A friend of mine from San Diego confided in me that they are in serious trouble with their mortgage. My friend earns good money - and with his wife's income they are way above the medium level for San Diego County - which is high to start with. I'll call my friend Able - because he has always been more than able to see through different schemes and come out smelling like a rose. This time, I think he is in trouble.
Able is a 63 year old professional that refinanced his modest home for $618,000, at the peak of the market with an Option Adjustable Rate Mortgage (Option ARM). This loan program allowed Able to decide monthly which of four optional mortgage plans he would pay, each month. Since getting the loan, Able always chose the lowest payment - which was actually less than the interest he accrued.
The plan Able and his wife had been to sell their home when he reached 65 and retired - planning on relocating to Palm Springs. Did I mention that Able thought he knew what he was doing?
Well, the $2200 monthly mortgage jumped to $2700 with another jump to over $4000 looming in the not too distant future.
The problem is that despite what appears to be a path of recovery for the housing industry there are still more than a half million option ARMs that are scheduled to reset in the next four years!
Since many of the Sub Prime mortgages have already failed more and more of the Option ARMs are failing and since February, the Option ARMS have exceeded the default rate on the Sub Prime mortgages.
The sad news for Able is that the home is now only worth approximately $400,000, or less, and the balance of his mortgage has risen to over $680,000; since he only made the minimum payments...his principal balance went up every month.
Between 2004 and 2007 over $750 Billion in Option ARMs were made and remain at risk. The real kicker is that despite the perfect payment history of many borrowers they still cannot refinance their way out of this mess, as their homes are worth so much less today than when they borrowed the money. About one third of all Option ARMs are currently in default, according to industry analysts.
In comparison to the Sub Prime Mortgages, the borrower of an Option ARM typically had much higher credit scores, better jobs and more to lose than the masses of Sub Prime borrowers who literally walked away from their homes and neighborhoods, in droves. The Option ARMs tend to have higher balances and when they reset have been known to double the initial monthly payment.
The industry is expecting to see 600,000 or more Option ARMs reset in the next 4 years. The four payment plans that Able and other borrowers were offered included the interest only, less than the interest (where the difference would be added onto the principal - OK, when you are accumulating equity every month - but really bites in a declining market), fully amortized over both a 15 year and a 30 year fixed-rate-mortgage.
Over 75% of all borrowers never paid more than the minimal payment - less than the current interest rate plan. This plan was set to reset at either 5 years or when the new principal balance reached a pre-determined level somewhere between 110% and 125% of the original loan. Then once the ‘cap' is reached, borrowers have to pay down a higher balance at a higher interest rate in a shorter time period.
Like so many other exotic loans, they were great products if used properly. Unfortunately industry experts expect 81% of the Option ARMs that originated in 2007 to default with many of them ending in foreclosure.
The problem is that the loans were not only offered to those for whom they were designed but to just about everyone with a decent credit score. People were not taking on these loans because they believed their income would grow over time - they were used by homeowners who believed the equity in their house would increase and that they could refinance out of the teaser rates.
The losses from Option ARMs promises to be staggering. Another industry expert is projecting at least $112 Billion will be lost by the banks as a result of Option ARMs written between 2005 and 2007.
The good news, if there is any, is that interest rates remain low - so loans are taking longer to reach their cap and will not rest at the higher interest rate until they do reach the cap.
If you don't know whom your congressperson is or how to reach them, check out this link
Blessings to all who read,
John Occhi, REALTOR®
www.JohnOcchi.Com
Hemet - San Jacinto Valley
951-6564-5550
Servicing THE REO Needs of Asset Managers, Servicers, Banks and Lending Institutions in the Hemet - San Jacinto Valley, Temecula, Murrieta, Winchester, Wildomar, Menifee, Sun Valley, Perris, Moreno Valley, Romoland, Homeland, Nuevo, Banning, Beaumont, Cherry Valley, Yucaipa, Redlands, Mentone, Loma Linda and throughout South West Riverside County and The Pass Areas of The Inland Empire in Southern California. If you are a buyer, investor, first time home buyer or are just interested in REO real estate, please contact us at the above phone number.
Serving California and Riverside County zip codes of 92501, 92503 , 92551, 92555 , 92562, 92563, 92504, 92505, 92557, 92553, 92506, 92507, 92590 92591, 92508, 92509, 92570, 92571, 92592, 92399 , 92584 , 92596, 92820 , 92571 , 92543, 92544, 92545, 92583, 92582, 92879, 92580 , 92530, 92532, 92881, 92882, 92567, 92518, 92883 , 92549, 92561, 92220, 92223, 92028, 92088
Until Next Time, Have a Blessed Day,
John Occhi, ePRO, REALTOR®
www.JohnOcchi.Com
DRE Lic No, 01444168
This blog and the contents written here is the intellectual property of John Occhi, Hemet - San Jacinto, CA REALTOR® in the South West Riverside County region of the Inland Empire of Southern California. The views and opinions expressed are just that - views and opinions of John Occhi and those who comment. Please note that I am not an attorney or a tax professional and any time I discuss either topic, I suggest you consult with the proper professional for relevant assistance.
I am proud to be a full time REALTOR® who is proud to be a contributing member of the ActiveRain community.
Posted by 
It is incredible to even phantom what a mess we are in! What were the a responsible actors thinking?????????????
;)
;)
On the bright side, Able would have still been upside down in his loan even if he had chosen the more expensive options. With a 30%+ drop in value, his 3 to 4 years worth of payments didn't stand a chance.
You are correct about the next wave of short sale / foreclosures getting ready to hit. There is still a huge inventory of these types of loans out there that haven't adjusted yet. It is just a matter of time.