‘Pay option’ mortgages could swell foreclosures (over the next 2 years)

[sabra]

Source: MSNBC

New wave of defaults likely as risky loans reset to sharply higher payments

With 16 years' experience in the mortgage business, McGarry didn’t believe the “pay option” loan was a good deal for most of her customers, so she didn’t promote it. “I looked at it and I thought: I’m 60 years old. If I were in these peoples’ situation 10 years from now, where would I be?”

Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia’s Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the “Pick A Pay” loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said.

These “pay option” adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically “recasted” in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.

While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.

Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages “recast” to higher monthly payments over the next two years.

Read more: http://www.msnbc.msn.com/id/28035238/

[PSPS]

1. This is LBN?

The pay-option ARM "liar's loan" is how this financial mess got started. These joke "mortgages" started going bad in 2007 when the first of them started being recast. The biggest wave of these will hit between now through 2011. That's why now is the absolute worst time to buy a house because prices, which are still way too high, will continue to decline until at least then.

I guess MSGOP feels it necessary to begin breathlessly reporting this "late news" because of the pending change in administration.

[UpInArms]

2. ahhh - the lamestream media - late to the party again!

:eyes:

[AndyTiedye]

3. Almost Seems Like they Wanted More Defaults

Why pay double the commission for a loan like that, which is more likely to go into default?
Was Wachovia hoping for defaults, so they could pick up properties on the cheap?

[slackmaster]

4. People who originate loans have little reason to care whether or not a default occurs months later

Most loans get sold immediately after they are funded.

[AndyTiedye]

5. But Why Else Have Double the Incentive for a Riskier Loan?

[slackmaster]

6. My semi-educated guess is that non-conforming loans create less work at origination

The documentation requirements for a conforming loan are pretty strict. Junk loans like the one described in the OP don't have to meet the underwriting standards set by Fannie and Freddie, so on some level they are probably less of a hassle to set up.

[David__77]

8. The rate is probably higher.

They are more profitable in the short run. Until, of course, the value of the loans went into the toilet.

[AndyA]

7. And the American taxpayers are bailing out the very people who created the problem.

And they're arguing over how much of a bonus they're going to get.

Congress should insist that all CEOs of banks, financial instituations, major corporations, whatever...are terminated if any bailout money goes to their company. If they can't be more ethical and responsible than they've been, they shouldn't be allowed to keep their jobs, much less be paid bonuses.

And Congress needs to pass legislation immediately preventing these types of mortgages from recasting.

[David__77]

9. Why does the media act like foreclosure is akin to famine?

I don't get it. Even if a few million mortgage holders (otherwise called "home owners") revert to being renters, does this, in itself, mean that there's a new Great Depression? I don't think so. What has occurred is a large shift in wealth as a result of the credit bubble. The air is coming out, and nothing will stop that. There will inevitably be dislocations as prices come back into "normal" range tied to traditional price determinants. The key is not to keep everyone in the house they are currently in.

[slackmaster]

10. It's really an evaporation of paper wealth, and a calling in of debts based on it

Not really a shift, because there really are no direct beneficiaries.

The people who will actually win at the end of all this are those who are almost able to buy a home, and are waiting for prices to come down to a level they can afford.

[Doctor_J]

11. I know someone in the mortgage industry who claims they were "forced"

by the government to give mortgages to anyone who walked through the door. Something about being sued if they didn't.

I guess this article pretty much repudiates that bizarro claim.

:eyes: