The End of The Payoption Arm FINALLY!

It amazes me that almost 1 year since the implosion of American Home Mortgage (that king of the pay option arm) that Wachovia was still offering their version of a "Pick-a-Pay" loans. Today, Wachovia finally stopped offering these destructive loans. Yes those famous loans with those tantalizing minimum payments that don't even cover monthly interest on the loans. In fact, with every payment your balance grows until in most cases your loan recast. This spells doom for homeowner and ultimately leads to high foreclosure rates among loan holders.

Below I will try to define some of the terms associated with a pay option Arm.

Option ARM loans have four major types of payment options:

* Minimum Payment

With the minimum payment option, your monthly payment is set for 12 months at your initial interest rate. After that, the payment changes annually, and a payment cap limits how much it can increase or decrease each year.

If you make the minimum payment after the end of your initial interest rate period, which usually holds only for the first 1 to 3 months, it may not be enough to pay all of the interest charged on your loan for the previous month and the unpaid interest will be added to the principal balance you owe (will be deferred).

* Interest-Only Payment

With the interest-only payment option, you can avoid deferred interest, when the minimum payment is not enough to pay the monthly interest due. The interest-only payment option, however, is not available if the interest-only payment would be less than the minimum payment. Please note, that this payment option does not result in your principal reduction.

The interest-only payment may change every month based on changes in the ARM index used to determine your fully indexed rate.

* Fully Amortizing 30-Year Payment

With fully amortizing payments, you pay both principal and interest and keep your loan on schedule. Your payment is calculated each month based on the prior month's fully indexed rate, loan balance and remaining loan term.

* Fully Amortizing 15-Year Payment

If you prefer to put your loan on an accelerated schedule and can afford higher monthly payments, the 15-year payment option allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.

There are many variations of this innovative home financing product on the market: PayOption ARM, CashFlow Option Loan, 1-Month Option ARM, Flex 5 Home Loan, Pick-a-Paymentsm Loan, 12 MAT ARM, Option Power ARM, FlexPay® 12 MAT, FlexPay® 3/1 LIBOR ARM, OptPAY ARM, etc.

Option ARM loan programs vary in the initial rate, negative amortization and lifetime caps, ARM index, or optional features, however, when comparing one option ARM with another, pay close attention to the margin and the fully indexed rate. Keep in mind that the initial interest rate holds only for the 1st month. This is how so many homeowners got tricked into the loan.

Loan Term

Option ARM loans are available for 40, 30 or 15 years.

Initial Interest Rate (Note Rate)

Your Minimum Payment Rate or 'Start Rate'. It may vary from 1.25% up to 3.95% and depends on your Loan-to-Value Ratio (LTV).

With hybrid option ARMs, that use a different minimum payment calculation method, your initial rate is usually higher.

Initial Interest Rate Period (Introductory Period, Initial Fixed-Rate Period)

Option ARM loans are available with an initial introductory period, usually of 1, 3 or 6 months, after which the interest rate may change.

Notes:

* Some option ARM were offered without any introductory period, so the fully indexed rate (FIR) is effective immediately.
* The initial Fixed-Rate Period should not be confused with Initial Fixed-Rate / Fixed-Payment Period, a typical feature of hybrid option ARMs.

Examples:

* With 1-month option ARMs that have a 1-month introductory period, the first interest rate change occurs when the 1st monthly payment is due. Thereafter, the interest rate may change monthly.
* If you have a 1-month option ARM loan with a 3-month introductory period, the first interest rate change occurs when the 3rd monthly payment is due. Subsequent interest rate changes may occur each month thereafter.

During the introductory period: After the introductory period:
Monthly Payment = Minimum Payment
Interest Rate = Start Rate

Monthly Payment = Minimum Payment
or Interest-Only Payment
or Fully Amortizing 30-Year
or Fully Amortizing 15-Year
Interest Rate = Fully Indexed Rate

What is a Recast? A feature in some types of mortgages where the remaining scheduled principal and interest payments are recalculated based on a new amortization schedule. Some mortgages may allow for a recast in order to help a financially distressed borrower, in which case the interest rate might be reduced and/or the remaining term of the mortgage extended. Most often, a recast is associated with a negative amortization mortgage which must recast at some point so that the mortgage will be paid off by the end of its scheduled term.
Investopedia Says... Payment option ARMs are popular negative amortization mortgages with recast features. Most payment option ARM’s have a scheduled recast in month 61. Additionally, they have triggers that might cause an unscheduled recast to occur if a negative amortization limit is reached. For example, if the principal balance of the loan reaches a set limit through negative amortization, a recasting of the mortgage is triggered.

UpsideDownFlorida Founder Featured on NPR MarketWatch

Although this was taped awhile ago many readers have mentioned the segment so I thought I would post it on here. It details the unintended consequences foreclosure can bring to a community. I am looking forward to doing a follow up to the alternatives to foreclosure namely short sales and loan modifications.

Just click on the button below to listen.

http://marketplace.publicradio.org/display/web/2008/04/29/condo_fees

Success!

