Tuesday, March 25, 2008

Watch out for those Neutron Mortgage Loans!

Watch out for those Neutron Mortgage Loans

It's no wonder people in the US are in financial trouble, read this one and you will be amazed - Long-fuse mortgage bomb
Americans who took out `option ARM' home loans will see monthly payments explode in coming years

New York–Joe Ripplinger took out a $184,000 (U.S.) mortgage in 2006 and makes his payments every month.

Now he owes $192,000.

The 66-year-old Minneapolis house painter has a payment-option adjustable-rate mortgage. It allows him to write a cheque for $565 a month even though he owes $1,300.

The difference is added to the mortgage, and when his total debt reaches $212,000, or after five years have passed, he said his monthly payment could jump to about $2,800, which he can't afford.

"We're barely making it right now," Ripplinger said.

The estimated one million homeowners with $500 billion of option ARMs are beyond the help of interest-rate cuts by Federal Reserve Board chair Ben Bernanke.

While subprime borrowers face an average increase of 8 per cent or less when their adjustable-rate mortgages reset, option ARM homeowners may see their monthly payments double after their adjustments kick in.

"We call them neutron loans because they're like a neutron bomb," said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. "Three years later the house is still there and the people are gone."

Once option ARM borrowers' loan balances reach a predetermined limit, called a negative amortization cap, usually 110 per cent to 120 per cent of the mortgage amount, their payment rates immediately increase. They also automatically shoot up after five years.

Otherwise, increases typically are capped at 7.5 per cent of a borrower's initial payment per year.

"These could be called long-fuse, exploding ARMs," said Kathleen Keest, former assistant Iowa attorney general and now senior policy counsel at the Center for Responsible Lending in Durham, N.C.

"I've heard people say they are the most complicated product ever offered to consumers. They are the real liar loans."

The loans accounted for 8.9 per cent of the almost $3 trillion in U.S. home loans made in 2006, up from 8.3 per cent in 2005, according to an estimate by industry newsletter Inside Mortgage Finance.

Originations of option ARMs fell 50 per cent during the first nine months of last year, the newsletter says.

"The problem is, you can refinance an option ARM to a 30- year conventional loan at a 5.5 per cent interest rate, and you're still looking at your payment going up 150 per cent," said Andrew Laperriere, managing director of New York-based research firm International Strategy & Investment Group.

"That's pretty ugly."

About $460 billion of adjustable-rate mortgages are scheduled to reset this year, with the next spike in resets coming in 2011, when $420 billion in mortgages will adjust to new interest rates for the first time, according to New York-based analysts at Citigroup Inc.

That's the year that Joe Ripplinger's payment will jump, provided he doesn't reach his negative amortization cap before then.

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