Interest Only Loans Equal a Recipe for Default24 January 2005
Foreclosures.com, a California-based investment advisory firm specializing in distressed properties, warned today that the growing popularity of interest only home loans in the sub-prime mortgage market may trap unwary New York metro area homebuyers into situations from which the only exit is default and foreclosure.
"These loans are very seductive," said Foreclosures.com president Alexis McGee. "They offer below market interest rates for two or three or five years, with no reduction of principal, and then convert automatically into fully amortized loans for the balance of the 30 year term." Ms McGee went on to say that one result is that homebuyers can wind up with homes that they simply cannot afford, when the loans switch into "real world" mortgages.
She cited recent reports from Dominion Bond Rating Service in Wall Street. The firm also does risk assessment on mortgage-backed securities. "Dominion's report warns investors of potentially high default rates as two and three year interest only loans reset. They point out that payment shock would result as monthly payments increase by as much as 50% to 70%." She added that the problem would be exacerbated by the fact that the amortization period would then be 25 or 27 years, rather than 30 years, requiring larger payments toward principal.
"Dominion cited an actual three year interest only $350,000 loan that closed last September, with the borrowers qualifying at 4%. In the 37th month, their payment would jump from $1,167 per month to $2,184 per month. That's a recipe for default." She estimated that the biggest problems would likely occur in Queens, Brooklyn and on Long Island, where there are more owner occupied dwellings.
Ms. McGee said her firm was just as interested in preventing needless foreclosure activity as in showing investors how to profit from investing in foreclosure properties. "For example, we have an investor client, who purchased and resold 11 houses last year. But, more importantly, she showed 21 other families how to solve their default problems and keep their homes (and didn't charge them a cent for her help)."
Foreclosures.com has been tracking foreclosure activity and assisting investors since 1992. In addition to the New York metro area, the company serves markets in all of New Jersey, Chicago metro, Phoenix metro, Las Vegas metro, and in selected major California counties.
Contacts
Foreclosures.com
Alexis McGee, 916-860-1122
Source: Business Wire
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