Here comes the next wave of foreclosures - Option-ARM Mortgage Delinquencies Continue to Climb

These past few years we have seen the housing market crumble as a result of the sub-prime lending frenzy.  Just about anyone who had a pulse could get a mortgage based on "stated income" with no documentation of a paycheck or income level required.

For months I have been hearing about the next wave of foreclosures coming - the Option ARMs.

These are typically NOT sub-prime loans, meaning the borrower needed to document the information on their loan application.  Option ARMs (Adjustable Rate Mortgages) are mortgages where the borrower has an option every month to pay the entire monthly payment including interest and principle, or just the interest, or an even less amount that doesn't cover all of that month's interest.  In that case, the homeowner's mortgage balance actually INCREASES each month that they chose that option, until it reaches a predetermined point that it is required to reset with HIGHER payments. 

Billions of dollars of option ARM mortgages are scheduled to reset in the next couple of years.  And based on how many delinquencies and defaults there currently are on this group of mortgages, BEFORE the higher payments reset, we know that there is trouble ahead.  Another wave tsunami of foreclosures coming around the corner!

I came across an interesting report from Mortgage Bankers Association (MBA) with statistics on mortgage delinquencies that are driving foreclosures.  The first thing that caught my eye was that the mortgage delinquency rate breaks the record set last quarter.  The records are based on MBA data dating back to 1972. 

The increases are being driven not by sub-prime loans,
but by prime and FHA loans, which have strict qualification standards:

"Prime fixed-rate loans continue to represent the largest share of foreclosures started and the biggest driver of the increase in foreclosures.  33 percent of foreclosures started in the third quarter were on prime fixed-rate and loans and those loans were 44 percent of the quarterly increase in foreclosures.  The foreclosure numbers for prime fixed-rate loans will get worse because those loans represented 54 percent of the quarterly increase in loans 90 days or more past due but not yet in foreclosure.

"The performance of prime adjustable rate loans, which include pay-option ARMs in the MBA survey, continue to deteriorate with the foreclosure rate on those loans for the first time exceeding the rate for subprime fixed-rate loans.  In contrast, both subprime fixed-rate and subprime adjustable rate loans saw decreases in foreclosures.

What does all of this mean for you?

It means that if you have a home to sell and are waiting for the housing market to turn around, you are going to be waiting for another year or two, at least.  Although the first wave of sub-prime mortgage defaults and foreclosures is waning, the next wave is coming.  And it is predicted to be even BIGGER than the last.  You need to factor this in as you plan your strategy. All indications and forecasts are for the real estate market to get worse before it gets better, overall. 

"The outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve," according to Mortgage Bankers Association.

As you plan your best course of action over the next couple of years, your plan needs to be based on that piece of information.  Home values decrease as foreclosure rates climb. 

Read the entire Mortgage Bankers Association report here.

Now having said all that, remember all markets are local.  In our Coeur d'Alene Idaho real estate market, some communities and price ranges are doing much better than others.  If you would like the statistics for your community and price range, give me a call and I will send you the Total Market Overview report I receive every week.