ARM’s set to Adjust in Next few Years will bring another round of Foreclosures
Millions of adjustable rate mortgages (ARM) are set to adjust in the next few years. This will probably bring a new round of mortgage foreclosures.
About 10% of all mortgages are ARM’s set to adjust. Many will go up and a few will go down. Almost every sub prime loan will adjust upwards. Almost every FHA mortgage and VA mortgage that is adjustable will go down. A few FHA – VA mortgages will remain the same and almost none will go up. This is why I consider the FHA mortgages and (if you qualify) the VA mortgage the best mortgage on the market.
How did this market happen? Well traditional ARM’s usually start lower than fixed rate mortgages. This allows a buyer to qualify for a bit more home. The theory being that as time goes by and the loan adjusts the borrower will make a bit more money and be able to afford the loan. Or a refinance is done at an advantageous time and the borrower is set up with a fixed mortgage. As the roaring 90’s came the qualifications for a home loan were lowered. The reasons they were lowered is for another post but lowered they were.
Now on to current events. Sub prime loans were written with the potentional for huge rate increases when they adjust. Again the idea was a sub prime borrower would improve their credit and qualify for a prime loan over the fixed period of time before the rate change. But when the housing bubble collapsed and values declined we have big trouble on Main Street. Many if not all sub prime and alt A borrowers are upside down in their loans. You say what are alt A loans? Well those are what we call liars loans. These are stated income. zero down, reduced or no document loans. The borrower (in theory) had good to great credit and the lender took the borrowers word that they actually didn’t lie to get the loan.
Keep in mind these loans are not evil in and of themselves. Many self employed people have a hard time proving income. Some work for cash on some jobs. Others write off everything on taxes so taxable income is lower to avoid tax liabilities. Also these loans were originally used for good to great credit borrowers. Standards were lower by politicians as time went by.
Now we come to Option ARM’s. These loans were the ones with a pick a payment plan. Most offered 4 payments every month. 1) Usually a very low payment that produced a negative amortizing effect. That meant your mortgage balance when up every month you made that type of payment. Usually this was the only payment ever made. 2) An interest only payment. That meant your loan balance didn’t increase but it didn’t go down either. 3) A 15 year payment. This was usually a very high payment and paid the loan off in 15 years. 4) A 30 year payment. There will be tens of thousands of these loans coming due every month for the next 2-3 years. Almost every single one of them will be upside down in value.
The Option and alt A mortgages coming due in the next few years will present a very difficult problem for our leaders. Given the fact our leaders can’t or don’t understand the mortgage business I personally will not hold my breath expecting a good result. This is why I have always been an advocate of the FHA mortgage and VA mortgage. These loans limit the increase in a rate to only one point up or down.
More tips and information on my blog.
While we’re in the Everett mortgage: ARM’s set to adjust will hurt economy Creative Mortgage Solutions zone, The majority of lenders are participating in this new government subsidized plan, and homeowners are encouraged to learn how they can qualify and apply for a loan workout and avoid foreclosure.
Fascinating post, thanks. Could you explain the second paragraph in additional detail please?
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Nice post… Does anyone have any updates on Obama’s plans for FHA in 2010? I heard they were supposed to be making changes.
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Hi Carroll I am flattered that you like me blog. I have been a real estate agent and loan officer since 1991. I have bought a number of fixed upper home and have made money on each one. You can too.. If there is anything specific I can help with let me know.
There are 10′s of thousands of ARM’s set to adjust in the next 2-3 years. Most of them are sub prime mortgages. A few of them will be OK because they are FHA / VA or some form of a good conventional loan. The good ARM’s will adjust downward. The bad ones will go way up. With the bad ones because most if not all of these homes have lost value the results will be foreclosures. That’s because they will be upside down and can’t afford the payment. If you end up owing $20K to $100K or more, on a home then it’s value, and the payment goes up what do you think the home owner will do? I will bet most will simply walk away. The downward pressure of these short sales will delay the recovery of values. The Obama administration hasn’t done much of anything to help this situation. I am not sure there is much they can do. The one thing that they could do doesn’t seem to be something they grasp. That is there will be no economic recovery without jobs. It really is that simple. The value of homes will not come back until people can afford to buy. Without jobs the economy will limp along and we may never see a real recovery. History tells us about the great depression.The economy would never have recovered without WWll. Entering WWll we still had 15% unemployment. FDR never made the economy recover it just limped along. Obama seems to want to make our country into a socialist paradise. That has been proven to fail every where it’s been tried. And it’s been tried a hundred times. Sorry to go political on you but I will tell you something my teachers taught me. Politics and economics are synonymous.
Hope this is what you wanted. I hate to be so dismal but right now all the MSM wants you to think there is a recovery starting but there really isn’t one. Right now the real unemployment rate is 17-18%. It is going to get worse too. 5 Years ago the MSM (main stream media) wanted you to think the economy was bad. Now they want you to think it’s OK. What do your own eyes tell you? Personally I NEVER watch or pay attention to any MSM anymore