Foreclosure Warnings still in the air

In reading through the current influx of daily email news items, I'm struck by a couple of recent ones that might indicate that perhaps some of the foreclosure market is still waiting to show up on our doorstep.

Realtor Magazine online posted "Trouble Ahead for Subprime Borrowers" which has a focus on the ARM market for these loans and the catch 22 that they borrowers will find themsleves, if they haven't already lost their homes. The numbers in the article are a staggering 2.2 Million households in the subprime market, with a cost to homeowners of over $164 Billion dollars.

An article in Business Week entitled "Nightmare Mortgages" is even harder to read. For those of us who teach in this industry and who are on the lookout for their customers at the same time, I can't stress enough my worries when it comes to the Option ARM, which this article discusses. This type of loan has put many homeowners at risk in the coming years and I believe Agents should help to council clients and customers of the risk this type of loan creates.

Let's just make this as clear as possible; an Option ARM allows the homeowner to choose their monthly payment.

a) pay $1300 per month or;

b) pay $1750 per month

What's the catch? The repayment schedule looks right, the loan starts at only 85% of value and the mortgage broker selling the loan says "and you can choose your repayment option", which seems great! The borrower selects the lower payment and then the catch begins.

In just a couple months the borrower will make their first payment and if they pay attention will also notice that the monthly statement from the bank shows a higher principal balance than last month. Why? because an option payment lower than the required minimum payment creates a negative amortization loan, allowing the bank to add the $450 per month that the borrower decided not to repay on to the principal balance of the note.

Sounds like a great deal doesn't it! I had a customer who took out this type of loan (which by the way almost always seem to include a massive early repayment penalty) and within 3 years lost the house to foreclosure. These types of loans may be the single largest reason I can point to for the increase in foreclosures. Any regulator or government official investigating foreclosure might be well served to start their research at the mortgage products currently available to C and D paper borrowers. I think that might shed some light on the situation.