I bought a “pay option ARM” loan a few years ago. Dumbest financial move I ever made.
As of last week I have two offers for $150K on my home, on which, after making “interest only payments” for 3 years, I still owe the full amount, $300K.
Bank of America wants $170 based on the BPO (buyer’s price opinion). No word from the buyers yet if they want to pay that much.
Thought: Anyone issuing a BPO should be forced to pay that much for the place if the bank can’t get what the bank’s agent says the buyer should pay.
Meanwhile, because I have both a 1st (an interest only pay option ARM) and a 2nd (HELOC), I am now getting two calls per day asking if I will make a payment. I tell them the same thing every time, as I have for the last 12 months:
This was my first home, so I took a lot of things on faith. I trusted the loan officer. I was told that I could afford the payments. My income has not changed in four years. When my adjustable rate loan adjusts, however, I will not be able to afford the new payments. That’s the problem with the 5/1 interest only pay option ARM.
My business decision, faced with this trap, was to stop paying a year early and try to negotiate, or take the foreclosure and save a year’s worth of payments from going into a black hole. No deal was reachable, despite three work out negotiation attempts … but perhaps the bank’s short sale counter offer of $170K would not have happened had I kept making payments for the last year. They turned down my only other short sale offer of $240K a year ago when I was still making payments.
With the option ARM, they want you to keep paying and have faith that something will work out when the rate adjusts. Nope. The way I see it, my lender already fooled me once. That’s enough.
What is a pay option ARM?
Imagine you were thinking of buying a home. Based on your income of $5000 monthly you may have calculated that you can afford $1600 per month and you went to LendingTree.com and saw that at todays rate you could buy a home for $210,000. Then you went to a mortgage broker and found out that this genius has a way for you to buy a home for $450,000 in a much better neighborhood with a pool and cobblestone driveways for THE SAME PAYMENT. You went for it, of course. What you were never told was that you were not really paying the mortgage every month, but borrowing from the bank every month so that you could afford to live there. This isn’t imaginary though, there are many people in this situation and they are about to lose thier homes.
The animal we are speaking about is the Pay-Option ARM. This is an adjustable rate mortgage where the borrower is given the option of paying principle and interest, interest only, or just the index (what it costs the bank to lend to you without profit.) In many cases, this index was as low as 1%. As you can imagine the payment is very low. (There are many types of pay-option ARMS, this is just an example but pretty standard.) The difference between what the true rate is and the minimum payment is put back onto the loan. In the case above, every month the borrower would pay the 1% at $1600 but every month $1800 was put right back into the loan. Once the loan amount reaches anywhere from 115%-125% of the original amount, or about $525,000 (about 40 payments) the lender takes away the ability to pay anything but the full principle and interest payments. So after about 3 years of living in a $450,000 home. The buyer’s payments go from $1600 to $3400 overnight. At a steady $5000 per month, this buyer is headed to foreclosure and owes $75,000 more than the original loan amount so has no equity to sell. – mdf
Can I sue B of A for the predatory lending practices of Countrywide and get my credit restored? That’s what should be happening here… but Countrywide no longer exists.
Here is another summary which fits my situation:
Defaults on a popular form of mortgage that gave home buyers a choice of how much to pay each month are rising and could rival those on subprime loans, potentially causing more trouble for investors and banks.
Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance, an industry publication. Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders.
Option ARMs typically were made to borrowers with higher credit scores than those getting subprime mortgages. But many of these borrowers were stretched thin even when they were making payments, and are particularly vulnerable to a weakening economy and falling home prices.
Here are some excerpts from Sen. Charles “Chuck” Schumer’s letter to Federal Home Loan Bank Chairman Ronald Rosenfeld.
… reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis. … Countrywide reportedly held $27 billion of “pay option ARMs” as of September 30, 2007, accounting for over one-third of the loans held for investment by the bank. Countrywide’s option ARMs were (and may still be) often underwritten with less than full documentation – according to UBS Warburg data prepared for the Wall Street Journal, 91 percent of Countrywide’s option ARMs underwritten in 2006 were “low doc.” It has been reported that delinquencies on Countrywide’s pay option ARMS are skyrocketing, jumping nearly 75 percent in the last quarter. – cnbc
How is my credit being damaged by a Countrywide con? The FBI is investigating:
“The FBI has been investigating potential fraud in the mortgage/sub-prime lending industry, however, we can not confirm or deny which companies are under investigation,” said FBI spokesman Richard Kolko. A law enforcement official told CNN that there are currently 16 companies being investigated. Both Countrywide and Bank of America (BAC, Fortune 500), which agreed in January to acquire Countrywide for $4 billion in stock, did not return calls to CNN. Calabasas, Calif.-based Countrywide is the nation’s largest home lender, responsible for roughly one-fifth of the mortgages in the United States. – cnn
In other words, the loan I bought looked great on the surface, but was a real lemon. We need a Loan Lemon Law to fix our credit!
How does an ordinary citizen go about creating a national law?
To get a federal law passed, it must be proposed by the House or Senate and signed by the President (or vetoed, and the veto overridden). Therefore, the only way to get into the system would be by contacting your state’s Senator or Representative in Congress. Make sure you have good notes on what you want to accomplish and how it will be done. – egd on yahoo answers
I propose we call it “the 2009 Consumer Credit Repair Loan Lemon Law”. Is there already something like this in the works?