August 2009

Up in ARMs (Adjustable Rate Mortgages, that is)

Christina Latta Henry |  | Uncategorized

It’s a lot like waiting in line for a ride at Disneyland: you wait for 45 minutes, turn a corner, and find yourself at the end of another long line. Just when we thought we finally hit the bottom of the housing market, there appears to be an entirely new level on the horizon: a massive re-setting of option ARMs. 

Many of you are probably familiar with option ARMs—loans popular during the housing boom because they gave borrowers the option of paying very low monthly payments (less than the interest) for the first five years.  The Seattle Times reported that between 2004 and 2008, more than $750 billion of option ARMs were originated in the U.S. (58% of which were in California!).  As many as a million of those loans are estimated to reset higher in the next four years. 

Most option ARM borrowers assumed the value of their house would steadily increase, allowing them to refinance or sell before the reset date.  Instead, the values have dropped dramatically, meaning many borrowers will be stuck with the reset loan payments, which may be double the initial amount (or even more in some cases).

What does this mean for the economy at large? It’s not a pretty picture, according to real-estate finance professor Susan Wachter, as reported in the Seattle Times article:

“Owners may surrender properties to the bank rather than make higher payments for homes that have plummeted in value…The option ARMs will drive up the foreclosure supply, undermining the recovery in the housing market…The option ARMs will be part of the reason that the path to recovery will be long and slow.”

For more information, take a look at this New York Times article  published last week.

Mortgage Servicers Not Motivated to Help with Modifications

Christina Latta Henry |  | Current Events, Foreclosure

Having trouble modifying your mortgage?  You’re not alone.  The New York Times recently reported that mortgage servicing companies have little interest in helping troubled homeowners lower their monthly payments because of the “lucrative fees” they can collect on delinquent loans. 

According to the Times article, the Obama administration’s foreclosure program, which provides a $1,000 incentive to servicers for each loan they modify (plus $1,000 a year for the next three years) is no match for the revenue generated from delinquencies and foreclosures:

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month.  “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

What’s more, the article reports, some mortgage companies (Ocwen, for example) have established their own title companies in order to keep more of the revenue from foreclosures. 

Scary stuff, but kudos to the Times for shedding light on these dark dealings.

(Please don’t let this post stop you from trying to get a modification…many people have successfully lowered their mortgage payments! The loan modification and forbearance section of our website can help you get started.)