I was surfing the web yesterday and came across this YouTube video of a 60 minutes episode that must have aired recently. The episode was concerning a new wave of adjustable rate mortgages called option mortgages. These mortgages grew in popularity the last few years due to its payment flexibility. A borrower can choose to make payments that are less then the interest due on the mortgage. From a borrowers perspective this seems like a great deal. But According to TheTruthAboutMortgage.com:
What many borrowers may not understand is that paying the minimum payment each month is simply a way of deferring the interest, not avoiding it altogether. By paying the minimum payment each month, the accrued interest eventually stacks up against the borrower, while effectively building zero equity. And after five years of paying the minimum payment, the borrower would have a loan balance above their original balance without the flexibility of the minimum payment option.
What’s even worse is that many borrowers are currently defaulting on their 3% teaser rates that haven’t even reset yet. What’s going to happen when the interest rates reset? And like other exotic mortgages, option mortgages were sold in mortgage back securities that were purchased by major financial institutions. We may not have seen the worst in the Real Estate market yet. There will be a sharp rise in distressed properties that will overwhelm the market in the next few years. What can we do as Realtors? If you aren’t dealing with Short Sales now, then my suggestion is you start. Because if this article proves to be correct, short sales will be here to stay for some time.