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Cue the contrarian opinions on the local housing market: investment group Blue Sky Capital released a statement yesterday predicting another wave of foreclosures will soon hit San Diego County, this one even worse than the first round of massive foreclosures in the late 2000s.

The culprit, Blue Sky says, is the so-called “Option ARM,” or adjustable rate mortgage. These loans, designed to give borrowers affordable payments on large mortgage balances, allowed consumers to make payments based on a “teaser” interest rate, often as low as 1 percent. Although the rate adjusted upward several points as soon as one month after the loan was funded, borrowers were allowed to keep making the lower payments, with the unpaid interest being added to the principal balance each month.

So while loans remained current, borrowers owed more each month on houses that were simultaneously declining in value.

But there is a limit to how far homeowners can allow their debt to balloon – when the loan balance hits a predetermined maximum, usually between 115-125 percent of the original amount borrowed, the loan is “recast” and borrowers have to begin making payments equivalent to the amount necessary to repay their loans in the time remaining on the original 30 year term. For many, this means a monthly increase of $1,000 or more.

Blue Sky has singled out one neighborhood in particular likely to feel the wrath as these loans come due.

“While these Option Arm and Alt-A loans exist throughout the county, areas like Carmel Valley are filled with them. During our tracking of distressed properties in the county we found many homes in areas like Carmel Valley were purchased with zero, or a small amount down, so there is very little equity in these properties," says CEO Chris Williams. “While higher end families have been able to withstand the initial housing meltdown, things are about to change.”

The affluent Carmel Valley area in northern San Diego has a median income of $90,000, Williams says.

While recent reports have indicated slight gains in home values overall, as many as a third of San Diegan homeowners remain “underwater,” owing more than their homes are worth.

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