Teaser Rate Mortgage Borrowers Defaulted Before Rates Reset To Higher Levels

Home buyers who used low teaser rate, adjustable rate mortgages defaulted before the borrowing rates reset to a higher level. Along with yesterday's Wall Street Journal article that the housing markets now suffering the biggest housing decline were not the markets with housing bubbles, it is becoming more clear that neither the types of mortgages, subprime, ARM, etc. nor high interest rate payments were the cause of our high rate of mortgage defaults or housing price decline.

From The Wall Street Journal article, "Option ARM Time Bomb Blows Early, Easing Damage to U.S. Housing" by Prashant Gopal and Jody Shenn:

This was the year thousands of U.S. homeowners with option adjustable-rate mortgages were supposed to default as their payments spiked.***About $600 billion of the loans were made from 2005 through 2007, according to industry newsletter Inside Mortgage Finance. Of those packaged into bonds, some 20 percent have been liquidated at losses to investors, and almost half of the remaining ones are at least 30 days delinquent, in foreclosure or have been seized by lenders, according to data from JPMorgan.

“It’s not that option ARMs weren’t a bad way to finance homes, it’s just that the disaster already happened before the resets,” McCarthy said in a telephone interview last week.