During the recent millennium boom, interest-only loans gained enormous popularity across the United States, especially in California, Florida, and Nevada. Many buyers who took out these purchase-assist loans have grown accustomed to small loan payments. However, they are now opening their eyes to the reality that they have yet to pay off a penny of their mortgages. The wake-up shock comes as interest-only loans reset, when it is not uncommon for monthly payments to jump by more than 70% to amortize principal, making formerly affordable payments instantly out-of-reach for continued homeownership.

first tuesday take: With the coming jump in REO resales, 2011 promises to be the year of the patient California homebuyer. Mid-tier priced homes will be flooding the market during the next 18-24 months—comprising in great part involuntary sales by owners who can no longer pay (thanks to the reset loans, increasing job losses, and insurmountable delinquencies to come in 2010). Lenders will be dumping real estate owned properties (REOs) even more frantically than they will in 2010.

Government (federal and state) meddling with lenders’ routine management of the foreclosure process, augmented by the occasional loan modification (most of which will re-default), have aggravated the volatility of sales volume from great numbers of REOs in all of 2008 to comparatively no REOs by mid 2009 — and massive new quantities of REOs by 2010. These REO fluctuations will yank the chain of speculators looking for sudden riches, and frustrate the classic homebuyer’s single-minded need for shelter.

Brokers and agents are the gatekeepers for homeowner entry. As such, they must keep an eye open for all types of corrupted and fraudulent practices. Most of all, brokers and agents must avoid being an accomplice to these practices while trying to emerge from this patch of market violence with credibility and integrity intact.

In California, over 1,000,000 homeowners (in 8.5 million homes) will be foreclosed out of their home in this great recession. The burning question becomes, what will lenders do to get them back into homeownership, and when will they do it?

Re: “As an exotic mortgage resets, payments skyrocket”, from The New York Times