Today we got the exciting news that we got one of our clients approved for a loan modification with HSBC. The borrower originally started with a 7.45 rate that adjusted to 12.5 in just 18 months after his initial fixed period expired. The borrower was on a "2/28" or a loan that was fixed for the first two years and then became adjustable. In many cases these loans have rates that can adjust 1.5 points higher every 6 months. The worst part...they NEVER adjust below the floor rate or start rate of the loan. So even if rates go lower, they will not adjust down in all cases.

These loans are so toxic that they are no longer written by banks and lenders. In fact, many of these loans were paired in combo loans or 80/20's. In this case, many homeowners face an adjusting first mortgage payment and cannot refinance because their two mortgages total more than their home is worth. Until now, homeowners had few choices, they could either pay the higher mortgage payments or walk away. At UpsideDownFlorida we can help you determine if a loan modification will work for you while saving you hundreds of dollars monthly.

Short Sale and Your Credit Score

Recently, I have been getting several inquiries into the effects of a short sale on your credit score. I do want to preface this by stating everybody's situation is unique and thus generalizing may be over simplifying the situation. If you have always had excellent credit and continue to pay your other accounts (Cars, Credit Cards, Student Loans, etc.) on time you are likely to see a relatively minor impact on your credit. One of our recent clients had a short sale approved on their home in March and currently has a 751 beacon score. That is down about 30 points from the 780 they had previously. Understand in this situation the borrower had impeccable credit entering the situation. In this case below from Americas Servicing Company (ASC) you can see how the account was reported:

Address:
AMERICAS SERVICING CO
7485 NEW HORIZON WAY
FREDERICK, MD 21703


Address Identification Number:
04xxxxxxx

Status:
Transferred,closed/Paid,Closed.


As for a Foreclosure the damage is much more severe.

With a Foreclosure or Deed-in-Lieu of Foreclosure your credit score suffers significantly more than doing a short sale.
Homeowners will take a hit of 300 to 350 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380. In addition it becomes a public record and the judgment remains on your credit report for 10 Years.

Home Prices Take a Big Hit in South Florida

With a 27 percent drop in Miami housing prices since 2007 (For the purposes of this report, Miami includes Broward and Palm Beach counties) we are now approaching a reduction in values of almost 40% from the highs in 2005. South Florida has been mired in a housing slump for more than two years with no recovery in Site. The real estate downturn, along with higher fuel prices and a shrinking job market, is taking a toll on consumers and the economy and thus adding to more fuel to the fire.

In today's Ft. Lauderdale Sun-Sentinel this was reaffirmed with a quote from James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut.

"There's such an excess of inventories that we certainly expect to see more price declines. The economy is still weakening and housing still looks pretty weak."

To most Floridians this unfortunately does not come as a surprise as the real estate crash has impacted so many families irrelevant of income, credit or profession. At UpsideDownFlorida we want homeowners to understand you are NOT alone and there are alternatives to simply walking away. We specialize in fixing your mortgage problems and you never pay if we can't help you. To see your city's depreciation in 2007 see below:

