Adjustable rate mortgages (Pay Option ARM’s) were widely used in the hot housing market of recent years. Many households that took advantage of “Option Pay” loans or “teaser rate” loans (types of adjustable rate mortgages that holds down payments for an initial period or when the borrow selects a lower payment and defers interest and/or principle), are facing resets of their interest rates that can cause monthly payments to balloon upward of 65%.
Home owners list major payment adjustments. For example, a 1 million dollar mortgage taken out 36 months ago with an initial payment of $2,528 per month could jump to just under $7,000 per month.
Sean Reynolds, Managing Director of Mortgage Loan Restructuring at the Law Offices of Joseph R. Manning, Jr., A Professional Law Corporation that focuses on loan modifications, says the handwriting is on the wall, adjustments will mean multitudes of borrowers will be unable to make the higher payments and may be forced to sell their homes, or worse, lose them to foreclosure.
The firm cites statistics from 60 Minutes indicating that Option Pay Mortgages are the next wave of defaults that are now plaguing the Luxury Home Market. It’s a predictable time bomb. Reset dates indicate as much as 70% of “Pay Option” ARM loans may default over the next three years. Many home owners are now defaulting on the teaser rates indicating the inevitable when these loans reset.
According to CNBC 12% of all mortgages in the U.S. are not current.
Many home owners locked in rates as low as 1 percent in the early stages of their Pay Option Adjustable (ARM). In almost every case these mortgage payments will more than double once the rate is adjusted. And that spells tragic news for homeowners — according to Credit Suisse, a third of loans are deeply delinquent and resets will begin to accelerate next spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in September 2011. About $500 billion of Pay Option ARM loans are outstanding, according to the bank.
Further compounding the problem is many types of adjustable rate mortgages (ARMs) or Pay Option (ARM’s) carried heavy prepayment penalties that may make it difficult to refinance once the loan adjusts. Many of these loans also carried caps on the amount of interest that could be deferred causing a recast in as little as two years from the date the loan was funded.
“Consumers are in a real bind, especially in California and Florida,” said Sean Reynolds, Managing Director of Mortgage Loan Restructuring at the Law Offices of Joseph R. Manning, Jr.