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The Option Arm Debacle

Written By Brian Hicks

Posted February 16, 2009




As the ultimate showman of his time, P. T. Barnum sure knew how to draw a crowd.

In fact, as he lined his pockets with their money at one show after another, he also became known for the famous quip “there’s a sucker is born every minute.”

But while Barnum definitely profited from this time-tested truism, it turns out he never actually said it.

Instead, the famous phrase was muttered by one of his competitors, a banker named David Hannum, which seems kind of fitting given the mortgage meltdown. In its heyday, it was a circus in and of itself.

Of course, one of the biggest lending scams of the age was the Option ARM.

It was pushed by these mortgage wolves not only because it was easy to qualify for but also because the low initial payments were the ultimate bait. That’s why they call them “teaser rates” to begin with.

But while these initial rates were quite marketable to the “monthly payment nation” that bought them, in practice it didn’t take long before the payments on these loans nearly doubled.

And when that happens, it nearly buries the people that got them with no clear understanding of how they worked in the first place.

To make matters worse, even if these troubled borrowers are able to make the higher payments, they often do so at the “minimum payment” amount, which adds the uncollected interest to their loan balance, driving them deeper and deeper in debt.

Nice trick huh?

But the truth is that it was all a little too clever since Option Arms have been blowing up left and right.

Unfortunately, that’s the next stage of the current crisis as these loans go bust in numbers well beyond the estimated default rates.

Here’s a great story on the brewing debacle courtesy of 60 Minutes.