Reseting Rates, Jitters Setting in For Thousands of Florida Mortgage Holders

The reset jitters are settling in.

Florida mortgage investors, lenders and regulators are concerned about the ability of millions of homeowners to handle the potentially painful payment spikes due on home loans they took out during the peak of the housing boom.

Some experts say that at least a half-trillion dollars worth of home loans in the U.S. with reduced initial payment terms are scheduled to reset during the coming year.

Many Florida mortgages carry negative amortization features that permit borrowers to pile on additional debt beyond their original balance and make minimal payments for the first several years. Once the initial period is over, payments could shoot up by 100 percent or more.

Other programs allow interest-only loan payments with absolutely no reduction in the original loan balance until the reset point.

Then payments can jump by 50 percent or more in order to amortize the debt balance over a compressed number of years.

Regulators are expected to issue restrictive guidelines for lenders making new mortgage loans this fall, but tightened rules won’t help homeowners who are heading for payment resets in the upcoming year and may be blissfully unaware of the littany of financial shocks they face.

John G. Walsh, an official at the federal Comptroller of the Currency, recently described his agency’s concerns about poorly informed borrowers who don’t realize their artificially low monthly payments won’t continue indefinitely.

“We’ve had consumers tell us they didn’t know that after making 60 minimum payments on a payment-option loan, they would owe more than they did when the loan was brand new. They should certainly understand the basic bargain: The price of lower payments now is a much higher payment later,” he said.

“I think it goes without saying that someone, at some point, should have explained this to borrowers,” Walsh said.

Lenders active in no-ntraditional mortgages carrying negative amortization and interest-only features say they have taken care to make sure their customers comprehend their reduced payment loans. They also insist that they’ve reserved these high-risk programs for borrowers with solid credit scores, large down payments and excellent employment histories.

Analysts have questioned those confident assurances, however, warning that in the last year, disturbing numbers of minimum-payment Florida home loans were extended to borrowers with subpar credit scores.

Other firms noted that given the option to make minimum monthly payments, more than seven of 10 people did so. In the process, those borrowers are racking up heavy debt balances and could be heading for payment shocks.

To head off potential problems, the Florida home loan originators are sending out letters to thousands of borrowers making only the minimum payments on these popular adjustable-rate option mortgage loans.

A hypothetical example of what could be ahead for a homeowner currently making only minimum payments on a $402,000 Florida mortgage loan is, suffice it to say, daunting.

• The borrower has been paying just $1,348.47, far less than what’s needed to fully amortize the mortgage over its 30-year term.
• If the loan resets at today’s rates, the full payment required would be as high as $2,887.50. Future reset rates could be even steeper.

So what do you do in this case? How can you stave off the pain that is to come and avoid defaulting on your Florida home mortgage?

• Switch your payment option out of the minimum if you can and move to either a 15- or 30-year standard amortization plan.
• Switch to an interest-only option if full payments are not feasible at the moment. At least interest-only payments will not result in higher principal debt to pay off later.
• Explore alternative Florida mortgage refinancing options — sooner, rather than later.
• Stay on top of things so you don’t end up in this situation again.