The real ticking time-bomb...

Subprime was just a warning shot. Option ARMs are the real thing, and they're starting to blow up now. The key thing to understand about Option ARMs was the main reason people chose them was they could not afford the house without negative amortization. The only non-foreclosure exit strategies for these loans were:

1. refinance to another Option ARM


2. substantial home price gains to create equity, substantial increase in income and then refinance to traditional mortgage


3. moderate home price gains to cover neg-am and then sell

The first one isn't really an exit, it just passes the problem to another lender. I think we can all agree that the second and third options are off the table. Now from the Wall Street Journal:

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis. ... "The realization of the issues related to option ARMs is just beginning," says Chris Marinac, director of research at Atlanta-based FIG Partners.

Known as Pick-A-Pays - a brand name popularized by Wachovia Corp. - the mostly adjustable-rate loans were typically issued to creditworthy homeowners, and allowed borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many of the loans, balances have risen while values of the underlying properties have plummeted amid the nationwide housing crisis.

As of April, 36.9% of the loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. (FAF).

By contrast, 33.9% of subprime loans were delinquent as of April, while 14.5% were in foreclosure.

The loans are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making option-ARM borrowers inordinately vulnerable to declining property values.

More on the backlog...

By way of Calculated Risk, more from L.A. Land on the concept of a clogged foreclosure pipeline: while the rate of mortgage defaults has nearly doubled in LA county in the past year, the rate of foreclosures has actually fallen slightly. The result is

the "foreclosure backlog" now looming over the housing market. It's caused by various government-mandated and voluntary foreclosure moratoriums, and possibly by lenders trying to manage the flow of repossessed homes entering the market.

My sense is this pattern is being repeated almost everywhere to some degree, with most government and private programs designed to reduce or prevent foreclosures simply resulting in delaying them.