New Foreclosures Waiting to Crash

Posted on June 30, 2009
Filed Under Foreclosure Homes | Leave a Comment

Troubled days are ahead for those with ARMs as new foreclosures are waiting to crash. This time the sub-prime crisis could pale into insignificance causing the housing crisis to get prolonged and intensify.

The mortgages at stake are worth $230 billion ARM’s – the ones that went like hot cakes during the time of the housing boom. In option-ARM the borrower had the choice to pay less than the monthly due. The balance would then be tagged on to the principal. Many pundits had apprehended a spurt in defaults for about 564,000 mortgages. Interest rates fell to record low levels but that has only postponed the detonating of the time bomb that is ticking.

Rick Sharga of RealtyTrac said, “They’re probably going to default at a rate that makes sub-prime look like a walk in the park.”

The option ARM reset to new interest rates according to a pre-fixed time period or when the debt amount swings above the value of the loan. The drop of interest this spring permitted many borrowers to postpone D-day because the level was not reached. The issue has merely been postponed. The problem has not been solved.

California, Nevada and Florida have the greatest number of ARM’s. Property value here has dropped so much that most of the borrowers have gone underwater. This means the value of the house has become less than the loan amount.

ARM loans are no longer available. The majority of these loans were granted from 2004 to 2007. From 2009 to 2012 the monthly due amount for these loans are scheduled to reset. Sharga said, “They’re going to have a loan they cannot afford on a house that’s probably way underwater and not have a lot of good options on how to avoid foreclosure proceedings.”

The number of ARMs is less than that of sub-prime mortgages but it slowly increased from 3% of all the mortgages that were sold off to investors in 2004 to 14% in 2007. The risks from these are much greater than the previous ones because they were now add to the already spiked inventory of distressed houses for sale. Professor Elizabeth Warren of Harvard University said, “We can’t rebuild housing values when there’s a serious risk that another set of mortgages is collapsing.” She is the head of a government body that supervises the use of the bail out money.

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