Posted on 09/17/2009 1:57:32 PM PDT by Kartographer
The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.
"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
"That's the next round of potential foreclosures in our country," he said.
(Excerpt) Read more at news.yahoo.com ...
I never heard of a payment option arm, but I guess the problem will be the same as the last arm issue, banks sold the debt and “now can’t do anything to help”.
Banks sold the debt because there was a demand for it. Smart borrowers are the ones who will pay for the choices made by stupid borrowers.
“Banks sold the debt because there was a demand for it.”
What a mess. Is this the type of “greed” obama is applying regulations towards or are we going to just have to live with this kind of risk to the economy?
I think they are talking about “balloon” Mortgages.
Because we have irresponsible leftists in power and in the press, I find the public discussion of these matters to be more and more Alice in Wonderland.
Let the markets work.
It's starting to have a psychological impact on them and everyone around them. Young people who recently graduated from college are saddened by the lack of jobs. Many folks are having health problems.
It will take, IMO, many years for this to right itself if at all. God help us all.
“Risk can only be minimized if people understand that there are consequences to decisions. “
I agree with you there, but the system as is has made it virtually impossible for the failing party to work anything out short of bankruptcy (I’m referring to the housing mess). It is not the individual’s fault the bank they arranged terms with sells the loan to a third party. In that case, who really should be bearing the consequences? We’ve never had this type of thing happen before so something has changed structurally in the system to compound the downside risk. Free market or not, this is not good. It is clearly risky to loan especially in this environment, but becoming risky to borrow as well.
It wouldn't surprise me to learn that there are any number of COI/ACORN affiliates involved, using CRA (thanks a lot Bill Clinton, for expanding it on your watch).
They were a gimmick to get people into mortgage amounts with the "option" of making a very low initial payment. Thus making them borrow more $$ than they could afford.
Usually, a borrower had 4 options to pay each month -- their monthly statement would have 4 payment option boxes. A 30-year amortization pmt, a 15-yr, an interest only, and then a "minimum" payment at some ridiculously low rate like 1¼ - 2½ %.
With the interest only, the principal stays the same for a set number of years, say 10 years (with interest only, you're not paying down the balance). After 10 years, the balance is then amortized over the remaining 20 years, so if you took this option, you then have to pay off the entire loan in 20 years, so the payment would be higher for the remainder of the loan than a 30 yr would've been.
Here's where it gets interesting ... and ugly. With a minimum payment loan, not only isn't the borrower paying down the loan, but since the amount that is getting paid is less than the note rate on the loan. If the loan is at 6% and you're paying 1½%, that shortage gets added to the balance, i.e., negative amortization. They'd have a cap of 110-125%, which means a $300K borrower could eventually owe upwards of $375K, at which time the loan would re-set and the monthly payment would adjust to the amount needed to get the loan down to $0 over the remaining # of years.
Someone borrowing $300k using this method would do so because they couldn't afford the payment on a regular 30-year. If this is the case, how easy do you think they'd be able to afford a $330k - 375k loan amortized over only 20 years?
And with home values dropping, this means upside-down mortgages ... and a lot of people walking away from their home. As I said earlier, UGLY!
I agree - with LIBOR at 1.25 - there is not a lot of resetting to do for mortgages which were originated 3 years ago. The IA AG should stick to something he has knowledge of.
BTO!
Hopefully, it is the kind of nonsense he will form sensible regulations about. Some more Wall Street crap to clean up.
parsy, who is sick of Wall Street
Great explanation. Let’s put numbers to it so others really understand. Initial payment on the loan= 999.76. (forget about tax and insurance) New payment after the loan resets= 2416.13. Difference= 1416.37 Oh, BTW, the home you now owe 375K on, that was originally 300K, is now worth 225K. (it wasn’t worth the 300K anyway, but back in the day the appraisers could bump the value) No more.
One more thing, just for giggles. The lender that wrote the bad loan had insurance on it. Guess who wrote the insurance check? AIG(who takes the fall), the governments conduit to get the money in the hands of the bank that never should have underwritten the loan anyway. CDS another time.
We’ve been hearing about the coming ARM and commerical Real Estate implosion for more than a year now,
it’s starting to look like Y2K
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