Tidal Wave of New Defaults In High-End Homes

Fauquier County, Warrenton, and the surrounding area needs to take heed; the first waves of a long-dreaded tsunami of new defaults are washing up on our shores. As a market where prices soared during the housing boom, this “wall of water” is poised to bring the nightmare of foreclosure to higher end areas that rarely see “bank-owned” yard signs.

These defaults result, in part, from the recasting (resetting of the interest rate and principal amount owed) of a loan type called Option ARMS. In addition to the “teaser” entry-level rate, these loans also carried a feature called “negative amortization.” The homeowner had the option to pay less than what was a “full monthly payment.” Most opted to pay less than the full monthly amount and the result was that the difference was tacked onto the principal: when the loan “resets” in the five or ten-year term borrowers find themselves locked into a new, much higher, set monthly payment.

Many buyers, caught up in real estate frenzy, ignored or failed to appreciate the risks involved with this type of loan, in this “era of real estate.” Instead of rising, values fell leaving Option ARM borrowers “upside-down” and time has run out, as the five year “reset” arrives.

More than $750 billion of option ARMs were originated between 2004 and 2008. From published reports, approximately $29 billon worth of loan will “reset” in the time-period September 1, 2009 through December 31, 2009. Predictions for 2010, which are based on detailed recent history, indicate that another $67 billion in loans will increase their monthly payments, approximately $1,000, in 2010. That would appear to indicate that these modifications will continue at an annualized pace of $150 billion per year through 2013.

Early reports on these “resetting loans” show a 40% delinquency rate now. What will the affect be as these increased payments pile on top of each other, and there is no appreciating market to relieve them. Prices in this price range are doomed to decrease in the short term, with possibilities of continuing through 2013.

Don Khoury

info@realestatephd.com