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New alarm: Option-ARM 'liar's loans'

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moh malekpour

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http://www.chicagotribune.com/business/chi-mon_loans_0121jan21,0,2045461.story
Miller said Downey Financial Corp. was "the canary in the coal mine." The Newport Beach, Calif.-based S&L has specialized in making option ARMs since the 1980s and keeps them as investments. Option ARMs make up about three-quarters of Downey's loan portfolio, with most of the rest being similar loans that allow interest-only payments during the first five years but don't allow the loan balance to rise.

Miller thought Downey had shown prudence in cutting back on lending in 2006, when home prices stopped rising and competition intensified from option-ARM newcomers such as Countrywide and IndyMac Bancorp of Pasadena, Calif.

But a key indicator of loan troubles, the ratio of non-performing assets to total assets, shot up from 0.55 percent to 3.65 percent at Downey over the last year, with the dud loans on Downey's books growing by $80 million in November, Miller said. That number, disclosed last month, was larger than the entire amount of non-performers Downey had a year earlier.

The quality of option ARMs appears to have deteriorated quickly when Wall Street began buying them to create mortgage bonds in the middle of this decade, drawing IndyMac, Countrywide and others into the business, Miller said.
 

Scott Kibler

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This was news?

Stated programs went into the toilet the 1st time a borrower didn't have to prove they were actually self employed, a lottery winner or other person using the product as it was designed.

It just took a while for anybody to notice.
 

Mr Rex

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I'm trying to figure out why the tie between Option Arms and Stated Loans. They are not necessarily partnered.:shrug: I guess when you put the 2 together, it is a pretty bad thing, but hardly what has lead to the "Perfect Storm" that seems to be the news blurb de jour.
 

Scott Kibler

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Option ARM's and stated loans were used for the same purpose, to "qualify" people for loans they did not have the capacity to pay back.

The option ARM is more insidious, to lenders at least, as the minimum payment feature can allow a borrower to hide this fact longer, maybe allow the loan to "season" after a number of minimum payments made before being chopped and sold to various Deutsche Bank trust accounts.
 

George Hatch

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The second wave of ARM resets, which will start about 6 months after this first wave ends, is smaller than the first wave but reportedly has a much higher percentage of the option ARMs. This second wave doesn't end until late 2010.
 
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