'Sayonara' To Option ARM's?
thehousingbubble2.blogspot.com
The lending side of the housing equation is set to get tighter, as Kevin Harney writes. "Two developments, one that took effect Aug. 1, another due this fall, could reduce the number of promotions you see for cut-rate option ARMs."
"The dominant rating agency for so-called nonconforming, jumbo and 'alternative' home loans is Standard & Poor's Corp. Think of Standard & Poor's as a kind of gatekeeper. On Aug. 1, Standard & Poor's blew the whistle on option ARMs. It concluded that lenders are allowing credit standards to slip too far. And too many of the borrowers using option ARMs are paying the minimum amounts per month, thereby accumulating potentially toxic levels of debt, especially in markets where home values are likely to soften."
"'We wanted to jump in before this got any worse,' said Standard & Poor's mortgage bond director Michael Stack. By 'any worse,' he meant that if credit standards continued to decline, there would be a rising probability of defaults on option ARMs, something unacceptable to bond investors."
"A second development potentially affecting option ARMs is under way at the federal financial regulatory agencies. A task force headed by Deputy Comptroller of the Currency Barbara Grunkemeyer is preparing new underwriting and credit risk guidelines on option ARMs, interest-only mortgages and reduced-documentation loans."
"She said that financial regulators have 'noticed that these products have taken off in the past six months.'"
"Bottom line: It's probably sayonara to 125 percent mortgages at 1 percent to buyers with marginal credit, insufficient incomes, minimal down payments and no clue whatsoever about the potential payment-shock monsters lurking over the horizon." |
