Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia's Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the "Pick A Pay" loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said.
These "pay option" adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically "recasted" in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.
While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.
Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages "recast" to higher monthly payments over the next two years.
"The next wave (of foreclosures) is coming next year and in 2010, and that is primarily due to these pay-option ARMS and the five-year, adjustable-rate hybrid ARMS that are coming up for reset," said William Longbrake, retired vice chairman of Washington Mutual. The giant Seattle-based bank, which collapsed this year under the weight of its bad mortgage loans, was one of the biggest originators of pay-option ARMs during the lending boom.
So, while everyone knew there was a problem, and while everyone realized that consumers were vulnerable to predatory lending practices, and also while everyone was trying to find ways to fix the problem, mortgage industry employees were running around like chickens with their heads cut off, planting the next bomb that is going to explode in our faces.
They greedily pocketed the money they made--money that further inflates a bubble which is tremendously unhealthy for the economy. If the economy rebounds in 2009, a wave of foreclosures and defaults on loans in 2010 will march us back to the brink. The industry needs to be gutted and restructured, and introduced to some serious regulatory guidelines. No one should be setting up loans that cause instant default when the real "terms" kick in after a few years.
The ENTIRE industry needs to be locked down and placed under heavy regulation. ANY loan that creates a balloon payment or unsustainable monthy payment that locks in after a set period of time does NOTHING to solve the problems that homeowners are facing. These loans are landmines that are waiting to be stepped on.