The Federal Deposit Insurance Corporation or FDIC seized Washington Mutual and sold the thrift’s assets to to JP Morgan Chase. This is one of the largest bank falls in our history. Some said pitfalls that WAMU ran into that caused this issue was their involvement in the subprime world, and even more the “option ARM”. In case you are not aware of what the option ARM is, I’ll tell you. The Option ARM was a popular loan in the California area where appreciation was blasting upward so fast that you could stand to buy a home that negatively amortized because the appreciation “outran” the negatively amortizing costs of interest. In the Option ARM, you had the option to make a monthly payment that was less than an “interest only” payment. Let me dig in a little deeper to explain. In this lowest payment option they gave you, your monthly payment had $0 money going to principle, and only a portion of what you owed the lender in interest monthly was paid. This means that the remainder of what you owed the lender in your monthly interest went back on top of the loan…therefore increasing your loan amount every month. In other states where homes weren’t appreciating so fast, and eventually California, buyers would get into a home with this loan, or refinance using this loan because they couldn’t afford the monthly payment they were currently paying, and the loan amount would eventually get to an amount defined in the loan details that said they could no longer make the lowest payment anymore, and then they would be forced to pay the next lowest payment option in that program which was the interest only payment that they couldn’t afford int he first place…so they eventually foreclose.
Today was one of the first interest rate “betterings” in over a week. The mortgage interest rate market today was a result more of the reaction of the bailout and economic news rather than the economic reports that were issued at any point this week. Scary news with such a large bank falling. What will our economy and banking look like in the coming year? Really scary!