Sensible Investing

It has been reported in numerous publications that the next wave of foreclosures could be caused by so-called “option ARM” loans.  These loans allow the borrower, at low introductory rate, an option to pay each month either the full monthly payment (including principal and interest), only the interest payment, or so-called “minimal” payment that is even less than the monthly interest which leads to negative amortization.  After a fixed period of 3 or 5 years, full monthly payments on remaining balance must be made.  The vast majority of such loans were underwritten in California in 2004-2007.

Well, the first of option ARM loans are resetting, and so far the borrowers are not complaining.  Since the index to which the rate is tied (typically LIBOR), is currently at very low levels, the loans are currently adjusting to 1-1.5% below the introductory rate.  While we can’t expect these conditions to persist and the rates will eventually go up, at least for now it appears that we don’t have to worry about this foreclosure wave.  Quite the contrary – extra few hundred dollars a month for option ARM holders may turn out to be another “stimulus” package – at least for the short term.