Industry experts are bracing themselves for a wave of San Francisco foreclosure homes when the scheduled resetting of option adjustable-rate mortgages (ARM) will take place in 2010. They said that many homeowners in the Bay Area metropolitan statistical in California have taken out risky loans which will start to readjust into higher mortgage rates next year.
Experts said that the resetting could drive up foreclosures again, thus hampering whatever progress has been made to stabilize and strengthen the housing market. Market data showed that one out of five borrowers took out option ARMs from 2004 up to 2008.
ARM loans were used for purchasing and refinancing in the counties of Alameda, Contra Costa, San Francisco and San Mateo. Industry analyst said that the impact of option ARM resetting will be felt only in high-cost states like California.
According to market data, without the option ARM resetting, San Francisco foreclosure rates are already at their highest. Last month, one in every 595 homeowners received at least one foreclosure filing.
Out of the 10 metropolitan areas in the country where there are high concentration of borrowers who have option ARMs, three are located in the Bay Area. These areas accounted for the second highest option ARMs combined in the country. Market data showed that about 54,000 ARMs were issued in the Bay Area, with a total value of $30.9 billion.
Industry analysts said that option ARMs are highest in the area because prices in the housing market go up rapidly, forcing many borrowers to avail of risky loans in order to afford their home purchasing.
They explained that originally, option ARMS were intended for real estate buyers and investors whose income fluctuates. But the loan product evolved to become attractive to regular borrowers who want to purchase properties that they could not afford to pay.
Option ARMS are attractive to regular borrowers because they are given an option to make low mortgage payments for five years after taking out the loan. And during the initial period, borrowers were allowed to choose the payment terms, either by paying the interest only, principal and interest or a very low monthly payment that does not even cover the loan's interest.
The ARM resetting is spread out for three years, giving industry analysts hope that foreclosures could be averted.
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