There has been much talk of the Bush administration planning to help subprime borrowers whose loans are due to reset to higher interest rates next year. But hundreds of thousands of borrowers that obtained the Pay Option ARM with good credit will see sharp increases in their payments if unable to refinance.  These homeowners could be the next wave of trouble in the mortgage crisis. 

If they chose to make only the minimum payment on a regular basis, their loan balance has increased.  Terms of the Option ARM allow for a maximum loan balance cap usually at 110% of the original loan balance, which then require the fully amortized payment over the remaining term.  This will be a problem where home prices are falling and not enough equity remains to qualify for a refinance. Borrowers who get in too far over their heads may not be able to refinance their loans or even sell their houses for enough money to pay the loans back. This may contribute to more foreclosures.

Option ARMs generally carry a low introductory rate -- in some cases as low as 1% -- and often have high prepayment penalties that make it expensive to refinance. With lending standards getting tighter, refinancing may be impossible in any case.  Here is an idea of the predicted Option ARM loans over the next year:

Option ARMs Payment Shock - HOPE Lending

I highly encourage anyone who is currently using this product to inquire with their mortgage professional as to a safe plan.  HOPE Lending is committed to providing practical mortgage solutions for each borrower that make sense to their individual situation.

 

HOPE Lending LLC

 
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6 Comments on Option ARM Borrowers not included in Bush's Plan

Just curious, do you think the holders of neg-am loans should receive federal assistance???

01/02/2008 07:01 PM by Rich Sweum (Homestead Mortgage)

Hello Rich - No, it doesn't seem appropriate for neg-am borrowers to receive federal assistance.  Exactly why I posted this.  There is so much confusion and uncertainty that I don't think anyone should rely on federal assistance.  Thanks for commenting.

01/03/2008 11:04 PM by HOPE Lending LLC

Melissa, you're back.  I hadn't seen you for a while.  This is one of those products that were being pushed heavily in the investment market.  I'm curious as to what you think would be a safe plan. With markets quickly declining, is there a safe plan?  I'm not sure there is.  What type of advise are you giving your clients?

 I read recently that FHA secure had only underwritten 250 loans - 250, that's it and that Bush's plan isn't expected to fair much better. 

01/03/2008 11:16 PM by Kate Bourland; Redding Mortgage, Loss Mitigation, Money Merge Accounts (Windsor Capital, Dyer Beech & U First Financial)

Melissa, Great information for the consumer.  As far as the 110% The majority of my lenders where 115% - 125% person of Neg Am.  Not saying it is right but that is just the way it was.

01/04/2008 07:06 AM by My Favorite Mortgage.net - Matthew J Blum

My thoughts are that the Option Arm never should have been available in the first place.  But, since they were, there is going to be a problem in the future.  I have only originated one Option Arm in my career because I felt it was a product that was too confusing to consumers and only the financial savvy could really understand or benefit from it.

01/04/2008 08:38 AM by Don Draughn - Debt Counselor (USA Services - Financial Debt Freedom)

Kate - My advice for a "safe" plan is different for each client.  Thanks for reading.

Matthew - Yes, I've seen many caps at 115% but decided to stay conservative for this posting.  Thanks for stopping by.

Don - There have been many investors I've worked with that love the Option ARM.  Yes, it is complex to understand but a great tool.  Thank you for sharing.

01/06/2008 04:16 PM by HOPE Lending LLC

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Mortgage Company: HOPE Lending LLC
Melissa Olson ~ HOPE Lending LLC
Bellevue, WA
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HOPE Lending LLC

Office Phone: (425) 284-3055
Cell Phone: (360) 509-3030
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Our vision is to help everyone find financial freedom through lifetime learning, passion for excellence, integrity, and trust. Home Ownership Provides Everyone...what dreams are made of. HOPE Lending returns 10% of all revenues to the Muscular Dystrophy Association. Thank you for being part of this and living with a solid contribution in our ever changing Real Estate market. [RSS] [Google] [My Yahoo!] HOPE Lending LLC - Melissa Olson has invited you to Join Active Rain

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