The Housing Chronicles Blog: Loan defaults moving onto Option ARMS

Friday, December 28, 2007

Loan defaults moving onto Option ARMS

The next wave of potential loan defaults is expected to involve Option ARM loans made to borrowers with good credit according to the LA Times. Why were these loans so popular? Simple math and greed:

Before standards were tightened, several mortgage brokers and former and current Countrywide employees said, it was easy to sell option ARMs to borrowers by focusing on the low minimum payment.

As the housing market boomed, borrowers figured they could always sell the home at a higher price if they got in trouble -- and brokers pocketed big rebates for selling option ARMs, said John Diamond, a Chino broker with 39 years in the business.

Although a broker might earn $4,500 for selling a $300,000 fixed-rate loan, Diamond said, the commission could total $12,000 on an option ARM of the same size.

"These loans drove the whole industry from late 1999 through late 2006," Diamond said. "It was just about the only thing any broker wanted to sell."

I remember those days well: if you were bold enough to demand a traditional 30-year fixed rate loan, you had to be prepared to steadfastly stand behind your decision, which wasn't easy when others were bragging about their low teaser rates and payments. Suddenly anyone who could fog a mirror was becoming a loan broker, including cab drivers and personal trainers (and I'm not making this up). It was really little more than "Take the Money and Run" (no offense to Woody Allen, of course).

I just wonder where the media was when these loans were taking off: if newspapers and TV stations were regularly doing stories on the different types of loan options -- and the consequences -- would it have mattered?

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