The graphic at right comes from The Wall Street Journal and it illustrates something that we all intrinsically know: Sub-Prime ARMs foreclose at a faster pace than all other home loan types. When adjustable rate mortgages reach the end of their "fixed rate" period, some homeowners are unprepared for the upward-adjusting mortgage payments and that can lead to payment shock.
It doesn't mean that sub-prime mortgages are bad for all homeowners, however.
A little known fact: Nearly all sub-prime ARMs carry an initial fixed period of 24 months or more. This means that the sub-prime borrower has at least two years to make financial adjustments that include:
- Paying collections, charge-offs and other delinquent accounts
- Making timely payments on loans, credit cards, and open charge accounts
- Reduce his monthly debt load with systematic payments to creditors
All of these actions help the homeowner ascend from sub-prime borrower status and into the realm of "prime" loans. It's the responsibility of the loan officer to help guide the way.
A trusted loan officer will help a sub-prime borrower to develop a financial plan and will hold them accountable. Then, as the borrower's status changes from "sub-prime" to "prime" because of better credit scores and payment history, the loan officer will remortgage the borrower out of his sub-prime loans and into a new, more favorable (fixed-rate, perhaps?) loan.
For borrowers who follow "the plan", their sub-prime loan will never adjust --they'll get rid of the loan before that two year period ends.
This is a terrific method for reducing sub-prime ARMs in foreclosure -- improve a homeowner's credit rating so they can leave the sub-prime world on their own accord and before their payment ever has a chance to change.
