Principal Payments Need to Be Factored In

There's still one more issue to address, and that's higher payments when the interest-only period ends. For example, a 5-year ARM loan typically goes from interest-only payments to interest + principal amortized over 25 years on the first rate reset. Likewise, a 3-year ARM loan typically goes from interest-only payments to interest + principal amortized over 27 years on the first rate reset. Some ARMs have a 10-year interest-only period, which postpones this particular problem.

Across the board, those in 3-Year ARMs with principal and interest payments will likely see their total mortgage payment drop. However, those paying interest only, especially those in 5-1 ARMs, may see their total payments rise. Even so, the situation has hugely improved from a year ago.

Pay Option ARMs Still a Problem



The problem with Pay Option Arms is over 80% of POA mortgagees only make the minimum payment. Given that minimum payments typically don't cover interest owed, the loan balance increases every month. This is called negative amortization, and it's been going on for years.

Negative amortization is compounded by falling home prices. At some point, typically 110-125% of the mortgage, an enormous "gotcha" kicks in. That "gotcha" requires a fully indexed, fully amortized principal and interest payment, amortized over the remaining years. People who could only afford the minimum payment will be forced to pay principal, plus interest, on top of a loan balance that's been growing monthly. Good luck on lenders getting all their money back on those loans.

The second problem in regards to POAs is that a huge portion of these loans originated if the least affordable, biggest bubble areas, like Florida, California, Las Vegas, etc. From a lender's perspective, that hugely increases the likelihood of default, as well as the size of the problem, should default occur.

Conclusion

Other than the ticking time bomb of Pay Option Arms (which is still a huge problem, especially for California), the ARM reset problem has vanished for as long as rates stay low, or permanently if ARM holders roll over into affordable fixed-rate mortgages. (For more on this, see ARMs Reset Problem No Problem at All.)

Unfortunately, reset issues aren't the only problem. The economy is still losing 600,000-plus jobs a month, and for every job lost, there's another person who might be shoved into foreclosure as a result.



In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.