorgan, for its part, holds $40.2 billion in option ARMs that the bank acquired when it purchased most of Seattle-based Washington Mutual Inc., which collapsed last year.

The New York company also said in a filing that it has some exposure to an additional $46.5 billion in option ARMs sitting in complex off-balance-sheet entities.

http://online.wsj.com/article/BT-CO-20090710-713165.html

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I think you may be right.

Some info from a WSJ article:

-San Francisco-based Wells Fargo holds a mountain of Pick-A-Pays, having acquired $115 billion of the loans in its purchase of teetering Wachovia Corp., which it agreed to buy late last year.

-JPMorgan, for its part, holds $40.2 billion in option ARMs that the bank acquired when it purchased most of Seattle-based Washington Mutual Inc., which collapsed last year.

The New York company also said in a filing that it has some exposure to an additional $46.5 billion in option ARMs sitting in complex off-balance-sheet entities.

http://online.wsj.com/article/BT-CO-20090710-713165.html

LOL @ Pick-A-Pay - sounds like something you'd pick up at Woolworths... oh dear.

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And another thing, the banks actually booked those extra interest payments which were to be added on to the original principle as EARNINGS. Therefore, they were generating "profits" which weren't actually there. IE, collecting future potential "earnings" before they actually got that money.

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And another thing, the banks actually booked those extra interest payments which were to be added on to the original principle as EARNINGS. Therefore, they were generating "profits" which weren't actually there. IE, collecting future potential "earnings" before they actually got that money.

Don't worry I'm sure they'll change the accounting rules again so that this doesn't matter. More fantasy figures to boost the profit figures the traders love it and the share price to go up.

The entire system appears fraudulent but I'm sure this has all been "priced" into the share value.

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I wanted to post the original mortgage reset chart.

IMFresets.jpg

Scary, yet very interesting, however, this chart only tells us about the resets and NOT default rates when these resets happen. I've been looking around online and can only find this info about default rates. This info was produced by Mark Hanson (AKA Mr Mortgage on several other sites and so can be assumed reliable).

http://www.fieldcheckgroup.com/2009/04/23/231/

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Thanks for that yellerkat. I knew there was an updated version of it but I only had the original version in my photobucket account.

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How does this affect british lenders.

well, not one jot, cos with the miracle of ultra white MARKOTOMODEL washing powder, the value of the CAPITAL assets these banks hold will remain unchanged.

Brillo.

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Self: can you send me your real name and address? After seeing that chart I need to send you the dry cleaning bill for my trousers :angry:

:lol::lol:

Sorry about that.

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I mentioned Mr Mortgage earlier (aka Mark Hanson). He has a great website with some great info and figures. I think he's actually in the mortgage business so he knows what he is talking about and does his own research:

http://www.fieldcheckgroup.com/

Anyway, he updated his blog just yesterday.

"One in five properties in Florida is in some stage of foreclosure".

I don't know if I can copy and paste his stuff here so please check out the link, best sit down first though becaise the numbers are pretty horrific.

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I mentioned Mr Mortgage earlier (aka Mark Hanson). He has a great website with some great info and figures. I think he's actually in the mortgage business so he knows what he is talking about and does his own research:

http://www.fieldcheckgroup.com/

Anyway, he updated his blog just yesterday.

From his blog:

This number even shocked me -- this equates to 1.3% of ALL mortgage loans in the country becoming delinquent in May alone. This is out of control.

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