Up in ARMs: A Way Out for Seniors Facing Foreclosure?

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Some banks, most notably Bank of America (Stock Quote: BAC), have created a novel way to help seniors get out of option adjustable-rate mortgages, and even save their home from foreclosure. It involves a unique twisting of the reverse mortgage story — only this one might have a happier ending.

The deal goes down like this. The Wall Street Journal reported this week that Bank of America had started a pilot program — only 20 cases so far — where the bank had kept senior homeowners in their homes despite the fact they were overwhelmed with Option ARM mortgage payments and facing foreclosure.

The Journal cited one California couple that owed $490,000 on a mortgage that appraisers now say is only worth $150,000. Bank of America wrote down more than $400,000 on the loan, and created a reverse mortgage worth another $85,000.

But unlike most reverse mortgages, where a reverse mortgage payment is given to the homeowner, Bank of America keeps the money but allows the homeowner to live in the home without having to make payments on the principal mortgage.

When the homeowner passes away, Bank of America takes ownership of the home, although the homeowner’s heirs have the option of buying it back for $85,000.

In the end, that sounds like a pretty good deal for both the bank and the homeowner.

That’s fortunate, because neither party seems to have a choice. Banks are facing the grim reality of more and more homeowners who can’t keep up with their mortgage payments, especially seniors living on a fixed income who face increased monthly payments after option ARMs' high interest-rate triggers kick in.

According to RealtyTrac — a real estate industry analytical firm — 937,840 U.S. homeowners found a foreclosure notice in their mailbox in the past three months. That’s one in every 136 U.S. homes that are in foreclosure. That’s also up 23% over the same period in 2008, RealtyTrac says.

Option ARMS are an increasingly notorious contributor to the burgeoning foreclosure rate. In a report issued by the U.S. Office of the Comptroller (The Mortgage Metric Report, 2nd Quarter, 2009), option ARM mortgage holders are three times more likely to have their mortgages in default. Says the report: “In the second quarter, 15.2% of the more than 900,000 Payment Option ARMs in the portfolio were seriously delinquent, compared with 5.3% of all mortgages, and 10% were in the process of foreclosure, more than triple the 2.9% rate for all mortgages.”

Consequently, financial institutions like Bank of America find themselves in a corner. Should they allow senior homeowners to fall into foreclosure? Or should they step in and provide creative methods — like the reverse mortgage deal — to keep seniors in their homes? In many cases, banks lose money on foreclosures, but not as much on a reverse mortgage deal.

If that continues to be the case as foreclosures mount, any strategy that saves a buck or two will likely get a closer look by bank directors — and a sigh of relief from elderly Americans facing foreclosure.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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