"Option" mortgages to explode, officials warn
09-20-2009, 05:27 AM
"Option" mortgages to explode, officials warn
For those who see this rose colored name they have given this and don't recognize it, these are the bigger properties. Older, better known names were Teaser Rates, Balloon Loan, Negative Amortization Loans, just to name the worse. Teaser rates were prevalent mostly in upper lower to middle properties.
1 - Teaser Rates : One would get a loan at say 4.5% when all other loans were 6%, but after a predetermined set of years the rate adjusts automatically.
2 - Balloon Loans: Bigger upper middle and high end properties used this s lot. The thoughts of the house appreciating over say a 3-5 year (sometimes longer) period the house would increase in value which would offset the fact that Interest only in most cases would be paid. At maturity, the whole loan becomes payable, most of the time with only the interest being paid, nothing or little applied to the principle. Many of these loans wer written to business executives with the thoughts they would move before maturity.
3 - Negative Amortization: Upper middle and high end properties. Say loans were 6% but you couldn't afford that huge, massive property you so deserved, but if it was say 3% interest you could squeak by. These were written mostly to those looking for better paying jobs coming along. Problem is, the 3% you didn't pay gets added to the principle... with interest. some also sought this being business heads of corporations thinking they would possible move or hit the jack pot.
Many of these loans aren't sub-prime, they are more dangerous and for the first real time will cause banks losses. Sub-prime was usually obtained by either borrowing 80% or more, heavy debt ration, or poor credit. They were then insured by the borrower in the banks interest with MIP (Mortgage Insurance Premiums) which paid the banks back every penny, plus expenses, should the borrower default. It also insured that the bank could not go back on the borrower should they default. Banks did not lose money on these, people did, the insurance company did... but not the bank. These are usually lower end to lower middle properties that are more readily affordable to most people.
The Option Arms are usually in a slow market because the average person can't afford them, thus dropping their value even farther. They are usually not insured with MIP. This will be bad. Short sales have burst from these but beware. The bank can come back at a date of their choice and recapture the monies they lost from the borrower. These are the big properties you look at and say how do they afford that?
Example: Cabin in Pigeon Forge I have listed was built and sold in 2006 for 345,000.00. In 2007 it sold again for 269,000.00. I have it on the market at 194,900.00. They may get 185,000 from it if they are lucky.
Sorry, back to the real report :
by Lisa Lambert 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. Continued...
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