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Paul Kiesel
Paul Kiesel
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Beware Mortgage Crisis – Option ARM Loans

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California Lawyers file class action against Option ARM loan banks.

The New York Times has observed that a “tidal wave of mortgage failures” is on the horizon. As California lawyers we have initiated 15 class action law suits against the largest home lenders in the state of who sold Option Adjustable Rate Mortgages. These mortgages were a trap for the unwary consumer. The Class Action alleges that banks sold the Option ARM loans without disclosing the true costs and risks of obtaining these loans. Many home owners with good credit scores and fixed rate loans were encourgaged to obtain the Option ARM loans with the promise of reduced payments for FIVE (5) years when, in fact, the true payments cost far more than the fixed rate loans most of the home owners previously held.

During the next five years, some $1 trillion in adjustable-rate mortgages will reset. But in the here and now — from just June to October this year — more than $100 billion of that amount is scheduled to reset, and all of it is in loans that are in the riskier subprime category. Given the recent interest rate spike, many of those loans that once carried low teaser rates are on track to reset to at least 11 percent — or more than four percentage points higher than the current rate on a conventional, 30-year home loan.

Chances are slim that even the most creditworthy borrowers can survive payment shocks like these. And so, as the reset storm hits, delinquencies will rise and foreclosures will follow. It is too early to estimate how many foreclosures will take place as a result, but last year there were 1.2 million, according to RealtyTrac, an online real estate database.

The cost to our financial markets will be felt for many years to come. The cost to those who are trapped in the Option ARM loans may be felt for a lifetime.