Santa Clarita Real Estate

Economic analysts say the fall out from the mortgage meltdown will be getting bigger - risky loans made to people with good credit.

For much of this decade option ARM’s also known as pay-option adjustable-rate mortgages were the easiest and the most profitable home loans for brokers to make for many buyers…buyers with excellent credit.

So popular that last year alone they accounted for 9% of the volume of all mortgages made in the U.S. Many of these loans were for mortgages in California, Florida and Nevada, states where home prices rose the most during the housing boom and are now falling most sharply.

An option ARM loan gives a borrower the option of paying less than the interest due, causing the loan balance to rise. If it rises too much say, by 10% or 15% the opportunity to make a low payment vanishes and the required payment skyrockets.

In a report from analysts at Standard & Poor’s Corp. 75% of option ARM borrowers have been making only the minimum payments, as a result, the delinquency rate on option ARMs already is jumping and is likely to keep rising sharply. Option ARMS went only to "prime" borrowers, they aren’t eligible for a much-publicized interest rate freeze that is part of a White House-backed plan to stem sub-prime foreclosures.

Option ARMs were originally offered in the 1980s by California savings and loans as a way to give some financial flexibility to self-employed people and others with variable incomes. But as homes became more expensive this decade, they became increasingly desirable simply because of the ability to make extraordinarily low payments for a good period of time.

No matter if a home loan is sub-prime or prime it does appear that indeed we are all in this together. The plain truth is it may come down to how much equity the owner has in the home and how much further home prices fall.