We have been seeing a drastic decline in foreclosures across the country, many markets show signs of stabilization, and it is beginning to look like the end of our current housing crisis is in sight. However there is small group of mortgage products that may have been overlooked, the Option Adjustable-Rate Mortgages (ARMs) with five-year resets.
Option ARMs were mortgages that are negatively amortized. As the borrower makes their minimum subprime payment, the balance of the loan actually grows to a balance of 100% to 125% of the original mortgage. The bulk of these loans were written in 2005 and 2006, and will begin to recast as early as this year. This means that the borrower’s monthly payment will increase from its current minimum monthly payment, to a fully amortizing principal and interest payment. home loans & mortgages reno nevada
On average (according to Fitch Ratings Inc.) this new payment is 63% higher then the original minimum monthly payment. Most of these loans closed with an original loan-to-value (LTV) of 79%, but now due to the negative amortization and declining housing values have approximately 126% LTV. This high LTV makes it nearly impossible to refinance the current loan.
In an effort to mitigate the upcoming effects of these recasting, some option ARMs have been modified. The modifications have included term extensions, conversions to interest-only loans, and interest-rate cuts as well. However, it is estimated that only about 3.5% of these option ARMs have been modified. Although the total number of option ARMs represent only about 2 to 3% of the market, we’ve already seen that it doesn’t take much to upset the housing markets.
What should you do if your 5 year option ARM is about to reset?
If you are unable to refinance your loan, the next best option would be to contact your lender before the recast and try and get the loan modified.
If you are unable to get your loan modified, or the modification your lender is offering is still unfeasible, you may want to look into seeking legal counsel, joining an advocacy group, or contacting a Realtor who has experience in assisting those who are in default, or about to be default on their loans.