The next foreclosure crisis will be homes where owners have payment option adjustable rate mortgages that are beginning to reset according to Reuters.
Option-ARMs are now considered among the riskiest that were offered to home owners during the recent housing boom. The result of these has left many borrowers owing more than their homes are worth, or “underwater”.
In Arizona, the attorney general is estimating that 128,000 of those mortgages will reset over the next year. Many have already started to adjust.
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 “teaser rate”, but then reset to a higher level.
New monthly payments can be five or 10 times what the homeowner/borrower has accustomed to paying. The average family can’t begin to pay these new payments – even if they have good jobs.
These mortgages tend to be “jumbo,” or for significantly large amounts which makes it even harder for borrowers to do anything except foreclose on the home.
As an example, we saw one homeowner where both the husband and wife had excellent paying jobs, but they also had a lifestyle with a lot of expenses. Their option-ARM mortgage payment had been just under $3,000. per month and they were doing fine in making that payment. However, overnight the mortgage payment jumped to a bit more than $10,000. per month! Even with good jobs, there was no way for them to make this sort of mortgage payment. The result was the home foreclosed.
Foreclosures are not going to be a thing of the past anytime soon it appears.
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