If unemployment doesn't increase bigtime, these option ARM mortgages really shouldn't cause the same kind of problems as the Subprime mortgages. Most of these borrowers would not like to destroy their credit history and would have known that their repayments would increase significantly after the 'honeymoon' period so to speak. I'm not sure what kind of deposit most of these mortgages required though and the big issue is whether or not they feel their negative equity is insurmountable to point where they hand back their keys to the bank. From what I have read, in the case of an average size home loan in America, the exit fees would in most cases be less than $10000 if they want to refinance and the reduced interest rate would take care of this in a year or so. However, the banks know they will be royally screwed if option ARM holders start leaving in droves. I think that the banks would have to be much more reasonable.
I thought this was an interesting point from http://bankapedia.com/mortgage-encyclopedia/faqs/530-how-long-before-my-property-goes-into-foreclosure
"In a strong market, banks are more likely to pull the trigger on a foreclosure, as the value of your home is more likely to be greater than what you owe the bank. During the hay day of the beginning of the new millennium, when property values where increasing at a clip of 20% plus in certain areas of the country, a bank would make money in the foreclosure process. As of the writing of this entry (2009) banks would rather modify the terms of your mortgage than send you into foreclosure, in which they may not be able to sell your property, even at a deep discount."
Anyway, just my thoughts and I am certainly no expert on the matter. However, I am noticing a lot scaremongering from the press on the issue of these option ARMs so it is a worry. The media had much to to do with the last panic and this biased reporting certainly doesn't help.
The whole issue of being able to hand back your keys to the bank and walk away was introduced during the great depression. It's interesting, but devestating, that this law has come back to bite them on the bum and put the world at risk of another one.
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