The Next Wave of Foreclosures!
If you have not seen it already, there are already talks about the next wave of foreclosures! It is pretty scary. Basically, it all has to do with the resets of the Alt-A and Pay option arm loans!
What are these?
Alt-A: These are the loans which were given to individuals whose credit score was not good enough for a regular loan, but did not have a credit score which would put them at “High Risk.” Therefore, a loan category was created for these people called “Alt-A.” A majority of these loans reset within 3 to 5 years from the origination date. As you can see - 2009 is when we see a lot of these!
Pay-Option Arm: These loans are actually regular loans! What made these “Creative” was that an individual had an option of which of 4 payments they wanted to make. They paid one of the following payments: interest only, fully amortizing 30 year conforming loan, fully amortizing over 15 years, or a starter low interest rate (as low as 2%) for a small period of time which was negative amortization. Most people as you can imagine were paying only the 2% payment. A number of people foreclosed even at the low 2% rate because they weren’t even able to afford that amount! When are these going to reset you may ask? A majority of these loans will also be resetting within 3 to 5 years from the origination date. So again – around 2009 is when we start to see them.
What is negative amortization?
Instead of your principal being paid off a little bit every time you make your monthly payment, your principal actually increases every time you pay your payment. Why? The true interest is 6.5%, for example, and you are only paying 2%. Therefore, that 4.5% that you are not paying gets added onto the principal!
What does this all mean?
It means be very scared - be very very scared! We need to see legislation that will help all of these individuals before the surge of resets starts up again. So as the subprime loans resets begin to dissipate we are going to see this surge from Alt-A and Pay Option Arms.
What are your thoughts on this? What do you think should happen? I would love to hear from you. You can either leave a comment right here or email me at psingh@rempower.com!
I will look forward to seeing you in a future workshop!
Prabhjit Singh
Prabhjit Singh