Besides Foreclosures – Bay Area Residents have Another Thorn in the Eye
The situation is getting only worse what with people losing jobs faster than ever. This has triggered off a wave of foreclosures in various regions of the country. Now, another bad news is that in Bay Area people had taken a loan that is popularly known as Adjustable Rate Mortgage (ARM). In 2010, many of these mortgages will readjust, slapping borrowers with very high monthly bills. Experts observe that this is a time bomb waiting to burst and could trigger off a very high tide of foreclosures. Statistics reveal that the Bay Area residents had taken these risky loans.
The senior director of marketing in San Francisco at First American CoreLogic, Bob Visini, says that between 2004 and 2008, one person in five who had taken a mortgage in San Francisco received an optional ARM. This was twice what the nation had witnessed.
According to New York research firm, Fitch Ratings, there are 10 metros where a large majority of residents had taken the adjustable mortgage option. Of these, three are in the Bay Area. Contra Costa and Alameda in the East Bay and San Benito and Santa Clara in the South Bay, Marin, San Francisco and San Mateo are some of the regions.
Now the question that arises is why should ARMs be clustered around one region. The senior director at Fitch Ratings, Alla Sirotic, says there are certain regions in the US where home prices shot up rapidly. At that time, the lenders designed these adjustable mortgages to help those whose income fluctuates, for instance, those who received payments on commission. These loans, therefore, became a tool in the hands of those who could not afford to buy homes, yet wanted to.
These option ARMs allow a person to make low payments on the monthly mortgage in the initial years. During this five year period, the homeowners can choose what they pay. They can pay interest along with principal or just the interest. He can even pay a minimum amount.
Fitch says that most of the borrowers offered to make the minimum payment. The shortfall ultimately balloons and gets added to the balance amount. This phenomenon is known as negative amortization. After the five year period, the balance reaches a certain level and borrowers have to make the entire payment, covering both interest and principal. The new payment is usually about 63 per cent higher but in some cases, it could be even double the amount.
