Defaults on option ARM mortgages are expected to double in the next two years, driving foreclosure rates even higher.
NEW YORK (CNNMoney.com) -- They're known as "pick-a-payment" mortgages or option ARMs, but their detractors call them pure poison. Now their default rates, which are already high, are about to explode, according to a Fitch Ratings report issued Tuesday.
Option ARMs are loans that allow borrowers to make very low minimum payments that don't even cover the interest for the loans. The difference is then added to the mortgage balance, which grows every month.
There are about one million option ARMs outstanding, according to Fitch, and somewhere between 10% and 24% of these are seriously delinquent - 90 days or more past due.
But payments are slated to jump for large numbers of option ARM borrowers in the next two years, which Fitch predicts will double that delinquency rate.
"These things have their own private hell," said Keith Gumbinger of HSH Associates, a publisher of mortgage information. "The reset trigger is absolutely coming."……
….. Scale of the problem
During the boom, option ARMs were often the only way that borrowers could buy wildly appreciating real estate. Indeed, lenders actually approved these loans based only on whether borrowers could afford to make the minimum payments.
Homeowners were counting on the fact that the value of their property would continue to soar, so that they could either refinance or sell when the minimum payment option expired…..
