Resets to Drive Up the Foreclosure Supply

The following article is an indication of why the resets are going to be a major problem for a significant number of home buyers, and in the process, inflict more anomalies to the housing recovery and the economy in general. Here are a few excerpts from the article:

From Bloomberg: Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.

Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its low minimum payments before resetting at higher costs later.

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008..California accounted for 58 percent of option ARMs, according to a report by T2 Partners LLC.

emphasis added

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