Stop foreclosure homes has been one of the key statements made by Iowa Attorney General Tom Miller when he met with Obama administration officials and other state attorneys to discuss strategies in preventing mortgage fraud in his state.
Miller’s concerns about foreclosures intensified after getting more information about the resetting of pay option adjustable rate mortgage loans in the coming months and in the next couple of years.
While subprime loans caused most of foreclosures in the first months of the crisis, option ARM loans are now expected to drive foreclosures in the coming months and years.
In Arizona, according to its state Attorney General Terry Goddard, around 128,000 mortgage loans will reset within 12 months and many of them have already started resetting.
Pay option ARM loans are riskier than other ARMs because the loan principal keeps rising as months and years pass. Borrowers are making their monthly payments, but they are paying only the interest rates.
Aside from paying only the monthly interest, borrowers were also given teaser rates for the first few years. When their loans reset, they will be shocked to see that their monthly payments have increased by 5 to 10 times their initial monthly payments.
The remedy for borrowers who took out option ARMs is to refinance their loans under the Obama administration’s stop foreclosure homes program, but many option ARM borrowers have been deemed ineligible to refinance. Either their loan balances have increased much higher than the value of their homes or they no longer have the finances to pursue loan refinancing or loan modification.
According to Miller, the issue of option ARM loans was discussed at the meeting on mortgage fraud with U.S. Treasury Secretary Timothy Geithner, HUD Secretary Shaun Donovan, Attorney General Eric Holder and Federal Trade Commission Chief Jon Leibowitz.
Arizona Attorney General Goddard said most of the option ARMs were jumbo loans, as borrowers bought larger houses when they found out their initial monthly payments would be low. Most of them were assured that they can always refinance before their home loans reset to escape the scheduled rates which were much higher.
Goddard also said that incidents of mortgage fraud involving higher loans in his state have been rising because troubled homeowners are becoming more desperate. They are easily swayed by seemingly-reputable companies showing proofs of their strong performance in stop foreclosure homes programs.