Option ARM Delinquencies Double Since 2008

[update 1: clarification on Option ARM delinquency time frame] Monthly delinquency and foreclosure rates for pick-a-payment loans continued their ascent in the latest monthly data from First American CoreLogic, more than doubling from rates seen a year earlier. In April, 36.9% of the Option ARMs First American CoreLogic tracks were delinquent by 60 days or more. Of these Option ARMs, a product that allows borrowers to choose only a minimum monthly payment, First American saw 19% of the loans in foreclosure in April. Banks roundly lodged pick-a-payment loans into their portfolios when deferred interest allowed them to book current-period income when the borrower made only the minimum payment. Problems arose when borrowers realized that the monthly bill only addressed the minimum due, not including interest charged. Banks essentially loan the borrower the remainder each month and stack it onto the principal, and when interest rates reset, the tiny growth balloons — and, as First American’s data indicates, performance falls off a cliff. As a result, foreclosed Option ARMs in First American’s records have increased every month since October of 2005, when the rate was only 0.04%. Homes delinquent by more than 60 days rose every month since March of 2006, when the rate was at 0.49%. Both foreclosure and delinquency rates more than doubled since the year-ago report when 8% of Option ARMs foreclosed and 15.7% sat in delinquency in April 2008. Write to Jon Prior.

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