Option ARMs: The Most Misleading Mortgage Product Ever Devised

[Joanne98]

Option ARMs: The Most Misleading Mortgage Product Ever Devised. Worst Than Subprime? You Bet. Looking at Wells Fargo, JP Morgan, and Bank of America.
Submitted by drhousingbubble on Fri, 07/17/2009 - 17:01


If you had to create a mortgage that was more toxic and more destructive than a subprime loan, you would have a very hard time creating that product. Yet leave it to creative finance to spawn a devilish product with the unique name of option ARMs. The option ARM is a 30-year adjustable rate mortgage which offers borrowers four different monthly payments. You have the 30-year fully amortizing payment, a 15-year fully amortizing payment, the interest-only payment, and the most popular last option of “negative amortization.” The illusion and Orwellian language of this loan gave the impression that borrowers would have tremendous options in paying off their mortgage.

The facts are disturbingly different for this Jekyll and Hyde mortgage. Over 80 percent of option ARM holders elected to go with the smallest payment. The option ARM is a subset of the Alt-A toxic mortgage universe. In the midst of the major bank failure circus Washington Mutual, Wachovia, and Countrywide Financial all were swallowed up with their option ARMs into the belly of JP Morgan, Wells Fargo, and Bank of America. The three firms are now gone but their option ARMs linger creating banking indigestion.

In California these loans were highly popular with the decade long housing bubble. Imagine paying only $1,479 a month for a $460,000 loan. Things are good with the teaser payment and then the mortgage transforms into a toxic giant that’ll eat you alive. Take a look at a Countrywide loan example given to us in a suit brought on by the California Attorney General:

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http://www.zerohedge.com/article/option-arms-most-misleading-mortgage-product-ever-devised-worst-subprime-you-bet-looking-wel

[slackmaster]

1. Common sense cannot be taught, but schools should teach the basics of personal finance

It doesn't take an advanced degree in math or economics to see that negative amortization is a slippery slope.

[pokercat999]

2. But, but , but...your house will be worth so much more in just

a couple of years that you'll be able to sell it, make a huge profit and buy a house you could actually afford, CASH! At least that how I'd sell this toxic shit, that is, if I were a criminal banker.

[slackmaster]

3. One thing that could be taught in a basic finance class is that your primary residence is not

A speculative investment. It's a place to live, with a fixed price over time and no landlord.