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<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Verdana">Nightmare Mortgages
They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung <BR style="mso-special-character: line-break"><BR style="mso-special-character: line-break"><?xml:namespace prefix = o ns = "urn:schemas-microsoft-com
fficeffice" /><o
></o></SPAN><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Arial">For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.
Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.<o></o></SPAN><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Arial"><o></o></SPAN><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Arial">The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.
The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comffice:smarttags" /><st1lace w:st="on"><st1:State w:st="on">New York</st1:State></st1lace>'s Ford Foundation. "It's going to kill all the people but leave the houses standing."
Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in <st1:City w:st="on">Salinas</st1:City>, <st1:State w:st="on">Calif.</st1:State>, and 26% in <st1:City w:st="on">Naples</st1:City>, <st1:State w:st="on">Fla.</st1:State>, they're not just found in overheated coastal markets: Through Mar. 31 of this year,
They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung <BR style="mso-special-character: line-break"><BR style="mso-special-character: line-break"><?xml:namespace prefix = o ns = "urn:schemas-microsoft-com
fficeffice" /><o></o></SPAN><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Arial">For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.<o
></o></SPAN><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Arial"><o></o></SPAN><P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="FONT-SIZE: 10pt; COLOR: #1f5080; FONT-FAMILY: Arial">The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com
ffice:smarttags" /><st1lace w:st="on"><st1:State w:st="on">New York</st1:State></st1lace>'s Ford Foundation. "It's going to kill all the people but leave the houses standing."Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in <st1:City w:st="on">Salinas</st1:City>, <st1:State w:st="on">Calif.</st1:State>, and 26% in <st1:City w:st="on">Naples</st1:City>, <st1:State w:st="on">Fla.</st1:State>, they're not just found in overheated coastal markets: Through Mar. 31 of this year,
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