Foreclosed home numbers are expected to rise largely due to the expected resetting of exotic mortgage loans provided during the housing boom. These loans, which have been allowing borrowers to make very low monthly payments, will adjust to their higher rates in the coming months and in the next few years.
Since these rate adjustments will result to unaffordable monthly payments, more homeowners will be forced to leave their homes to foreclosures.
One of these exotic mortgages is the interest-only option mortgage, which allowed borrowers to pay only the interest portion of the computed monthly payments and not to pay anything to reduce the principal.
The interest-only paying period was set by lenders to run for 5, 7 or 10 years, and many of these interest-only home loans are now approaching their interest-only expiry dates. According to real estate research firm First American CoreLogic, $71 billion worth of interest-only loans will adjust in the next several months and another $100 billion will adjust a year after.
In 2011, another $400 billion will adjust to higher rates. If the borrowers of these loans are not able to modify their mortgages before the reset schedules, many of these mortgages would enter foreclosed home lists as most adjusted monthly loan payments would become unaffordable.
Currently, according to the research firm, $908 billion worth of interest-only loans are active, held by a total of 2.8 million borrowers.
At first glance, homeowners who took out longer-term interest-only home loans are more fortunate than those who took out shorter-term loans because they have more time to modify their loans. But when analyzed further, those with 10-year interest-only loans will have to pay their entire loans, which have expectedly ballooned to higher principal balances, within the next 20 years.
The remedy for homeowners who took out interest-only loans is to start paying additional amounts monthly now before their loans reset so they can pay down their principal balances.
The problem however, according to housing and mortgage analysts, is that many homeowners bought the biggest homes they could buy with loans during the boom, making them struggle with their monthly payments even if the payments involve only the interest.
According to real estate data, interest-only loans became popular during the boom in California, Nevada and Florida. California is facing another foreclosed home wave because almost half of borrowers in the state in 2004 took out interest-only loans.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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