TAMPA – Sept. 24, 2008 – As Congress hashes out the details of the mortgage bailout plan, another wave of problem loans will soon come crashing down, especially in Florida.
Nearly $100 billion worth of loans are deemed at risk for foreclosure during the next two years nationwide as borrowers with adjustable rate loans, called option-ARMs, see rates adjust, some ahead of schedule, according to a report released this month by Fitch Ratings.
Some borrowers with those loans are being notified now about payment changes, and the majority of those loans will reset in 2010.
“The average increase in mortgage payments will be 65 percent,” said Alla Sirotic, senior director for Fitch. “Payments could jump by as much as 100 percent for some people. If you can’t get out of the mortgage or pay that payment, you’ll be in default.”
This is of particular interest to Floridians hoping the government’s bailout will jump-start the state’s healing process after hundreds of thousands of foreclosure filings. That’s because many of the loans scheduled to reset are in the Sunshine State.
“California will be the hardest-hit, and Florida will be right behind,” Sirotic said.
So far this year, Florida has had 299,118 foreclosure filings, including default notices, auction sale notices and bank repossessions, according to California-based RealtyTrac. The state ranks second-highest for foreclosure filings among all states.
Nationwide, there have been 2 million filings this year. RealtyTrac, which monitors foreclosure activity, projects 2.5 million additional homes will enter foreclosure over the next year.
Until now, the bulk of the mortgage crisis was caused by subprime loans, those with high interest rates made to borrowers with poor credit. However, the borrowers at risk now typically had good credit but stretched their budgets using option-ARM loans.
Option-ARM mortgages offer customers a choice of payments, including extremely low payment plans for a set time, often five years. Those low payments are so small, they may not even cover the monthly interest charged. In that case, the borrower’s loan balance actually grows each month, even if they make payments on time.
Sirotic said some borrowers may be getting a nasty surprise. For some homeowners, when the amount owed on a home exceeds 110 percent of the home’s selling price, it triggers a rate increase. For others, the trigger is 120 percent.
As borrowers see their balances grow, they’re starting to hit those caps and prematurely set off interest rate increases. That translates to higher payments.
“So even if you think you have years before you deal with this, you may not have that long at all,” said Daren Blomquist, spokesman for RealtyTrac.
The government bailout plan may keep some of the risky mortgages from going into default, but no one knows for sure what the effect will be.
That’s not the intent of the plan, dubbed the Troubled Asset Relief Program, said Chris Lafakis, an economist with Moody’s Economy.com.
The proposal would give the U.S. Treasury secretary broad authority to buy up to $700 billion in troubled assets from any financial institution.
“This is to unclog the financial system so we don’t restrict the flow of credit to our economy,” Lafakis said. “This isn’t so much to avert foreclosures.”
The plan will, however, help the economy in Florida and in Tampa Bay, he said, by allowing lenders to make more loans and by giving consumers the confidence to borrow.
A bonus, he said, is that the government may be able to restructure the loans of some troubled homeowners, if it ends up buying their mortgages.
It’s a gamble for homeowners who face trouble in the future because there is no guarantee the government will end up owning their loans, Lafakis said.
The bottom line, said Mike Larson, an analyst with Weiss Research in Jupiter, is that the bailout is not a cure for Florida’s foreclosure problem, but it will “treat some of the symptoms.”
“The real cure is time and price,” he said. “Prices need to keep falling and this plan could help start the lending again. More people would buy, the real estate market would start to stabilize and fewer people would fall behind on their mortgages.”
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