Foreclosures Increase as Adjustable Mortgages Raise

Foreclosure Rates Increase as Adjustable become fully indexed

One of the dirty little secrets lenders don't like to tell borrowers is that those low adjustables and negative arm mortgages will become fully indexed sooner or later and payments will increase, sometimes substantially!

In fact, here in California, Mortgage Bankers can not allow the principal balance on a mortgage to increase beyond 110% of the original borrowed amount. What this means is that if you have Negative Adjustable (or sometimes referred to as a Deferred Interest Payment) and if the interest rates increase substantially, like they Federal Reserve has been doing, then the bank has no choice but to increase your mortgage payment in order to make sure you don't owe more than 110% of the original loan amount.

So in the real life situation, the "Low Mortgage Payments" you started with have been increased beyond your affordibility level because the Feds raised the rates and the banks had to follow suit.

Fed raised interest rates in order to fend off inflation.
The nasty result of that is the substantial increase in Foreclosures.

According to Foreclosures.com President, Alexis McGee, "In San Diego County 50% of mortgages issued between 2003 and 2005 were either interest only, or so-called option adjustable rate mortgages with start rates as low as 1%. According to Dr. Christopher Cagan of First American Real Estate Solutions, when these loans convert to full amortization, the payment shock could be in excess of 300%. This is bound to lead to financial distress in many, many households."

Lessons to be learned here?
1- Foreclosure markets will be on a sharp increase in the coming months
2- Avoid Negatives arms unless you are a short term investor

filed under: Foreclosure Investing