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Bank Homes to Arise from 350,000 Exotic Mortgages

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By : John Cutts    99 or more times read
The expected increase in number of bank homes in the coming months and in the next few years will arise from the 350,000 option adjustable mortgages that were taken out during the boom years from 2004 to 2007, according to a report released by Standard & Poor's this week.

The S&P report showed that almost all the 350,000 borrowers who took out option ARM loans are now underwater because of the unpaid interests that have not been paid. Worse, many of these exotic loans - those taken out in 2004 - are now scheduled to reset to higher rates this year or next year. Even newer loans can reset earlier than scheduled if the interests have accumulated to a level where the loan-value ratio has surpassed 110 percent or 125 percent.

According to the report, many borrowers will soon be required to make monthly payments staggeringly higher than what they have been paying. If homeowners are struggling to pay lower monthly payments now, it would not be surprising if many of them give up and walk away from their mortgages, leaving lenders with more bank homes to handle.

In one example described in the report, a borrower who took out a $400,000 home loan and who has been paying $1,287 a month would be surprised to see his monthly payment soaring to $2,593 after his mortgage resets to higher rates.

Additionally, according to S&P analysts, the expected defaults of these exotic mortgage borrowers will not only affect the homeowners involved, they will also derail the nascent recovery being experienced by the housing market.

S&P analyst Brian Grow explained that although option ARMs do not comprise a big portion of all U.S. mortgage loans, the high default rates for option ARMs will weigh heavily on vulnerable housing markets. He reported that out of the option ARM loans taken out from 2004 to 2007, more than 22 percent had defaulted within the first 20 months after they were issued. Of those issued in 2007, about 25 percent had defaulted within only 20 months after loan issuance because of negative equity.

The S&P analysts also reported that most of these option ARMs were taken out by borrowers in states which are still struggling from large numbers of bank homes like Nevada, California, Florida and Arizona. They said that 60 percent of option ARM loans were provided to borrowers in California and other states in the West.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.

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