Thursday, November 8, 2007

ARMs Ready to Adjust, Lenders Respond to Troubled Borrowers

by Nancy Osborne, COO of ERATE

Almost $50 billion in adjustable rate loans are scheduled to reset this month alone, many of them in the notorious sub-prime loan category, and $100 billion are on tap to reset by the end of 2008. It is estimated that over half the effected borrowers do not understand how their loans will reset or what their new payments will be. Sadly it may come as a shock to many borrowers whose payments could rise as much as 50%. It is also believed that many of the loans which were underwritten right up until the sub-prime implosion came to a boiling point last August, may pose an even greater risk to both the borrowers and lenders of the more recently closed loans as guidelines were not revised and tightened until that time. Since the housing market peaked at the beginning of 2006, home prices nationwide have fallen by as much as 6.5% and are expected to continue descending into next year. This decline in home prices could prevent the more recent crop of borrowers from selling as the inventory of housing climbs and values fall to levels which may be lower than the original mortgage, particularly for those borrowers having contributed little to nothing towards their down payment. Surprisingly 50% of the foreclosures which have occurred have happened without borrowers having ever consulted with their lender, therefore many lenders are now proactively attempting to get in front of the foreclosure problem by heading it off at the pass.

Countrywide Funding, the nation's top mortgage lender, and the company seemingly at the center of the sub-prime mortgage calamity, announced recently a plan to either refinance or complete loan modifications on up to 80,000 loans. Countrywide has on its books approximately $16 billion in mortgages due to reset by the end of 2008. The advantage that Countrywide may have over other mortgage lenders is that they are likely both the funder and servicer of many of these loans, making the process of managing the problem loans much more streamlined for them versus other lenders who have more channels of authorization to go through in resolving their problem loans. Many investors will lose money in the loan modification process so they are not going to readily cooperate but could be forced to weigh this loss against that of losses occurring in the foreclosure process. Loans servicers are faced with a lack of qualified staff to help them in the loan modification process as loan counselors will need to be hired and trained in accordance with the lender's and investor's loan modification guidelines. It is believed that if loan servicers cannot beef up their staff quickly enough to meet the demand that they may be left with no alternative but to simply permit the high risk adjustable rate borrowers to have an additional 3 to 5 years of the initially low teaser rate payments before taking any further action. Lenders may also require that any unpaid interest under the original loan terms simply be deferred as negative amortization and wrapped into the borrower's principal loan balance. This would hopefully permit sufficient time to pass so that housing prices could recover as well as all the parties to the transaction.

Nancy Osborne,   Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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