You may have heard the folks in D.C. mention that the worse in the economy seems to be over. You may also know that a great number of the mortgage loans that went into default that caused the current crisis have now traveled through the system. Foreclosures remain high, but the government bail out of big banks such as Bank of America, Citigroup and JP Morgan Chase, and insurer AIG have stemmed further significant negative economic impact caused by the first wave of mortgage defaults that began in late 2007.
You may ask yourself, “Did he just say first wave of mortgage defaults?” That’s right!
No one in D.C. has said it yet but the worse for the economy may still be ahead of us in what is being called the second wave of mortgage defaults set to hit the economy beginning in the fall of 2009. Approximately $750 Billion worth of 4 & 5 year option arm mortgages are set to reset or recast themselves in the next 4 years. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data shows.
An option arm mortgage is an exotic loan product with typically very confusing terms that usually end with a significant increase in monthly mortgage payments to the borrower. Many of these loans do not reset for several years, but once they reset there is usually no telling how high one’s mortgage payment can become. For example, Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house. Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed. Once this loan resets, her monthly mortgage payment will skyrocket to $3,500.00 per month! The next wave of mortgage defaults is littered with just these types of loans!!
“Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy”, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank or are foreclosed upon for failing to maintain higher mortgage payments will further increase the supply of housing which in turn will further depress real estate prices and continue to de-stabilize the housing market. This will be part of the reason why the economic recovery will be long and slow as the next wave of defaults will act to continue to drag down the American economy as a whole.
There seems to be no end in sight, but come the spring of 2013, almost all of these exotic option arm mortgages will have been through the system. Do not look for a rebound in housing prices until at least 2012. To learn more, contact us at Belsky, Weinberg, & Horowitz, LLC.