A R.E.D. (Real Estate Diversion) Alert
According to this recent Business Week article there will be blood in the streets in the Spring of 2009, when over 1million option ARM loans reset. This is more than a speculative guess on what is in store for the local real estate markets. The rates of delinquent ARMs are steeply on the rise right now -well ahead of the actual resets. Subprime idiots, right? Wrong. What makes this report alarming is that these loans were generally given to folks with good credit, most of whom are still only making minimum payments. 
The options ARMS that originated in 2006 generally performed well for the first 12 months, with the borrower paying minumum payments that didn’t cover the acrued interest on the loan. However, by the time these loans were 2 years old, payment delinquencies in excess of 60 days by borrowers rose sharply. These loans will be coming due next year at a time when house apraisal prices will be less than the original loan amounts and during a time of continued economic hardships such as job insecurity and rising prices for daily living goods and services. And next spring might not even be the worst of it. There is increased speculation that the option ARMs taken out in 2007 may continue to put downward pressure on the local real estate markets.
~~~Snip from the article ~~~ A major concern is that 70% of option arms are concentrated in California and Florida – two states that have already been hard hit by the housing slump. …..Option ARMs originated in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform similarly badly.
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