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By Kevin G. Hall~McClatchy Newspapers
Call it son of subprime. Experts warn that a new wave of mortgage foreclosures may be coming soon and could rival the default rates for subprime mortgages and slow efforts to find bottom in a prolonged national housing slump.
The mortgages in question are $230 billion of option adjustable-rate mortgages, creative lending products that flourished at the height of the housing boom. In an option ARM, a borrower can opt to pay less than his or her monthly balance due, and the difference is tacked onto the outstanding loan balance.
Many experts had expected an explosion of defaults in the springtime on these roughly 564,000 outstanding mortgages. However, interest rates dropped to historic lows, and that delayed the detonation of what many housing analysts still see as a ticking time bomb.
“They’re probably going to default at a rate that makes subprime look like a walk in the park,” warned Rick Sharga , senior vice president for RealtyTrac, a foreclosure research firm in Irvine, Calif.
Option ARMs have triggers that reset to a new interest rate based on either a set timeframe or when debt exceeds some cap above the loan’s value. The spring drop in interest rates allowed many borrowers to escape a day of reckoning because the lower rates prevented a triggering of that cap.
That just postponed the problem, however, because most option ARMs have five-year automatic trigger dates. These loans were most prevalent in states such as California , Florida and Nevada , where home prices have sunk so far that many homeowners are underwater: They owe more than their homes are worth.
