Short Sale Your Option-ARM, Don’t Walk Away!

The mortgage known as an Option-ARM has been rapidly gaining momentum as the most troubling of all mortgages to date. Option-ARMs aka Negative Amortization Loans are producing greater numbers of delinquencies and foreclosures than loans within the sub-prime category. Although they account for a much smaller percentage of all mortgages, when compared with sub-prime, Option-ARMs appear to be greatly more problematic on a lender’s portfolio. While the rate of default in the sub-prime loan category has somewhat steadied, the troubled Option-ARMs default issues may only be starting to gain speed as the cycle of interest rate resets are just beginning. One million Option-ARMs are expected to reset over the next four years! Those loans appear to be heavily concentrated in areas that have proven to be hardest hit by the housing crisis, increasing their exposure and risk to falling property values. Option-ARMs comprise almost 40% of loans that are delinquent by 60 days or more in both Florida and Nevada and account for 28% of similar delinquencies in California and 20% in Arizona. The numbers for Maryland, Virginia and Washington DC may not be far off.

Also known to the industry as “Pick-a-Pays”, these highly volatile adjustable rate loans were primarily created for credit-worthy, self employed borrowers who wanted to control their monthly cash-flow by being given the choice to select from a variety of payment options like minimum payment options, interest only options and fully amortized principle and interest payment options. To no surprise, over half of Option-ARM borrowers selected to make their required minimum monthly payment. The looming tidal wave of re-setting Option-ARMs on the horizon could create large setback in the current slow recovery in the housing market. Lenders, who could be faced with a flood of loan modification requests from soon-to-be resetting Option-ARM borrowers, must consider if a rate reduction, coupled with a principal reduction, along with an extended loan term might not even be enough to turn things around. Because many of these mortgages began with interest rates as low as 1%, there isn’t much room left to improve upon the rate or payment options now. Many Option-ARM loans seem likely to fall into foreclosure as so many of the loans were structured to permit deferred interest (or negative equity) of up to 125% of the original loan amount. The resulting amount of negative equity, which has accumulated, makes it unlikely that Option-ARM borrowers would have the ability to refinance into any of the programs currently available. Is it possible that some option-ARM borrowers may decide that their best option now may be to walk away?

Don’t walk away! There are other options.  Please contact our distressed property specialist for a free consultation before you throw in the towel.

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