It’s going to be a rough morning (and then some), so let’s just get this out of the way…Lehman is going bankrupt (think mortgages) while Merrill avoids a similar fate by getting acquired, the equities market is bracing for a wild ride (not in a good way), and option ARMs are rearing their ugly head over at Washington Mutual (and beyond).
As many as 45 percent of borrowers with payment-option adjustable-rate mortgages issued from 2004 to 2007 and bundled into securities may default, according to Fitch Ratings analysts Roelof Slump and Stefan Hilts. Washington Mutual held $52.9 billion of the mortgages, also called option ARMs or negative amortization loans, on its books in the second quarter, with defaults doubling to $3.2 billion from the end of 2007, according to a filing with the U.S. Securities and Exchange Commission.
Two other relevant option ARM factoids: “About 83 percent of the option ARMs issued from 2004 to 2007 were underwritten without full documentation of borrowers’ incomes,” and “Washington Mutual issued half its option ARMs in California.”
No word on the exact Option ARM breakdown (so to speak) in the Bay Area.
∙ Lehman Files for Biggest Bankruptcy as Suitors Balk [Bloomberg]
∙ Bank of America to Acquire Merrill as Crisis Deepens [Bloomberg]
∙ U.S. Stock Futures Drop, Pointing to Steepest Slump Since 2002 [Bloomberg]
∙ Washington Mutual Hobbled By Increasing Defaults on Option ARMs [Bloomberg]