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2010 Option ARM Recasts Portend New Wave of Foreclosures

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Option ARM mortgages, which allow home buyers to make very low payments for the first five years of the mortgage term became widespread in the year 2005. After the first five years, these mortgages ‘recast’, requiring the buyer to make full payments on the principal and interest until the loan is paid. These option ARMs are predicted to set off the next big wave of foreclosures next year. Since they became widespread in 2005, the five year low payment windows will begin to shut next year in 2010. The expected foreclosures are not evenly dispersed geographically or across the continuum of loan values. In fact, these option ARMs were used more commonly in higher cost areas like California. Even within pricier states, these loans are more prevalent among higher loans. It’s estimated that the San Francisco bay area probably holds about 30 billion dollars worth of option ARMs that will recast beginning next year; That’s as high as 1 in 5 mortgages in some bay area cities.

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