Pay Option ARMs - Up to 48% Default Rate!

The Wall Street Journal just came out with a story about how First Federal has been hurt badly due to the POA. It has already been a leading contributer in the take-down of American Home, IndyMac, Countrywide and arguably Bear Stearns. If not for this loan WaMu, Wachovia, Lehman, Downey Savings, Bank United and Capital One would be in much better shape than they are today.

• Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast.
• The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.
• the Los Angeles bank (First Fed) is on the front lines of what could be the next big mortgage debacle: payment option mortgages.
• These loans went mainly to people with good credit, but they are likely to experience defaults that are nearly as high as — in some cases higher than — those for subprime.
• Barclays Capital estimates that as many as 45% of option ARMs originated in 2006 and 2007 could wind up in default.
• UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans.
• FirstFed’s experience highlights the challenges lenders face as option ARMs recast.
• FirstFed is a relatively small lender, with just $7.2 billion in assets.
• option ARMs were “a very good loan for the borrower and the bank” for more than 20 years. But that changed, she said, when investment-banking firms entered the industry and set lower lending standards, which FirstFed and others followed.
• As long as interest rates were flat or falling, the minimum payment was enough to cover the interest due, making the option ARM equivalent to an interest-only loan in the early years of the mortgage.
• As competition increased, lenders dropped the introductory rate on option ARMs to 1% or even lower and made more loans to borrowers who didn’t fully document their income or assets.
• Rather than shut its doors, FirstFed joined the crowd and business boomed.
• borrowers making the minimum payment weren’t covering even the interest due.
• Others lenders are seeing borrowers fall behind even before recasts.
• FirstFed is scrambling to modify the loans of borrowers who can’t afford the higher payments.
• Instead of waiting for borrowers to fall behind, the company sends borrowers letters as their loan balances swell, offering them a chance to modify their mortgages. From January through June, the company had modified 705 loans totaling $345 million.
• Many borrowers took out home-equity loans with other lenders after getting an option ARM from FirstFed.
• Many borrowers submitted loan applications that overstated their financial condition. ”You expect a 20% fudge. You don’t expect 500%.”