Option adjustable rate mortgage loans worth around $230 billion are set to adjust to higher loan rates this year until 2012 and are expected to add larger numbers of foreclosed properties into the housing market which is already loaded with foreclosures.
Most of these option ARMs were offered to borrowers from 2004 to 2007, the years when home prices reached their highest levels and sustained the housing boom.
Large numbers of borrowers were attracted to option ARMs because these types of loans allowed them to make low monthly payments. The loans allowed many Americans to buy homes even if they lacked the income to sustain higher payments.
Option ARMs also prompted many homebuyers to buy larger houses even if their original plans were medium-sized or smaller homes. Many housing analysts contend that many homeowners whose houses have become foreclosed properties could have had easier time making their monthly payments despite the recession if they purchased smaller houses and took out smaller loans.
In the last few months, mortgage analysts said, there could have been many of the approximately 564,000 option ARM borrowers who defaulted on their loans, but the drastic drop of mortgage rates to historic lows gave them temporary reprieve.
Option ARMs automatically adjust to higher rates when they reach the preset date or when they exceed a preset total loan amount. The recent drops in mortgage rates enabled many option ARMs to escape increases that could have triggered the adjustment to higher rates.
According to market data, most option ARMs were taken out in states that have been topping charts of foreclosed properties since the start of the foreclosure crisis: Florida, California and Nevada. Home prices in these areas have also dropped to levels that have made many borrowers underwater.
The percentage of option ARMs in all mortgage loans is smaller than that of subprime mortgage loans – only three percent of all mortgage loans packaged and sold to securities investors in 2004 – but the percentage grew to 14 percent in 2007.
While many housing analysts fear another wave of foreclosed properties because of the impending adjustment of option ARMs starting this year, other analysts are taking a more positive view.
They argue that while the foreclosure of subprime mortgages shocked the housing market in 2007 and 2008, the longer adjustment period of option ARMs will prepare the housing market to handle foreclosed properties resulting from option ARM failures.
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