Sadly, there is another wave of distressed properties on the way. First came the sub-primes, then the primes- 2010 and 2011 will be the option ARMs, who won't be able to refinance because of reduced home values.

Hopefully most of these borrowers will be able to do short sales if they need to, rather than go into foreclosure. But the pain will be quick and severe....when those payment jump up, many of the borrowers will go immediately from O.K. to behind.

Match that with the currently unsustainable federal fiscal policy, and they may experience the double whammy of a rising index AND a re-set.

The mess is not a result of usual economic cycles, but deep seeded greed and regulatory abuses. "Solutions" like widespread loan modifications have not had the desired impact. While the Governor and Legislature are looking at introducing mediation, this will help some, but only a hand-full of homeowners. Congress and the President must devise a plan to allow the mortgage holders (lenders) to reduce principal. Freddie and Frannie could buy these loans at a discount and the principal forgiven could then be paid back at the end of the loan. The other essential ingredient to ending this mess: unemployment must be brought under control. Take the map above and overlay it with the rates of unemployment in the state; I wonder if the highest unemployment would look like the same rash?
Robert J. Strupp
Director of Research and Policy
Community Law Center

George and Robert are both correct. The Pay Option ARM's will explode in 2010, along with the ALT A Interest Only ARM's. These are the loans given to borrowers with high credit scores. The POA initial rates often started at 1% with deferred interest. This means their payment did not even cover the interest only option, which results in increasing your balance every month. After so many years, the loan "recasts" and that option is taken away. The ALT A Interest Only loans are similar in that once the interest only period expires, your loan is then re-amortized over the remaining term. So if your interest only for 5 years, the loan turns into principal and interest over 25 years (not 30).

The only way out of this mess is to reduce the principal balance. Lowering the interest rate is not enough. In order to prevent strategic defaults, the lender needs to be willing to write down the loan balance. If you owe 300k and it is worth 200k, the lender should write it down to 200k so the borrower doesn't walk away, even if they are able to afford the higher payment. It makes no sense to me why the lender would rather foreclose and sell as an REO for even less than the 200k when they can let the borrower make payments on that amount, which would also result in timely payments to recoup the write down.

I have no faith in the Gov't implementing this. Also, I think Fannie and Freddie will be gone by the end of this year. There is already talk in Congress about dismantling them. I don't think anything more will be done other than let this play itself out. I suspect this won't be over until 2014. We have a long way to go. This next wave of foreclosures will prove to be even more damaging than the sub prime melt down.

What really needs to be done is for the State of Maryland to change its law on Deficiency Judgments. I believe MD allows lenders to obtain a Deficiency Judgment for the difference in the amount owed and the sales price. Please correct me if I am wrong. I believe there is a 3 year Statute of Limitations for the lender to file. The State needs to change this as soon as possible. Requiring mediation before foreclosure is only part of the solution. More lenders will be willing to modify a mortgage in MD if the lender is not able to obtain a Deficiency Judgment. When the lender has rights to go after the homeowner after foreclosure, they are more inclined to foreclosure. If the lenders rights are taken away, they will be more inclined to modify when they won't be able to go after the homeowner after the sale.

Frank Rizzo,
I agree with you but feel the government should go ever further. Lenders should not only reduce the mortgage principal to the lower market value of a house but also should do so for automobile purchases. After all, a newly financed car loses thousands of dollars in value as soon as you drive it off the lot so why should borrowers pay the principal on the car when the car is no longer worth the loan amount?
This policy should apply to all purchases we make - if anything financed loses value after we get the loan, the loan principal should be reduced.
I am sure banks will then be more inclined to make even more loans knowing they will lose money on every loan they make.

Why are we not holding those in government responsible for regulating the mortgage markets? In Maryland, we have over regulation at every level of business. Of course, for the largest purchase one will make in their lifetime, the homeowner is on their own - dealing with uneducated realtors, unscrupulous mortgage brokers and greedy title companies. Oh - I forgot about the payoffs! With so much money flushing around the system from real estate transactions, the politicians were stuffing their pockets from all the developers money! What are they going to do this election cycle?

Interesting information. In fact this is good for investors who want to map the best points to find properties available and make money.

That's a very good question. I am starting to feel like things are improving some. Just by talking to people, looking at how busy the restaurants and mall parking lots are...Hopefully we'll be out of this soon, Let's just hope that the problems with the commercial real estate and finance markets don't send us back down the hole again.