Ariz. attorney general concerned over ARM

Arizona Attorney General Terry Goddard was in Yuma Wednesday to share some of his concerns about the already plummeting state housing market.

According to Goddard, thousands of homeowners who have an adjustable rate mortgage (ARM) are facing foreclosure because their loans are about to be reset into thirty year fixed rate mortgages.

"The reason I am so concerned is because of something called a payment option ARM," Goddard said. "Arizona has something like 128,000 loans that are payment options. That means the home owners have been making a minimum payment for the life of the loan, and are now facing a reset provision. If they are making a $200 payment when the normal payment would be $2000, the $1800 they are not paying every month gets added on to the principal, which keeps growing in a market that is declining."

Goddard said when the loans are recalculated into a fixed rate, many homeowners could lose it all.

"If the payment is $2,000 when the person was used to paying $200, and the bank comes and drops the hammer, the homeowner will probably default and go into foreclosure the next day."

Goddard said the reset provision started in August.

"I am really worried. Most of the payment option plans are going to re-calibrate in the coming year and unless the mortgage lenders become a whole lot better at working with their clients and modifying loans, virtually all of those loans are going to turn into foreclosures. That frankly is the other shoe that could drop on the Arizona housing market and it is a really scary proposition."

Goddard said it is his mission to help pass legislation which will force lenders to work with their at risk customers.

"As attorney general, my goal is to get long term modification to the home loans. It is my belief that unless we can get a much more serious effort from the lenders to modify troubled loans, we are going to continue in a financial free fall, and it would be very hard to find the bottom of the market."

Goddard said he would like more transparency from lenders.

"I want some kind of common Federal program that would force all financial institutions who received bail-out money to provide a single page (loan modification) form they would provide on the Internet, that way there wouldn’t have to be a separate standard for every lender. With $75 billion on the table to incentivize the lenders to do these jobs, it seems to me the federal government should ask for a standard, but they still haven’t done that."

Goddard said many loans now cost more than the property is worth, using Maricopa County as an example.

"This is shocking. Over 70 percent of the homes in the Phoenix area are under water because the loan is greater than the value of the property. And so, until we get out of that situation, recovery is going to be extremely difficult and almost impossible."

Goddard said the housing market will continue to have properties going into foreclosure, adding the short-sale process will leave the homes with an undetermined value on the street.

"Now we are faced with abandoned and stripped properties where the people who got foreclosed on usually take everything of value out with them whether it is legal or not, leaving a stripped hulk behind which hurts the whole economy as well as the lenders. They say for every foreclosure every house in the neighborhood has a $1,000 reduction in value. That is probably conservative; it may be even greater than that."

Goddard said Yuma County is at risk.

"Yuma has a substantial problem in that there was a fair amount of growth because sub-prime mortgages fueled new construction. That is where the heart of this problem lies. The more stable and older neighborhoods don’t have as many foreclosures, but in areas where there has been a lot of growth and construction in the last four years, there we find very significant foreclosure problems."

Goddard said when the housing market was still booming, lenders had a slew of extra money they were throwing at consumers.

"(Those with an ARM) were mostly people who tried to take advantage of the free money offered on a hot market where the lenders really pushed their product. For many who used the loans to refinance their homes, it sounded like all they had to do was sign their name on the dotted line and they could put money right in their pockets. They have probably burned up their money and now they can't sell their houses. Those people are facing a very serious financial situation."