Adjustable Rate Mortgages Ready to Reset and Add Fuel to the Existing Fires of Foreclosures

June 2nd, 2009

There seems to be slim hope that the economy will take a turn for the better in the near future, as the ARMs or Adjustable Rate Mortgages are about to reset to higher rates. With these mortgages the initial rates were even lower than the interest and no down payments were required. It was fine during the grace period of leniency but later on the due amount is tagged on to the principal and the monthly amounts shoot up to a staggering rate. An increase of over 50% becomes the norm.

Quoting from data collected by Credit Suisse, expert Dirk Van Dijk opines that the time has come for the resetting of these mortgages and it is feared that in the next few years more foreclosures will be posted as many will default.
Industry observers are watching with concern the Alt-A loans with apprehensive. Most of these loans were given to those with good credit but the income statements were not verified. It meant that those who took the loan could carry on only if everything in life went along as they had hoped. But hiccups like job loss, accidents or one of the traumatic events of life could easily disturb the fine balance and make borrowers start to default.

The scramble would begin to avert foreclosures.

Today the economic climate so grim, that there are more chances of things going awry than the reverse. Unemployment is rising while value of houses is falling. Mark Zandi of Moody’s economy.com feels that a third wave of foreclosure is just waiting in the wings to enter the stage. It will rush across the country like a tidal giant as the foreclosures pop out of Alt-A and ARMs.

Two primary causes are behind this approaching third wave according to the pundits – increasing unemployment and the depressed state of the housing market.

An article in New York Times reads, “60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.” The falling value of real estate are further pushing the owners underwater with their loans becoming more than the worth of the house. The houses are not selling and lenders are continuing to be adamant and non-cooperative.

Another fear is that not all the REO’s are in the market but will soon enter. On 22nd May 2009 the Christian Science Monitor reported, “Only 30 percent of foreclosed homes are currently on the market.”