Did you notice today that Wachovia has canceled their “option arms”.  These toxic instruments, were more than any other thing, the reason for the housing and mortgage crisis.  They gave the borrower the option to decide whether to pay the 1.00% required payment, the interest only payment or the fully amortizing payment.  Well, most people opted to pay the minimum payments!  The dirty secret of these option arms was they added the unpaid interest back into the loan until the new loan balance was 10% higher than the original - then they became fully amortizing.  They also guaranteed you a payment but not an interest rate.  Typically, these mortgages were monthly adjustables but that was quickly glossed over in the sales presentation.  The borrowers saw that they could get $400,000 for $500 a month or whatever,  and jumped in with both feet.  The net affect was that when the mortgages maxed out and “re-cast”, payments sometime tripled overnight leaving the borrower little choice but to simply walk away.  It gave birth to the new expression “Jingle Mail” (because you send the jingling keys to the lender instead of the payment).  Supposed A+ lenders such as Countrywide, Wamu, Wachovia and IndyMac set up boiler rooms to entice as many people as possible into borrowing more and more money.  They also qualified you at the lowest payment.  The borrowers bought way more house than they could afford, thinking that they could sell and make a fortune in the ever rising home market or that they could simply re-finance to another option arm when the dreaded 10% was reached.  Well - guess what - the home market took a dive and there is no more outlets to re-finance these loans.

I am proud to say that here at Bayside, we never solicited or funded a single one of these mortgages.  We decided early on that they were dangerous and opted to stay clear.  We lost a lot of business to the shops that specialized in them but as a result, today we aren’t ducking any process servers.

There will probably be more pain in the  housing markets going forward as a portion of these “A” prime loans will go bad, swelling the already copious inventories of REO and foreclosed properties.

However, sanity has taken hold again.  Underwriting has returned to who can afford what and the housing market will return to the normal ebb and flow of supply and demand.  We are very happy to see these exotic mortgages disappear, hopefully forever!