Option ARMs Assuming Much of the Blame?by Tim Manni
The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervison’s (OTS) Mortgage Metric Report for the second quarter of 2009 has been released (rather quietly might we add), and while many aspects of the report were widely expected, there was one new inclusion that particularly caught our attention.
In early September we warned that the pending resets of interest-only adjustable-rate mortages (ARMs) posed a significant threat to the long-term recovery of the housing market. It just so happens, that a new addition to the Metrics report includes data on Payment Option ARMs — a loan product that allows borrowers to put off paying down the loan’s principal for five, seven, or even 10 years by making interest-only payments. According to the OCC and OTS’s joint release:
The risks of these loans and geographical concentration caused them to perform significantly worse than the overall portfolio. In the second quarter, 15.2 percent of the more than 900,000 Payment Option ARMs in the portfolio were seriously delinquent, compared with 5.3 percent of all mortgages, and 10 percent were in the process of foreclosure, more than triple the 2.9 percent rate for all mortgages.
“According to this report, Option ARMs are failing at a rate of three times higher than the other products in the marketplace,” said HSH VP Keith Gumbinger. While subprime loans have been ascribed much of the blame for causing the housing crisis, many are fearful that Option ARMs may hinder the market’s recovery.
As expected in the report, delinquencies and “foreclosures in process” increased from the first quarter by 8.5% and 2.9% respectively. Delinquencies of high-risk products such as Alt-A and subprime loans continue to rise amidst the market’s tight credit conditions. Since the White House’s Making Home Affordable program was officially kicked off in the second quarter, it’s no surprise that “home retention actions” increased by almost 75%.
We likely won’t see the third quarter numbers until the end of the year. There’s little indication that delinquencies or foreclosures will abate to any great degree, and we’ll be most interested to see if Option ARMs continue to fail at the highest rate of any loan product.
Yet, just because Option ARMs seem to be entering delinquency at an increased rate, it doesn’t mean that all ARM products are “evil” or “toxic.” If you haven’t already, be sure to read our latest featured article titled “In Defense of Arms.”