With everyone worried about sub-prime mortgage problems, few are looking to the mortgage crisis on the horizon. The Real Estate Crisis may continue much longer than previously thought because when the majority of sub-prime mortgage problems show signs of improvement, we will need to worry about the Option ARM mortgage crisis.
Many of those that were not lured in by the low introductory rates and easy qualifying of the sub-prime loans couldn’t say no to cash in their hands and payments that were lower than they ever imagined. In come cases a borrower had only to pay the equivalent of 1% annual interest as a monthly payment while the loan itself was set to a rate coming in above 6 or 7%. The result, a fast growing loan balance with a time-bomb attached. The key to the security of these loans was a home’s value in relation to the loan amount since most of these Option ARM products required 20% equity in the home.
The problem is that these loans are due to re-set just like the sub-prime mortgages are, but instead of time being the factor, the loan balance (since it can continue to climb) is the factor. Even today, many of these loans are close to resetting and the equity that the borrowers had in their homes has dried up with the falling house prices. When the loan resets a borrower’s monthly payments can easily go up 50% or more. Because their loan balances have climbed over several years to thousands more than their original loan amount and the value of their homes has declined, these borrowers may find themselves in an impossible situation. Refinancing will not be an option for many and it’s likely that many of these borrowers will also fall victim to foreclosure.
