Adjustable Rate Mortgages Could Fuel The Next Wave Of Foreclosures

The record number of foreclosures may not include a large pool of adjustable rate mortgages that are scheduled to increase in the next few years. This ticking time bomb could cause an aftershock of foreclosures hitting the market in the future, even after the current wave ends. Dan Rafter from Mortgage Roadmap explains.

I'd like to think that we've seen the worst of the foreclosure crisis. I'd like to think that we'll be seeing fewer homes fall into foreclosure, and fewer homeowners missing their mortgage payments.

I'd like to think all that. Unfortunately, I can't.

What I really think is that the number of housing foreclosures is only going to rise in the coming months. And, unfortunately, many economic analysts agree with me.

A story in the Miami Herald focuses on the plight of homeowners who during the housing boom took out option adjustable rate mortgages. In these type of loans, borrowers can decide to pay less than what their monthly balance is. The difference is simply added to borrowers' outstanding loan balances.

The big problem — other than the fact that too many borrowers have delayed paying down the principal on their mortgage loans by using these products — is that many of these option adjustable rate mortgages are set to adjust to higher interest rates between 2009 and 2012. Many homeowners won't be able to make the higher monthly mortgage payments that result. At the same time, they won't be able to refinance because they won't have paid off enough on their home loans.

Because home values have fallen drastically over the last two years, many homeowners with these mortgage products will actually owe more on their homes than what they are worth.

Some financial experts believe that the wave of foreclosures we'll see from these loans will rival or better the wave we're seeing now.

This, of course, is just more bad news for an industry that's already reeling.

This article can also be viewed at Mortgage Roadmap.