Homeowners with pay-option adjustable-rate mortgage (ARM) loans are sitting on "ticking time bombs that the lending industry has the power to defuse," California’s attorney general said in asking 10 lenders and loan servicers for information that would make clear the extent of the problem and what they intend to do about it.
Economists estimate that about 1 million pay-option ARMs will reset in the next four years, "dramatically worsening the foreclosure crisis," the attorney general’s office said in a letter to lenders. With 58 percent of all pay-option ARMs originated between 2004 and 2008, California will be the "epicenter of this crisis," the letter said.
Pay-option ARM loans, now rarely made, give borrowers the option of making minimum monthly payments during an introductory period that often repay none of a loan’s principal and only part of the interest owed. Such loans are known as "neg am," or negatively amortizing mortgages, because their balance increases over time.
Lenders are being asked to provide by Nov. 23 information on the number of pay-option ARM loans they are servicing in the state, the number that have negatively amortized, and a "detailed explanation of the loan modification plans" they have developed for the loans.
The Obama administration’s Home Affordable Modification Program (HAMP) has been slow to get off the ground and will not benefit thousands of Californians threatened by foreclosure, the letter said, as it does not allow for principal reductions.
"This situation is even more dire for borrowers with pay-option ARMs, who now owe more on their homes than when they first took out their mortgages," the letter said.
The letter was sent to Bank of America Home Loans & Insurance, Wells Fargo & Co., JP Morgan Chase & Co., Litton Loan Servicing, ResCap LLC, Ocwen Financial Corp., OneWest Bank, American Home Mortgage Servicing, Saxon Mortgage Services Inc., and Select Portfolio Servicing.
In a press release, Attorney General Edmund "Jerry" Brown Jr. — a leading candidate in the state’s 2010 gubernatorial election — noted he has sought court orders to shut down more than 30 fraudulent foreclosure assistance companies and brought criminal charges and obtained lengthy prison sentences for dozens of deceptive loan modification consultants.
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