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The Journal of Structured Finance

The Journal of Structured Finance

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Article

Option ARMs: Performance and Pricing

Laurie S. Goodman, Roger Ashworth, Brian Landy and Ke Yin
The Journal of Structured Finance Spring 2010, 16 (1) 39-54; DOI: https://doi.org/10.3905/jsf.2010.16.1.039
Laurie S. Goodman
is a senior managing director at Amherst Securities Group LP in New York, NY. lgoodman@asglp.com
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Roger Ashworth
is an MBS analyst at Amherst Securities Group LP in New York, NY. rashworth@asglp.com
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Brian Landy
is a senior vice president at Amherst Securities Group LP in New York, NY. blandy@asglp.com
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Ke Yin
is a vice president at Amherst Securities Group LP in New York, NY. kyin@asglp.com
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Abstract

This article establishes that defaults on Option ARMs will be quite high because 1) borrowers have self-selected this mortgage to achieve the lowest possible payment, allowing them to stretch to be in a house they could not afford; 2) negative equity is a large issue for this market; and 3) payment shock still looms. However, the poor collateral performance is fully reflected in the low asset prices. Putting together the high default rates with our expected severities and current market prices, we establish a methodology to compare option ARMs to alternative MBS investments. We conclude, based on market prices when the article was written, that better value can be found in the option ARM market than alternatives—the subprime market or the market for Alt-A hybrid floaters.

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The Journal of Structured Finance: 16 (1)
The Journal of Structured Finance
Vol. 16, Issue 1
Spring 2010
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Option ARMs: Performance and Pricing
Laurie S. Goodman, Roger Ashworth, Brian Landy, Ke Yin
The Journal of Structured Finance Apr 2010, 16 (1) 39-54; DOI: 10.3905/jsf.2010.16.1.039

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Option ARMs: Performance and Pricing
Laurie S. Goodman, Roger Ashworth, Brian Landy, Ke Yin
The Journal of Structured Finance Apr 2010, 16 (1) 39-54; DOI: 10.3905/jsf.2010.16.1.039
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  • Article
    • Abstract
    • Collateral Characteristics: Option ARM Borrowers are an Adversely Selected Group
    • Performance to Date
    • Option ARMS No Longer Experience Negative Amortization
    • Negative Equity
    • Payment Shock
    • Option ARM Cash Flows: Sources of Uncertainty
    • What is the Yield on an Option ARM?
    • Conclusion
  • Info & Metrics
  • PDF

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