A Call to ARMS

The media is picking up on the "Big Squeeze" in ARM resets over the next three years. In case you are not aware, here's the scoop- in 2006 there will be about 600 billion in resets, in 2007 and 2008 about one trillion in resets each year. Yes, you read that right- each year.

Here is a story I found in the "Orlando Sentinel. It gives you a brief outline of what the current outlook is for the typical homeowner faced with the reset quandry.

"Homeowners who were lured to so-called option ARMs during the big housing run-up by promises of extra-low monthly payments or 1 percent interest could soon face an ugly reality: mortgage payments that could more than double."

"This surprise could kick in early next year for those who took out these loans three years ago, mortgage experts predict. And that's not the worst of it: Borrowers who put little money down, took out option adjustable-rate mortgages and who live in areas where housing prices have barely risen or even fallen can owe more on their house than it's worth."

"There is a lot of concern in the industry and among regulators that a high percentage of people taking out these [mortgages] will have difficulty continuing to make these payments," said Allen Fishbein, director of housing and credit policy with Consumer Federation of America. "They will either figure out alternative ways to make payments or they will have to get rid of their homes."

"This adjustable-rate mortgage usually allows borrowers to choose among four payment options each month. They can pay only the interest or pay principal and interest based on a 15-year or 30-year term. Or they can make a minimum payment that does not cover the interest due. Unpaid interest is added to the principal, so each month the borrower ends up owing more. This is called negative amortization. It's this payment method that worries advocates and regulators. "

"Here's how the minimum payment works:Monthly payments are based on an artificially low interest rate of 1 percent to 3 percent. The actual rate being charged can be much higher and change monthly. Unpaid interest each month is tacked onto the principal, so the balance doesn't go down.Payments are fixed for the year. They adjust annually but usually cannot go up by more than 7.5 percent.At some point borrowers must begin repaying the principal. This usually happens at five years, but it can occur earlier if the growing balance reaches 110 percent or 115 percent of the original loan. "

"Borrowers who took out an option ARM in June 2003, for example, could hit this trigger in February or March, said Keith Gumbinger, vice president with HSH Associates, a provider of mortgage information. Once this happens the mortgage will be recalculated based on the larger balance, the interest rate at the time and years left on the 30-year loan. This is how borrowers can end up with payments more than doubling."

"For many, the solution will be to refinance into another type of mortgage that better suits their finances. But beware: Option ARMs often carry prepayment penalties that can be thousands of dollars if borrowers refinance within the first three years, Sweren said. "

Keep on eye on this subject as I believe that you will see the number of homeowners that simply cannot afford to stay in their homes either list them to sell or hand the keys back to the lender.