The Luxury Home Time-Bomb… Still Ticking For Sacramento and Nation

Luxury home data suggests a big problem in the luxury market…

The Trophy-Home “Pay Option” time bomb

In the luxury home market, reset dates indicate as much as 70% of  ARM loans– Adjustable rate mortgages (Pay Option ARM’s)  may default over the next three years.

‘Teaser rate’ loans, were used by many high-end buyers in the hey-day of Sacramento’s real estate run-up; where buyers would enjoy a much lower monthly payment by deferring interest and principle.  Thousands of homeowners are facing resets of their interest rates that can cause monthly payments to balloon upward of 65% as reported by Credit Suisse (CS). “Home owners list major payment adjustments”. For example, a 1 million dollar mortgage taken out 36 months ago with an initial payment of $2,528 per month could jump to just under $7,000 per month.

These Pay Options were typically given to higher qualifying buyers, those with high credit scores, good work history and great income, but they were attached to a time-bomb. If the prices had kept rising, everything would have been fine, …but…

So even those who had equity, a great income, good credit score and were just trying to keep their payment low, might be in trouble- there are so many types of adjustable rate mortgages (ARMs) or Pay Option (ARM’s); and some carry heavy prepayment penalties that were going to be paid by equity, that now will not be able to be re-financed once the loan adjusts.

Katy bar the door– big houses are going to get cheap!


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