More on Option-ARM Loans

Yesterday Calculated Risk linked to our article on Option-ARMs and the Credit Suisse reset graph. To review, the point of the post was that while Wells Fargo claimed that virtually none of their $100 billion Option-ARM portfolio would recast before 2012, the Credit Suisse graph showed that no recasts would occur after 2012. Looking at the data it was clear that Credit Suisse made an error in their calculations.

Since there has been new activity in the comment section and I've started to get emails on the subject I wanted to clarify a few points:

1) I've gotten emails asking: "Given your chart, how is it that my neighbor/client/friend's Option-ARM loan recast last year?" The answer is either A) a lower cap (many lenders had a 110% cap, as opposed to the 125% cap for virtually all of Wells Fargo's Option-ARMs) or B) a higher margin (I use 2.5% which was a typical rate but it was higher for some mortgages. If you up the margin to 3.5% you're going to recast much sooner).

2) I agree that all this talk about recasts being pushed out might be a moot point. Option-ARM borrowers still face yearly increases of 7.5%. That starts to add up quickly and will likely get people walking away from their homes well before the recast date.

And if you read the first article posted at CalculatedRisk you'll see that 36.9% of Option-ARM loans are already over 60 days late on their payments.Sonoma County I'm looking at you! If those aggregate numbers reflect what is happening to Wells Fargo's portfolio, there won't be many loans left to recast in 2014.