About a month after I got my real estate license in 2006, I had a meeting set up with a lender acquaintance of mine for a brief seminar on some of the "hot" loan programs. One of the first things he was so anxious to tell me about was option-ARMs. I distinctly remember him telling me, "you need to push this on all of your investor clients. It's really the way for them to go."
If you aren't familiar with the term option ARM (option adjustable rate mortgage), basically it is/was an exotic loan program that allowed the borrower to decide whether he/she was going to pay principal and interest, interest only, or a minimum amount less than the interest amount due. And this decision was made on a monthly basis. Not only that, but the program also allowed the purchaser to come to closing with little cash and in some parts of the country allowed 40 year loan terms.
Now you don't have to be a rocket scientist to figure out that was probably a bad idea. According to a recent report released by Standard and Poors, over 93% of option arm borrowers selected the option of paying an amount each month that was less than the interest amount due on the note. So in addition to not gaining any equity in the property, the unpaid interest was also being tacked back onto the original loan amount.
Thankfully, the last year that this loan program was issued was in 2007. The default rate for borrowers issued an option arm in 2007 alone has reached almost 25%, and the projected default rate has already been labeled a possible "housing recovery killer."
Its no secret that the option arm program was most popular in the "bubble markets," where house prices soared in the middle of the decade. These same areas have been hit the hardest in the past two years as once lofty property values have fallen rapidly, sending the financial industry into a tailspin.
In the last quarter alone, California, Florida, Arizona and Nevada represented 44% of all homes beginning the foreclosure process. Nationwide, almost one in four (23%) of people with mortgages owe more than their home is worth.
As borrowers across the country are falling behind in record numbers, the government has ramped up its efforts to help struggling homeowners. Just this past week, President Obama and the treasury department have tightened the screws on mortgage firms who are largely in responsible for implementing the $75 Billion Home Affordable Modification Program aimed toward modifying existing loans to keep borrowers out of foreclosure.
Recent Comments