End of housing crisis? Think 2012.
By Barbara E. Hernandez
Monday, April 21st, 2008 at 4:25 pm in Foreclosure Fever, Mortgage Mania, The Market.
Oh, man, just when I was ready to call the end of the “housing crisis” in 2011, I see this. Apparently, the folks at the International Monetary Fund are doing their research. (For those of you who didn’t take development studies courses, the IMF is an international organization run by the United States that spends most of its time giving Western-interest policy advice, crippling the Third World with debt lending funds to developing countries and to ambiguously “strengthen the international finance system,” according to its Web site.)
Anyway, it shows that while we thought the mortgage resets were the problem, it’s actually the “recasts” when the option-ARM (and neg-am) loans hit their cap of 110-125 percent and homeowners have to cough up the balloon payment. Apparently, that happens a few months after, according to the chart and seems to be hitting in 2009 to 2011. According to Paul Jaber:
A good analogy is the three-year, no-payment, no-interest Circuit City TV loan. The catch is that in month 37 you owe ALL back interest — usually about double the original charge.
The guys talking about resets are trying to confuse the situation. The option- arm loan was very popular through [January-March 2007] - so take 40 months from that date, plus 3 months for them to go 90 days late and then and only will you see foreclosures start to level off.
Yikes. I hope all of you are able to make your mortgage payments. And if you have an option-ARM, please at least pay the interest.
(Hat tip to Herb Greenberg!)
[Both comments and pings are currently closed.]
April 21st, 2008 at 6:52 pm
I think you are a little off. You don’t have to cough up a balloon payment (implying you have to pay off the loan). Rather, the loan simply re-amoritizes as a 27-year ARM loan at the accrued principal. Big difference. Though payments are still likely to go up substantially, and few people will have the luxury of refinancing if they are underwater.
April 21st, 2008 at 7:07 pm
Barabra - The Payment Option ARM actually has two Recasts - the Recast Percentage that is mentioned (typically 110 to 115 %) and the Recast Term (typically 5 to 10 years out). Besides being sold on the payment, many homeowners were sold on the stability of the recast. They were told they would recast in 10 years.
In reality, the loan will recast every 5 to 10 years or when it hits the Recast % - whichever comes first.
I ran a evaluation for a foreclosure homeowner who’s loan Recast at month 39. Not anywhere close to the 10 year window her loan officer told her. Her payment rose 279%. Almost tripled!
Why? She paid only the minimum payment (Neg Am) and she had an abnormally high margin. That margin created a higher paycheck for the loan officer.
Homeowners can educate themselves. Read their Note. In it they will find all the terms they need to know. Recast Percentage and Recast Term. If the original loan amount was $400,000 and the Recast Percentage in the note says 115% - make darn sure you don’t add $60,000 in deferred interest or you’ll activate the Recast! How do you know how much deferred interest? It’s on you monthly statement.
If all this is confusing - consult your Trusted Mortgage Professional. They can help decipher this for you. But the keyword is “Trusted”!
April 21st, 2008 at 7:37 pm
OK, I didn’t mean balloon payment as in the loan says balloon payment, but just a big monthly payment you must pay when you have paid no interest (the lowest payment option) for X years.
April 21st, 2008 at 8:23 pm
I figured it was a mis-statement… but ‘balloon payment’ is a very specific thing with respect to loans. We WOULD truly be in deep sh*t if option arm recasting forced a balloon payment, since an underwater loan would be impossible to refinance. Almost everyone would be forced to ‘walkaway’.