Foreclosures are just one front to this economic war that the country is currently fighting. This first began in late 2006 and early 2007 following the resetting of many sub-prime adjustable mortgages. These mortgages provided a vehicle for many real estate speculators to hold property for a short term paying a low monthly payment until they could sell the real estate which would appreciate exponentially…or so we thought?
Most of the first wave of foreclosures that began in 2007 are now through the judicial foreclosure process and are now real estate owned (REO) assets that institutional lenders are trying to unload, most typically, at a firesale price. What is particularly disturbing is the next wave in the foreclosure mess stemming from what are referred to as “Pick A Pay” loans.
This particular loan offered borrowers an option as to a choice of payments each month. Most borrowers did not know that these loans carry a hefty price to picking your payment which is Negative Amortization. If the homeowner opted to pay less than the full monthly amount, the difference is then added to the principal amount due. The problem occurs when these loans readjust. The new payment amount is based not on the original principal amount borrowed, but the original principal amount plus the added on difference and that total amount is then financed at the much higher interest rate. Most of these loans, unlike the sub-prime loans, do not readjust for five years. Thus the borrower has added to their principal amount due and now has to pay a much higher monthly payment which for most individuals, in this economy, is impossibile.
Therefore, what is needed is more aggressive modification of these loans. In other words, modification programs that work! Most of the programs currently available do not offer a realistic opportunity for borrowers to truly be able to afford their home and stay in their home.
Most of the modification programs involve lowering payments in the short term and adding on the difference to the end of the loan. These missed payments are just deferred and are not part of the amount that interest is calculated against. But with the Negative Amortization loans, deferred payments have been added to principal before the new monthly payment is calculated. What may be needed is a moratorium on readjustment of interest based on the increased principal amount. Unless these loans are dealt with soon, most will readjust to exploding higher payments in 2009 or 2010.