Loan Modification Industry: Foreclosue and Default Loans Are Just Beginning

Despite what the politicians or the economist are saying the fact remains there is a second wave of bad loans that are soon coming due for a change.  These loans are far scarier than the ones that were approved in the subprime lending market. The two dangerous loans are called Alt A and Option ARM loans.  Let me define the two:

Alt A Loan products aimed at borrowers whose credit/other issues make them less suitable for a prime mortgage program

Option ARM a mortgage that, in the first year or several years of the loan, allows the borrower three or four options with regard to how much to pay on the loan each month

Both of these loans are dangerous but the most dangerous out of the two is the Option ARM.  Consider that fact that if there is a choice offered for a payment amount how many people would pay the lesser amount?  If a mortgage bank, in all of their infinite wisdom, gave you a loan with the implication that they have "your best interest in mind" why wouldn't you take the lesser option?  What do you have to loose, right?  WRONG!

• The first payment choice, the highest, is based on a 30-year amortization table;

• The second on a 15-year amortization table. These would correspond to payments for adjustable-rate 30 and 15 year mortgages, respectively.

• The third choice is an interest-only payment, which pays the interest that accrues during the month but pays nothing towards reducing the principal loan amount.

• The fourth choice, the one that makes this loan so dangerous, is called the "minimum payment." The minimum payment is calculated upon the first month's interest rate, which is usually a very low "teaser" rate that can be as low as 1-2%

Can you see why most borrowers with an option ARM choose the "option" to pay the minimum payment each month, enter the PROBLEM!

The interest rate on this loan is adjustable and can adjust every month. By paying only the minimum then the payment probably does not cover that month's interest.  The interest that is not paid is then dumped into the principal amount ofthe loan. As the principal amount of the loan grows the interest owed on the loan increases with it.  Now the borrower is in a negative amortization situation.  Now with the economy affecting the home values a house that is upside down (owe more on the home than the home is worth today) is even more upside down because of the negative amortization.

Most of these loans will mature for a change in 2010 this is when the real mortgage crisis will hit.  The government does not have an answer for this crisis for Pete's sake they are failing at this current crisis.  To the borrower I suggest, seek help and do your due diligence.