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By Dwdonhoff
March 25, 2009

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A while back I saw a nice 'USA Today' style data-graphic that showed the distribution of Neg-Am loan programs nationwide, and not incredibly surprisingly something like 80-85% of ALL Option ARMs were made on the coasts (mostly in Cali, FL, NY, and Mass... over half were in just those states.)

Of course, in those markets, even if the loans were normally amortized or even interest-only, most owners have seen a drop in value in the last 2-3 years... many below the 20% level (especially in Cali & FL, where 50%+ reductions are seen.) Being "underwater" is unfortunately a given in many cases.

Florida (and Phoenix/Vegas) have been unwinding/deleveraging for at least 2 years now, as has San Diego, the Bay Area and Sacramento. L.A. probably for about a year now.

I think that income distress has far superseded any reset-distress... with defaults happening with Option ARM borrowers before the so-called "toxicity" reset event has even had a chance to come into play. After all, the grand majority of Option ARM users were NOT using them for their strengths (budgetary flexibility) but rather for the underwriting blind-spot they offered (the approval of weak budgeters/manager to use flexibility in order to overleverage and "buy up" in property price (usually over-inflated prices) on that leverage.)

If you are looking for solid data, I might suggest digging for data showing the distributions of loan types already paid off in the last 12-24 months (I have no idea where this may be found.)

I can say anecdotally a few things;

Maybe 25% of the clients in our firm who've had Option ARMs have refinanced to traditionally amortized 30 FRMs in the recent drop down, with another maybe 25% paying off in a move & resale. The remaining 50% appear (so far) to be in well-managed equity positions with sufficient cash flows & reserves. We try to stay in regular contact with out clients, and thus we *DO* get the "SOS-distress" calls... but so far, almost none have been Option ARM users.

I suspect that the place where the primary abusers of these programs would be findable was in the over-inflated markets (as named above,) and the "Option ARM bubble" has most likely been getting deflated from the alternative market pressures in those areas.

I further suspect (just anecdotal observation here) that the remaining Option ARM users are "strong hands" who financed them for the "right" reasons, and are playing out their "worst-case" plans as designed from the beginning.

For what its worth.
Dave Donhoff
Leverage Planner