Declines in home equity strain many ARMs

August 24 2008 - Even David Copperfield couldn’t make home equity vanish—poof!—like it has for many holders of option-ARM mortgages.

According to filings by Countrywide Financial Corp., as of June 30, the typical holder of such a loan owed—that’s “owed,” not “owned”—95 percent of the value of his or her home. Contrast that with the 76 percent they owed when the loan was made, according to company documents.

Of course, sinking home prices play a role in this, but so, too, does the explosive nature of these loans. Option-ARMs are complicated adjustable-rate mortgages in which borrowers typically have a buffet of choices: They can pay the monthly sum required for a 30-year or 15-year fixed loan or they can pay only the interest or pay a minimum fee.

Countrywide (now owned by Bank of America) held $25.4 billion in pay-option ARMs as of June 30, and about 12 percent were at least 90 days delinquent. The company said 72 percent of borrowers were paying less than the full amount due each month.

Countrywide’s not alone: Wachovia Corp. earlier reported that borrowers of its sweetly named “Pick A Pay” (option-ARM) loans owed 85 percent of their homes’ values at the end of June, up from 71 percent. In parts of California, where prices have been falling faster than an anvil in a Warner Bros. cartoon, the bank’s average option-ARM borrower owed 109 percent of the home’s value. In the first quarter, Wachovia reported it held $122 billion in “Pick A Pay” loans.

Fortunately, the bulk of such lending is in the past tense. The Mortgage Bankers Association says option-ARM lending peaked in 2006, when the loans amounted to 15 percent of the value of all first mortgages originated in the first nine months of the year.

Declines in equity strain many ARMs
Mary Umberger