If the previous year of record foreclosure rates, falling home values, falling stock markets, and continuing inflation seemed like too big a catastrophe for the American economy to bear, wait. There will be no short-term recovery in the housing market; in fact, foreclosures will continue to rise and property values ​​will continue to fall for at least the next year, with a second wave of foreclosures beginning in the spring of 2009.

Now that the subprime market has crashed, the next shoe to fall will be option rate mortgages, a wave of which will adjust Adjustable starting in April 2009. These loans were originally sold to homeowners eager to buy. take advantage of rising property values. and that he wanted to keep his payments as low as possible. But sharp declines in real estate markets over the past year due to the foreclosure crisis are helping fuel a self-sustaining cycle of foreclosures, followed by a decline in property values, followed by more foreclosures.

What makes the upcoming ARM reinstatement options more concerning is who they were marketed to and what the “option” portion of the mortgage actually means. Borrowers with slightly better credit than subprime mortgages were able to qualify for these loans, but credit standards were almost non-existent during the boom. What was considered “slightly better than subprime mortgages” at the time can be considered completely unqualified for a home loan now. Thus, banks may find that they have a second wave of struggling high-risk borrowers right now who will have no choice but to default when their payments adjust.

And when payments are reset based on interest rates at the time of adjustment, and the monthly mortgage payments on such loans can instantly become unmanageable for many homeowners. Option ARMs allowed homeowners to pay only a small portion of the interest on their loan each month, which can result in negative amortization. In other words, borrowers keep making monthly payments only to find that they are falling further behind on the loan each month.

At the same time, your properties are losing value, so they are being attacked from both sides: equity is disappearing as your monthly payment is not enough to pay interest and property values ​​are falling closer to the loan amount. or below. This helps speed up how quickly homeowners are underwater in a home. And few homeowners feel comfortable sending in a higher mortgage payment each month when they realize that the loan and the market have completely wiped out their equity.

As usual, many people got these loans without fully understanding how they worked, why their payment was so low, and how they were able to qualify for a seemingly high interest rate on seemingly poor credit. Many of them will be surprised to find that when their interest rate adjusts, they will need to start making payments on both the principal and the interest on the loan. But even for those who are aware of the danger of a skyrocketing payment, selling the house is no longer an option when the market has fallen so far.

It is already clear that there is an economic crisis in the housing market, which was fueled and inflated by the cheap monetary policy of the Federal Reserve and the abandonment by banks of reasonable lending standards. And while there have already been predictions of the end of the recession that was never really a recession, looking into the future a bit seems to suggest that the foreclosure crisis and falling property values ​​are just beginning. If homeowners can refinance at a fixed rate or sell at a profit or breakeven point, now may be the time, before it’s too late.