High Rate Mortgages for Option ARMs Slow Housing Recovery
Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, Calif., in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years. Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its initially low minimum payments.
According to mortgage data firm First American Core Logic, about 1 million option ARM loans are scheduled to reset higher in the next four years. About 75% of those home loans will adjust either next year or in 2011, with the peak coming in August 2011, when about 54,000 mortgages recast.
In most cases, borrowers with Option ARM mortgages will be 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. Owners may surrender properties to the bank rather than make higher payments for homes that have plummeted in value, she said. “The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said. More than $750 billion of option ARMs or negative amortization mortgages were originated in the United States between 2004 and 2008.
Shirley Breitmaier chose the option ARM when refinancing her $315,000 previous home loan. Her payments began at 3/8 of 1%, or less than $100 a month, according to Cameron Pannabecker, a mortgage broker who is working with Breitmaier. The option ARM loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She will be required to start paying principal and interest to amortize the debt when the loan reaches 145% of the original amount borrowed. Such terms aren’t typical for option ARMs, which were also known as “pay option” adjustable rate mortgages. The mortgage rates on many payment option ARMS are “typically very low in the first one to three months” and can be as little as 2%, according to Federal Reserve. Article was written by Brian Louis for Bloomberg.
« Fed Considering Slowing Bad Credit Mortgage Securities | Home | Mortgage Rates Lower with fifteen-Year Fixed Home Loans At 4.36% »
Leave a Comment