I’m still not sure that the 1% Option ARM loans are part of this plan. I haven’t seen definitively whether they are or not. I think the target was the more typical subprime ARMs that start at 7% or so and go to 10% later.
It’s still the same problem whether it’s a teaser rate or a regular ARM, it’s just a matter of scale.
Re: foreclosures, investors DO get their money back, they call it the recovery rate in the industry.
If you’re an investor, would you rather recover 70% of your money back now through foreclosure and go put it in something else, or have 100% of your money locked in for five (or more) years in a possibly cash-flow negative investment, and eventually foreclose anyway at lower recovery rates (e.g. if the real estate market continues downward)?
Remember most investors themselves borrowed money to relend to homeowners. If their interest payment goes up but your ARM doesn’t go up to match, they may wind up paying you to live in your house.
This plan will delay the day of reckoning for a small number of borrowers while making it harder for everyone to get mortgages after burning investors further.