Jim Johnson

ARM's set to adjust will hurt economy



Posted: Saturday, November 07, 2009

by
Metropolitan Mortgage

ARM's set to Adjust in Next few Years will bring another round of Foreclosures

Millions of adjustable rate mortgages (ARM) are set to adjust in the next few years. This will probably bring a new round of mortgage foreclosures

.About 10% of all mortgages are ARM's set to adjust. Many will go up and a few will go down. Almost every sub prime loan will adjust upwards . Almost every FHA mortgage and VA mortgage that is adjustable will go down . A few FHA VA mortgages will remain the same and almost none will go up. This is why I consider the FHA mortgages and (if you qualify) the VA mortgage the best mortgage on the market.

How did this market happen? Well traditional ARM's usually start lower than fixed rate mortgages. This allows a buyer to qualify for a bit more home. The theory being that as time goes by and the loan adjusts the borrower will make a bit more money and be able to afford the loan. Or a refinance is done at an advantageous time and the borrower is set up with a fixed mortgage. As the roaring 90's came the qualifications for a home loan were lowered. The reasons they were lowered is for another post but lowered they were.

Now on to current events. Sub prime loans were written with the potentional for huge rate increases when they adjust. Again the idea was a sub prime borrower would improve their credit and qualify for a prime loan over the fixed period of time before the rate change. But when the housing bubble collapsed and values declined we have big trouble on Main Street. Many if not all sub prime and alt A borrowers are upside down in their loans. You say what are alt A loans? Well those are what we call liars loans. These are stated income. zero down, reduced or no document loans. The borrower (in theory) had good to great credit and the lender took the borrowers word that they actually didn't lie to get the loan.

Keep in mind these loans are not evil in and of themselves. Many self employed people have a hard time proving income. Some work for cash on some jobs. Others write off everything on taxes so taxable income is lower to avoid tax liabilities. Also these loans were originally used for good to great credit borrowers. Standards were lower by politicians as time went by.

Now we come to Option ARM's. These loans were the ones with a pick a payment plan. Most offered 4 payments every month. 1) Usually a very low payment that produced a negative amortizing effect. That meant your mortgage balance when up every month you made that type of payment. Usually this was the only payment ever made. 2) An interest only payment. That meant your loan balance didn't increase but it didn't go down either. 3) A 15 year payment. This was usually a very high payment and paid the loan off in 15 years. 4) A 30 year payment. There will be tens of thousands of these loans coming due every month for the next 2-3 years. Almost every single one of them will be upside down in value.

The Option and alt A mortgages coming due in the next few years will present a very difficult problem for our leaders. Given the fact our leaders can't or don't understand the mortgage business I personally will not hold my breath expecting a good result. This is why I have always been an advocate of the FHA mortgage and VA mortgage. These loans limit the increase in a rate to only one point up or down.More tips and information on my blog.

Everett-mortgage-on-line

Jim Johnson E.A. retired; (Enrolled Agent, licensed to practice law in tax court) BS -19+ year experience as an independent loan officer. My background is extensive: 15 years as an Enrolled Agent Licensed to Practice law in tax court, Real Estate Agent 15 years, BS Accounting, Economics University of Wisconsin - Milwaukee.

In 2009 I ran for mayor of Everett, WA I lost but did receive 30% of the votes.

Currently I offer local political commentary in KSER Radio 90.7 FM every Wednesday at 9:05 AM.

Viet Nam Veteran

Everett Mortgage on Line

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