This is the most troubling thing I read today. This is a $100 billion ticking time bomb, and nobody really seems to know when it is going to go off.

As you might know, Option ARMs are performing worse than subprime, and the Option ARM market is bigger than the subprime market. For those that don’t know, an Option ARM has a minimum payment option that allows negative amortization (not even covering the interest owed). It allowed people to buy houses that they possibly couldn’t even afford to rent. For the minimum payment option, the rest of the amount owed just gets shoved onto the end of the loan. After a certain point, the loan recasts as a normal ARM, and the minimum payment option disappears. As you can imagine, such a recast could easily more than double the payment, causing the “owner” to eventually be foreclosed upon in a deeply underwater home.

What is concerning is that this larger problem may be dragged out for years. The Credit Suisse analysis put the problem as peaking in 2011. Now it appears as if the problem could conceivably peak in 2014. A good portion of these homes are simply unaffordable to the people who live in them. They will be foreclosed upon.

Many of these homes are mid-end homes. On a more personal level, many homes in Santa Barbara are financed via Option ARMs. My adviser was offered such a loan, and the broker didn’t actually disclose that it was a negative amortization loan until he was specifically asked. My local market is not going to recover before this problem passes.