It now looks like the coming wave of foreclosures will be headed by homeowners stuck in an Option Arm, Negative Amortization (Neg Am) loan. These are mortgage loans whereby the homeowner has the option of paying less than an interest only payment and the difference is added onto the principle balance. In a short period of time, this causes the principle balance to balloon upward; often to as much as 120-125% of the original loan balance.
The combination of an increasing loan balance and a decreasing property value leaves many homeowners owing more than their property is worth. Attempts to refinance out of these loans are usually met with failure as tightening lending standards prevent a refinancing from occurring when there's no equity in the property. In addition, many of these loans were given to people on Stated Income loan programs, which have disappeared in the current banking climate. Currently, borrowers must prove their income to have any hope of obtaining a mortgage loan.
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The latest figures show almost 10% of all homeowners stuck in a Neg Am loan are now in default. This is almost 3x's the default rate on loans which are not negatively amortized. These homeowners are soon going to be foreclosed upon in massive numbers as the majority of Neg Am loans will "reset" in 2010 and 2011. This is when the loan payment jumps up to a mandatory principle plus full interest payment amount. States where real estate values skyrocketed between the late 1990's and 2006, such as California, Nevada, Arizona and Florida, will be especially hard hit. Throw in the rising unemployment rate, which is now at 10.2% Nationally, and over 12% in California and Nevada, and homeowners unable to obtain a loan modification will find it increasingly difficult to keep their home.
Educating yourself as a homeowner on how to successfully complete a loan modification, is the only way most people with a Neg Am loan are going to be able to keep their home. 90% of all people eligible for a loan modification are being turned down by their bank. All that is needed to turn that around, so that 90% of the eligible people are successful in their loan modification attempt, is the application of the right techniques and strategies. The bank must be made to understand the legal and financial costs of foreclosing are greater than the cost of modifying the loan.
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