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"Option" mortgages to explode, officials warn

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    "Option" mortgages to explode, officials warn



    WASHINGTON (Reuters) - The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

    "Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

    "That's the next round of potential foreclosures in our country," he said.

    Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures.

    In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

    "It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

    The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal.

    When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

    Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy

    borrowers that fed the first wave of the financial crisis.

    Miller said option-ARMs were discussed at Tuesday's meeting on mortgage scams, which brought state attorneys general from across the country together with U.S. Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, and Federal Trade Commission Chairman Jon Leibowitz.

    The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

    Goddard said his office is investigating hundreds of cases where companies have made fraudulent promises, and charged large fees, to mortgage defaulters.

    The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy.

    Some signs of stabilization emerged recently, with sales rising and home price declines moderating in many regions of the country. Home prices in some regions have risen.

    However, many economists say there is still a huge supply of unsold homes lingering on the market and that, coupled with a frenzy of more foreclosures ahead, should depress home prices for the rest of 2009.

    Real estate data firm RealtyTrac, in its August 2009 U.S. Foreclosure Market Report, said foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month, but an increase of nearly 18 percent from the same month a year ago.

    The report said one in every 357 U.S. housing units received a foreclosure filing last month.

    Can you say 0% FED RATE for the next 3-5 years?

    #2
    Those pay option loans were idiotic. The only reason I can think of for anyone to use one is to get into a home they can't afford. The real interest rate is generally higher than that of a 30 year fixed, ARM, or interest only loan so it's not like anyone could save money using one. It wouldn't take a rocket scientist to figure out that negative amortization and paying interest on the interest is not a smart thing to do. I don't see how someone could use the excuse that they planned to refi in a few years, knowing that the principal balance and PITI payment would be much higher at that point. I wonder how many of these loans are in existence? I wouldn't think it's enough to make much difference in the already huge number of foreclosures going on.

    Comment


      #3
      I was a loan processor and UW. And people got into the ARMS because the value of their homes were growing so fast they were redoing the mortgages every 2-3 years to take more out. The house was used as a bank for many to pay for braces, medical, colleges, new baby.. etc. There were some bad loans too, but the loan officers never really explained the ARMS very well. And many people did not understand it. All they knew was they were being offered the chance to buy the American dream. The past few years had been good in income growths for them, and there was no reason to believe there would be a change. So, they INVESTED in a home, which is exactly what a CPA will tell you that you are doing. A home is a tax write off too. Many of the bottom of the rung income earners did not understand the costs of owning one, and no one bothered to explain it to them. The saw this as a CHANCE to success and have a piece of the American pie. How very American of them, huh? Geesh.. I would say they are not at fault. The true fault is to set up a industry based on commission's for income and expect people to not exploit others. That is the new American way too, the robber baron image with a loud mouth and a flag. Yelling they are tired of paying for others, and then complaining their kids isn't getting a free lunch, or that they must pay for a parking ticket. How about if the top shifts some income down so people can afford to pay for what they have?

      Comment


        #4
        I don't think the concept of an ARM is bad, as long as they are used wisely and not to get into a home you can't afford otherwise. In a stable market they can save you a lot of interest if you intend to sell within a few years. It sucks that the market crashed before so many people could refi to a fixed rate. The pay option ARM is what makes me scratch my head - that's the type of loan where you don't have to pay even the full interest payment each month. You pay a minimum payment and the rest gets added onto the principal. It's called negative amortization and the principal balance grows each month, while you pay interest on the principal and interest. These loans tend to have higher rates too because they are so risky.

        I don't buy it that most people didn't understand what type of loan they were getting when it comes to adjustable rate mortgages. If our population is that ignorant, we're in more trouble than we though.

        Comment


          #5
          Momisery . . .

          APPLAUSE!!!!!!!

          APPLAUSE!!!!!!!

          APPLAUSE!!!!!!!

          APPLAUSE!!!!!!!

          APPLAUSE!!!!!!!

          APPLAUSE!!!!!!!

          Well said. There is guilt enough to go around, and more than a share at the top.
          11-20-09-- Filed Chapter 7
          12-23-09-- 341 Meeting-Early Christmas Gift?
          3-9-10--Discharged

          Comment


            #6
            I'm in this group, but my loan isn't jumbo.

            I do believe it was careless for people to simply buy a home with one, assuming the prices will continue to rise at high rates.

            I got mine to cash out and put the cash down on some apartment buildings. The apts were supposed to pay down my home loan...but they went belly-up due to forces I couldn't control. And thanks to my poor timing I couldn't sell them.

            Now I have foreclosed apartments, a jacked-up home mortgage, and a new golden rule:
            "NO business opportunity on earth is so great that it warrants funding from a HELOC, or cashing out your home."

            Comment


              #7
              Actually many did not understand, just stop and think for a minute, I do taxes too and most can not even fill out a 1040A let alone a 1040 and Schedule A/B. Toss in a childcare credit and people run for HR block or someone. Schools do not train for everyday financial issues. I spoke to many people asking for documents needed to get their loan thru. Most were going no doc, or bank stmt loan. Totally nuts. But when I talked to them it was as if we were from different planets. Just as I would not understand a mechanic very well, or my doctor I expect them to be professionals and to HELP me with the problem I am paying them fore. The experts in this case are paid by commission... they have no reason to help YOU only to help their incomes. I am not saying they were all bad, the loan officers, but they had families too and needed the money plain and simple.

              Comment

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