AZ AG Worried About ARM Resets

Eyeing the approaching Reset Tsunami:

Arizona Attorney General Terry Goddard was in Yuma Wednesday to share some of his concerns about the already plummeting state housing market.

According to Goddard, thousands of homeowners who have an adjustable rate mortgage (ARM) are facing foreclosure because their loans are about to be reset into thirty year fixed rate mortgages.

"The reason I am so concerned is because of something called a payment option ARM," Goddard said. "Arizona has something like 128,000 loans that are payment options. That means the home owners have been making a minimum payment for the life of the loan, and are now facing a reset provision. If they are making a $200 payment when the normal payment would be $2000, the $1800 they are not paying every month gets added on to the principal, which keeps growing in a market that is declining."

Goddard said when the loans are recalculated into a fixed rate, many homeowners could lose it all.

"If the payment is $2,000 when the person was used to paying $200, and the bank comes and drops the hammer, the homeowner will probably default and go into foreclosure the next day."

Goddard said the reset provision started in August.

"I am really worried. Most of the payment option plans are going to re-calibrate in the coming year and unless the mortgage lenders become a whole lot better at working with their clients and modifying loans, virtually all of those loans are going to turn into foreclosures. That frankly is the other shoe that could drop on the Arizona housing market and it is a really scary proposition."

...Goddard said many loans now cost more than the property is worth, using Maricopa County as an example.

"This is shocking. Over 70 percent of the homes in the Phoenix area are under water because the loan is greater than the value of the property. And so, until we get out of that situation, recovery is going to be extremely difficult and almost impossible."

Goddard said the housing market will continue to have properties going into foreclosure, adding the short-sale process will leave the homes with an undetermined value on the street.

"Now we are faced with abandoned and stripped properties where the people who got foreclosed on usually take everything of value out with them whether it is legal or not, leaving a stripped hulk behind which hurts the whole economy as well as the lenders. They say for every foreclosure every house in the neighborhood has a $1,000 reduction in value. That is probably conservative; it may be even greater than that."