City	# of Homes	Sales Volume				Median
		2008 (YTD/projected)		2007	+/-	2008 YTD	2007
Atlantis	1,237	17	41	46	-10.9%	$ 275K	305K
Belle Glade	1,879	18	55	65	-15.4%	$ 69K	142K
Boca Del Mar	4,629	70	163	178	-8.4%	$ 275K	363K
Boca Raton	36,718	563	1190	1,571	-24.3%	$ 370K	420K
Boynton Beach	29,179	508	940	1,600	-41.2%	$ 161K	218K
Cloud Lake	43	0	0	2		$ 0	220K
Coconut Creek	19,551	434	800	1,328	-39.8%	$ 130K	215K
Cooper City	9,680	147	348	401	-13.2%	$ 300K	350K
Coral Springs	37,076	761	1803	2,384	-24.4%	$ 304K	291K
Dania Beach	8,720	143	267	562	-52.5%	$ 155K	225K
Davie	25,984	395	828	1,596	-48.1%	$ 272K	259K
Deerfield Beach	32,129	784	1654	1,787	-7.4%	$ 80K	179K
Delray Beach	26,847	420	848	1,170	-27.5%	$ 205K	250K
Fort Lauderdale	67,066	1494	3070	4,731	-35.1%	$ 285K	342K
Glen Ridge	73	1	0	0		$ 105K	0
Golf	144	2	0	5		$ 1.3M	856K
Greenacres	13,694	254	493	669	-26.3%	$ 140K	188K
Gulf Stream	453	4	6	22	-72.7%	$ 1.6M	1.4M
Hallandale Beach	21,994	541	1198	1,717	-30.2%	$ 185K	294K
Haverhill	528	12	25	28	-10.7%	$ 215K	240K
Highland Beach	4,033	77	175	187	-6.4%	$ 432K	568K
Hillsboro Beach	2,199	36	87	75	16.0%	$ 300K	397K
Hollywood	51,468	1068	2390	3,246	-26.4%	$ 208K	260K
Hypoluxo	2,050	46	95	83	14.5%	$ 172K	210K
Juno Beach	2,450	46	86	88	-2.3%	$ 260K	400K
Jupiter	23,903	492	1049	1,156	-9.3%	$ 269K	320K
Jupiter Inlet Colony	229	6	9	11	-18.2%	$ 726K	1.1M
Lake Clarke Shores	1,456	21	54	62	-12.9%	$ 283K	294K
Lake Park	2,067	40	88	82	7.3%	$ 150K	199K
Lake Worth	9,788	193	392	456	-14.0%	$ 136K	199K
Lake Worth Corridor	2,560	49	84	206	-59.2%	$ 307K	220K
Lantana	3,663	70	144	142	1.4%	$ 172K	207K
Lauderdale Lakes	11,755	215	390	580	-32.8%	$ 69K	110K
Lauderdale-by-the-sea	5,657	116	259	251	3.2%	$ 384K	400K
Lauderhill	23,069	393	820	1,380	-40.6%	$ 105K	135K
Lazy Lake	16	1	0	1		$ 800K	949K
Lighthouse Point	5,174	93	189	251	-24.7%	$ 528K	415K
Loxahatchee Groves	774	6	11	37	-70.3%	$ 200K	349K
Manalapan	191	11	22	10	120.0%	$ 2.0M	3.8M
Mangonia Park	443	4	8	26	-69.2%	$ 111K	80K
Margate	21,487	419	898	1,164	-22.9%	$ 152K	190K
Miramar	35,440	760	1557	2,507	-37.9%	$ 260K	300K
North Lauderdale	10,526	204	406	767	-47.1%	$ 137K	220K
North Palm Beach	6,585	106	249	226	10.2%	$ 240K	275K
Oakland Park	14,649	317	686	1,039	-34.0%	$ 142K	177K
Ocean Ridge	1,025	15	29	29	flat	$ 650K	850K
Pahokee	994	9	19	33	-42.4%	$ 75K	72K
Palm Beach	7,624	146	324	387	-16.3%	$ 1.1M	1.2M
Palm Beach Gardens	22,483	460	1056	1,233	-14.4%	$ 290K	320K
Palm Beach Shores	734	8	13	35	-62.9%	$ 350K	450K
Palm Springs	5,833	69	122	277	-56.0%	$ 79K	142K
Parkland	6,976	190	432	705	-38.7%	$ 640K	729K
Pembroke Park	1,353	47	67	149	-55.0%	$ 55K	60K
Pembroke Pines	54,370	1018	2098	3,189	-34.2%	$ 240K	270K
Plantation	29,229	447	1016	1,396	-27.2%	$ 215K	250K
Pompano Beach	42,690	872	1969	2,484	-20.7%	$ 165K	211K
Riviera Beach	11,657	238	437	699	-37.5%	$ 207K	250K
Royal Palm Beach	12,223	313	638	622	2.6%	$ 220K	264K
Sandalfoot Cove	4,564	67	156	210	-25.7%	$ 195K	266K
Sea Ranch Lakes	206	2	16	8	100.0%	$ 1.2M	1.4M
South Bay	550	5	14	20	-30.0%	$ 115K	119K
South Palm Beach	1,617	23	40	48	-16.7%	$ 295K	269K
Southwest Ranches	2,151	30	63	82	-23.2%	$ 500K	892K
Sunrise	33,119	666	1450	2,206	-34.3%	$ 139K	208K
Tamarac	30,138	610	1236	2,009	-38.5%	$ 154K	194K
Tequesta	3,100	50	122	120	1.7%	$ 235K	274K
Uninc. Broward	3,173	89	176	196	-10.2%	$ 144K	216K
Uninc. Palm Beach (East)	78,353	1336	2779	4,026	-31.0%	$ 130K	219K
Uninc. Palm Beach (North)	7,347	151	315	322	-2.2%	$ 246K	324K
Uninc. Palm Beach (Northeast)	19,811	322	640	835	-23.4%	$ 265K	345K
Uninc. Palm Beach (Southeast)	11,411	184	341	599	-43.1%	$ 304K	415K
Uninc. Palm Beach (West)	159	2	10	5	100.0%	$ 78K	70K
Wellington	18,756	398	833	1,165	-28.5%	$ 324K	380K
West Boca	44,335	726	1684	1,821	-7.5%	$ 191K	255K
West Boynton	26,039	432	849	1,138	-25.4%	$ 235K	305K
West Delray	31,235	592	1291	1,309	-1.4%	$ 100K	172K
West Palm Beach	35,703	716	1372	2,457	-44.2%	$ 221K	254K
West Park	4,090	75	161	292	-44.9%	$ 160K	215K
Weston	22,429	423	1276	1,629	-21.7%	$ 381K	401K
Wilton Manors	4,648	131	262	505	-48.1%	$ 219K	374K

Source: http://southflorida.blockshopper.com/cities/