Adjustable-Rate Mortgages to Ring in a New Wave of Foreclosures, Expert Says

January 7, 2010 Updated: May 26, 2010

The recasting of adjustable rate mortgages is likely to spell disaster for millions of homeowners in the United States, according to Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center.

The opportunity for homeowners to make reduced payments through ARMs has halted, and owners are now faced with higher payments coupled with lower house values. A whole new wave of foreclosures is predicted as refinancing becomes tough unemployment remains high, Alayon said.

A conservative estimate of the number of homeowners in California likely to be impacted by the change is one million, said Alayon. Calling it the “next subprime” crisis, Alayon warned the industry to brace for a hit at the end of the first quarter.

The bulk of ARM loans were closed between 2004 and 2007, in a four year boom time. During 2003 and 2004, about one-third of all mortgage applications were for ARM products, a recent BusinessWeek report said.

The Consumer Mortgage Audit Center is a due diligence firm that works with attorneys and advocacy groups to find violations in paperwork.

“Our goal is to assist homeowners through [loan] modification, not litigation,” Alayon said. The hope is that lenders will modify the loans rather than force foreclosures.

Homeowners need to research their options, she said. “Too many fold their hands and walk away when faced with foreclosure—they think there’s no way out.”

Three options are suggested by Alayon:

1) Modify the loan on their own. This task will turn into a part-time job, she warns, and owners must be very tenacious.

2) Seek legal counsel. Many attorneys give their first consultation free, so homeowners need to ensure they are prepared—take all documentation and paperwork, and the advice received will be more informed.

3) Join the non-profit advocacy group, Neighborhood Assistance Corporation of America (NACA)—they can obtain a loan modification for you, the service is free (if you meet the criteria), but you have to be patient.

A typical ARM loan has an introductory period of discounted interest rate, followed by an interest reset after which the borrower's interest rate will jump-sometimes by a lot. Certain ARM mortgages also have prepayment penalties built-in if the borrower attempts to pay back a loan earlier.

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