News & Views on Real Estate


HERE IN CHICAGO, ELSEWHERE, Drop in Equity Affects All - Especially Pay Option ARM Borrowers!

Hope you're enjoying your Sunday, AR!   It's cool and pleasant here in Chicago today - far more comfortable than the mid-90's humidity of yesterday afternoon.

As we know, the housing boom created any number of creative home financing options.  One of those riskier options - Pay Option ARM Loans - are now creating some pain for home borrowers who financed using them.

Pay Option ARM's allowed the borrower to pay either his full 30 or 15 year amortized payment each month, or the option of paying a specified minimum payment, or interest due only.

There was a problem here, however - ignored when many assumed home appreciation would continue unabated, automatically. As adjustable rates adjusted, and monthly payments increased, many borrowers opted for the lowest payment possible.  Equity paydown was reduced, considerably.

In today's market, many Option ARM holders now have little or no equity in their home, yet are falling behind in their house payments each month.  Countrywide Financial, now a part of the Bank of America, issued thousands of these loans a few years ago.  Their figures indicate the average Option ARM borrower owes 95% of the value of his home.  This figure has declined from a 76% average when these loans were originally closed.

At the end of June, 2008, Countrywide held $25.4 Billion in Pay-Option ARM's.  Those at least 90 days delinquent on these loans made up 12% of total borrowers.  72% of Option ARM borrowers were paying less than the full amount due each month, instead opting for interest-only, or, in some cases, a slightly higher payment.

Wachovia Corporation a couple of years ago offered its very similar "Pick A Pay" Program. The average Pick A Pay borrower owed 85 percent of their homes' values at the end of June, up from 71 percent when the loan originated.   In hard-hit California, those with this Pay Option ARM owed an average of 109% of their homes current market value.  Wachovia's currently-held loans with the Pay Option Program - over $122 Billion.

Most lenders today have stopped writing Pay Option ARM's, although Wachovia still offers a form of them, but without the minimum payment option.  That's a big change from the first nine months of 2006, when issuance of new Option ARM's peaked.  During that year, 15% of all first mortgages issued had a Minimum Payment Option, according to the Mortgage Bankers Association.

Read our post today@ BlogChicagoHomes.comfor more info, as well as a link to Mary Umberger's column in today's Sunday Chicago Tribune.


Comment balloon 2 commentsTim Maitski • August 24 2008 09:41PM


Tim, if I had a pay option arm, the last thing I would do would be pay the interest only or fully amortized payment unless I was certain I could afford the reset payment.  Seems like the less equity a person has on their ARM, the higher probability they will have to either short sale or modify.  Countrywide hasn't been making many friends on the short sale side of things so who knows how their abandonment policy will fare them in public opinion when they take losses on these loans.

Posted by Mark Organek, On a journey to accomplish one huge goal. (And the United States of America) about 11 years ago

Mark- That's the scary part of all these loans coming up for resets.  There are going to be huge losses for the banks and all the one that don't get modified will add to the long list of foreclosures.

Posted by Tim Maitski, Editor of ( about 11 years ago