Wednesday, January 2, 2008

More on the next BIG US housing problem “pay option ARMS”

More US mortgage mayhem looms

"Subprime... is 2007’s story. 2008 will be the year of the pay option ARM, also known by various institutions as “Pick-a-Payment”, “Flex Pay”, or “Cash Flow ARM”. This homeowners’ delight is a mortgage that comes with a “virtual” credit card, so when you fancy making a lower monthly repayment on your loan you can use your card. But that additional credit facility, of course, comes with a higher interest rate, and an upper limit at which point you’d better be ready to pay the lot back."

Posted by happyrenterz @ 12:40 PM (704 views)
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6 thoughts on “More on the next BIG US housing problem “pay option ARMS”

  • happyrenterz says:

    There was a great post here on monday on this (http://www.latimes.com/business/la-fi-optionarm28dec28,0,4900304.story?coll=la-home-business). This FT article adds this chart which indicates how long the troubles will continue with resets. This mess will go on for a few years.

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  • Nice find, happyrenterz! Judging by that graph the crisis is still in its infancy. These Option Adjustable Rate Mortgages in the USA don’t have a direct equivalent here in the UK; but basically it’s a bit like taking out a mortgage and MEWing to pay the interest each month. That works for a couple of years, until you run out of equity at which point you have to start paying the full monthly payment and often at a punitive interest rate. Mortgage mis-selling in America was much deeper and more widespread than in the UK. I don’t know of anyone in the UK who has taken out such a confusing and deceptive mortgage; most people have straightforward interest-only or repayment mortgages, at 6-7x multiples of salary. We’re actually in a better position than them because we have decent consumer protection laws which stop banks from mis-selling financial products.

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  • Nice Graph !

    Well, as I read it, the only way out for the US (and UK?) is to let inflation eat the capital cost of the loans and allow the currency to devalue significantly…. which I guess is what is happening.

    Just how low can they go before they do have to pay some of it back ???

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  • yorkshireman says:

    It seems obvious that the people cuaght up in this situation, will lose their homes. What happens to the architects of the scheme I wonder. Presumably they move on to their next cunning plan and next set of victims ?

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  • Nouriel Roubini was saying a month or so ago that the Option ARMs were the next ticking time bomb. Roubini has been spot on about most things so far so get set for the next bang.

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  • For anyone who wants it, I posted the original of this article earlier

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