As we are now noticing an end to the subprime mess, many are forgetting about another huge snowball that is coming our way in the U.S housing market.  Remember those loans called the Option ARM’s or Pick-a-Payments? 

Here’s some real estate news.  The majority of homeowners with this type of loan pay only the minimum payment, typically the reason why they applied for the loan in the first place.  It is easy to assume that most of their payments were the minimum.  When it exceeds a set level, or at a set date in the future (whichever comes first), the borrower must start paying the fully amortizing payment of the now much larger principal amount.  Monthly payment increases have been seen in the 50% range, which is dangerous to many people’s financial situation.

These mortgages are set for a huge catastrophe.  With U.S home prices an average of 23% less than what they were just a couple years ago, it will make it nearly impossible to refinance out of these loans due to having no or very little equity in their homes.  At the current time, the number of recasts for these loans is small, an estimated $1 billion per month.  This number is set to grow dramatically over the next couple of years, exceeding $8 billion per month in the 4th quarter of 2011. 

What do you think is going to happen when a mortgage payment goes from $2,500 to $3,500?  What if one or both members of the household have been laid off or have taken jobs paying less. 

The bank that will suffer the most will be particulary Wells Fargo.  The biggest originator for these terrible loans was Golden West.  Golden West was bought by Wachovia, one of their most devestating acquisitions.  Wachovia was absorbed by Wells Fargo.  Sub-prime mortgages were mainly sought by entry level homes.  The Option ARM’s and pick-a-payments were targeted by more upscale homeowners, or homes that did not qualify as being in conforming limits.  It is expected to be called the “Gated Community Catastrophe” .

With the real estate Obama housing relief plan, homeowners who are 5% underwater may still refinance, giving the homeowner a refi loan to value of 105%.  This does very little though as most homeowners are way more than 5% underwater, which will leave them what I call SOL or out of luck!

With the Options ARM’s, it is safe to say that a lot of these borrowers have already walked away from the homes.  Investors are refusing to pay when the crash started and feel that their home is now just a black hole, despite the payment concepts.

Expect to see this as a huge issue in the future which will have an impact on our recovery efforts.

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