Jerry, as you and Don have stated, the second wave of ARM mortgages are to be in full swing by September 2009. These were loans that were made at the end for 2007. Low interest loans that people got thinking they would only live in their current house for two to three years and then sell for a profit. Well when these balloons become due, people who are now struggling to make the payments will not be able to afford the increased payment. The banks are typically allowing people to stay in their homes for 3-4 months which is why forecasters are predicting the beginning of 2010 before any "relief" is seen.
I spoke to a real estate broker yesterday that told me housing values in my area have fallen 20% in the last year and to expect another 20% in 2009.
I believe there will be yet another wave, beyond the regular ARM mortgages that nobody seems to bring up anywhere. There was another form of ARM, which went by several names such as Option ARM or Flex ARM. Those mortgages gave usually 4 payment options each month: a minimum payment amount less than even interest only, interest only, payment based on a 15 yr payment, or payment based on a 30 yr payment. Those taking this type of mortgage were lured in by the very low minimum payments and the difference between what they paid and the interest only payment is tacked on to the principal each month. You were able to buy a lot of house with a very low payment, however those mortgages reset or recast as they call it, after 5 years. Those people have principal balances that have continued to grow while the values of their homes have dropped and they have not put any dent in principal at all. They are called negative amortization loans, whereas very simply, the principal grows instead of declines. There were a tremendous number of these loans done, and the majority were sold to the "sophisticated investors", which to me translates to people that thought they found a way to buck the system and buy a "McMansion". Those loans were typically of higher value than the normal loan, and hence there are billions of dollars out there on these loans that are also going to be heading into default probably between 2010 and 2012 by my calculations. I knew some people in the business that virtually sold nothing but this type of loan, since they were such an easy sale. I haven't heard nor seen any mention of these loans out there and I have a very bad feeling that in a few years we will be seeing more about those in the news also. Just one more obstacle to completely clean up the housing market and extend the period for complete stabilization or some reasonable facsimile.
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