Bank Foreclosure Sales Expected to Rise, Report Says

by Peter Vernon on Foreclosure Crisis

Bank foreclosure sales are threatening to dampen all the progress that has been made towards the recovery of the housing market. A recently released report showed that the scheduled resetting of adjustable-rate mortgages (ARM) in 2011 is threatening the housing market to face another round of foreclosure.

These risky home loans will reset to higher payments, endangering thousands of borrowers into falling behind on their mortgage payments. The report noted that the resetting of about 70 percent ARMs, with a combined worth of $189 billion, would be a devastating setback to the housing market still reeling and scrambling to recover from the collapse that resulted to the financial crisis.

Data released by First American CoreLogic showed that option ARMS accounted for about 1.3 percent of the total mortgages. Option ARMS are used by a small segment of consumers compared with subprime mortgages.

Industry experts are hoping that because the option ARMs market is not that big, the fallout from the resetting may be manageable. However, because the housing market has not yet recovered from the subprime collapse, an additional burden, no matter what the size is, would lead to more bank foreclosure sales.

Options ARMs are loans that allowed borrowers to choose the amount of mortgage they want to pay every month. Majority of borrowers who took out this type of loan between 2004 and 2007 opted to pay less than what the interest due was. Some borrowers paid as low as 1 percent. But the loan is subject for resetting which means borrowers are required to start paying the full interest rate and the principal, resulting to significant high payments.

According to the report, an estimated $134 billion worth of option ARMS are scheduled to reset within two years. The report predicted that monthly payments after the resetting will increase by an average of 63 percent or $1,053 per month.

What alarmed industry analysts is that many option ARMS are in trouble even before adjusting. This indicated that some borrowers did not stand a chance of paying their monthly mortgages. As of April, over 35 percent of ARMs were delinquent for at least 60 days even if they have not reset.

Industry experts predicted that bank foreclosure sales will rise in states where home prices dropped the lowest, including Arizona, California, Nevada and Florida.

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