More middle-priced homes will be added to foreclosure listings in Pasadena and many other parts of California this 2009 and in the next couple of years, according to studies of mortgages and foreclosures in the state.
In California, many borrowers who purchased their homes with Alt-A loans and pay option adjustable rate mortgage loans are expected to face foreclosures when their monthly payments soar to unaffordable levels. With the scarcity of jobs, many of these borrowers are expected to see their houses get added to foreclosure listings in the last months of 2009 and in the next couple of years.
This contention is supported by Fitch Ratings when it said last week that home prices in California and in many other states will go down further because of continued foreclosures.
An Alt-A home loan is typically given to borrowers who have lower credit scores, incomplete documentation and high loan-value ratios. Some Alt-A borrowers have good credit but lack loan documentation.
A pay option ARM, meanwhile, is an adjustable-rate loan that allows the borrower to choose one among four initial monthly payment options: an interest-only monthly payment, a pre-determined minimum payment, a 15-year amortizing payment, or a 30-year amortizing payment.
Option ARMs are also offered with extremely low interest rates for the first 12 payment months. During the housing boom, this option enabled many borrowers to buy homes beyond their financial capabilities. Aside from subprime loans, this loan option also caused the addition of many houses to foreclosure listings.
In Pasadena, many Alt-A loans and pay option adjustable-rate loans were used to buy middle-priced houses by borrowers who are expected to just allow these homes to get added to foreclosure listings when they re-adjust in the coming months.
A good illustration of a risky loan taken in Pasadena is an $800 mortgage loan provided by IndyMac to a borrower who bought a 2,000-square-foot two-bedroom condo for a staggering $1 million in January 2007. The borrower had only $100,000 for down payment, so IndyMac loaned another $100,000 to make the $1 million payment.
What is more staggering is that the borrower was able to borrow a home equity loan of $188,000 from E-Loan just after six months of the original loan.
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