Friday, June 19, 2009

Worse than subprime? Other mortgages imploding slowly

Call it son of subprime. Experts warn that a new wave of mortgage foreclosures may be coming soon and could rival the default rates for subprime mortgages and slow efforts to find bottom in a prolonged national housing slump.

The mortgages in question are $230 billion of option adjustable-rate mortgages, creative lending products that flourished at the height of the housing boom. In an option ARM, a borrower can opt to pay less than his or her monthly balance due, and the difference is tacked onto the outstanding loan balance.

Posted by chris @ 05:15 AM (877 views)
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3 thoughts on “Worse than subprime? Other mortgages imploding slowly

  • george monsoon says:

    Just when you think it’s safe to back into the water…. Option ARM —– the return of subprime..

    It makes you wonder just how many more of these ticking time bombs are out there.. So how are they going to fix this one, as borrowers hit their trigger and whop up to the higher interest rates?

    does anyone know if they have the same kind of mortgages here and are they under a different name?

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    I’ve no hard and fast proof that there are these type of mortgages in the UK but I would be highly surprised if the geniuses in the financial sector had not jumped on the bandwagon.

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  • In terms of over or under payments and payment holidays, these are standard features one may obtain even in today’s mortgage market (known as flexible mortgages, but if you have a dialogue with a lender you’ll discover they will tailor their existing, marketed deals with such features.)

    Most mortgages will have a floor, and many reset in certain circumstances. Again one may tailor their mortgage, a cap will incur more monthly costs and a floor will reduce them. These features are a direct representation of the market in which the lender uses – where there are interest rate caps & floors (a collar being both instruments).

    I am not sure about ARM, but most over / under payments will require the debtor to maintain the interest payments, so one can think of flexible mortgages as being a halfway house between interest only and repayment mortgages. The allowance of payment holidays (not paying the interest due) are likely to be severely limited (such as having the last 5 months of payments made on time and a limit of 2 months of holiday per 2 years, again I don’t know the exact standard contractual terms – I’m no mortgage broker!)

    What sounds most dangerous about ARMs is that some lenders use their own indecies of cost of financing to vary the interest rate being applied (to maintain a steady margin) and these could be engineered in such a way as to be counter-cyclical – i.e. increase margins in bad times. However the Consumer Federation of America defines predatory lending, and some ARMs will, no doubt, be challenged.

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