Arms And The Foreclosure Wave
(The housing boom is officially over, causing a variety of problems in the real estate and mortgage world.)
During the boom, many borrowers took out mortgages that were beyond their means so they could get into a home, and they are now going to pay the price.
Adjustable-rate mortgages, or ARMS, are a very popular loan option because they start out with a very low interest rate and payments, but once the loan "resets" people could end up facing much larger monthly payments than they are used to paying.
Thousands of these loans are positioned to reset this year, causing many people to fear a huge amount of foreclosures in the near future, because people can not make their new higher payments.
A September 5, 2006 article by Charles DuBow of Business Week, "When will the tsunami of foreclosures hit?" discusses why we could see a rise in the amount of foreclosures very soon.
"This fall the ARMs that millions of Americans took out during the recent housing boom will be reset, and many homeowners will see their monthly mortgage payments shoot up by as much as 20%. According to the Mortgage Bankers Association, of all mortgages financed in 2005, 36% were ARMs -- the highest ever."
"This is a matter of concern because ARMs are typically initially made at a lower rate and then increase after a fixed period of time, usually one, three, five, seven or 10 years, after which the rate will more closely reflect current rates. As interest rates increase, mortgage payments increase. Between $400 billion and $500 billion in ARMs are due to be reset by the end of 2006. The following year will be even more dramatic, when more than $1.5 trillion will be reset."
This should not come to a surprise to any homeowner with an ARM, because they were well aware of the terms and conditions of the loan before they signed for it. Many people thought they would be out of the house before it reset, but are finding they are pretty much stuck as the market continues to slow.
"The result is that these homes, instead of being a springboard to greater wealth, suddenly become an anchor. Unable to pay their mortgage, and hit by the double whammy of higher gas prices and higher credit-card rates, many Americans in nearly every income bracket may be forced into foreclosure."
Although we really will not know how bad things are going to be until the rates reset and people start to default, things may not be all that bad, and many people may be able to make their higher payments if they really devote themselves to the cause.
"According to a new study by RealtyTrac, which publishes the nation's largest database of pre-foreclosure and foreclosure properties, the situation is not all that bad -- yet. In their survey of foreclosure rates in the 100 largest metropolitan statistical areas (MSAs) in the U.S., the second quarter of 2006 actually saw fewer foreclosures than in the first quarter. While Indianapolis, Atlanta and Dallas saw the nation's three highest metropolitan foreclosure rates, other areas, such as Chicago and Portland, Ore., saw a 60% and 188% decline, respectively, from the first quarter."
Things are not looking that bad yet, but many people are worried that things could get ugly since there is such an unprecedented amount of these types of loans out there. Also, the number of ARMs that were issued at sub-prime rates to borrowers with bad credit is unknown, which is a problem since this group tends to have higher default rates than regular consumers.
"Many industry observers are concerned that the default rate could reach dangerous economic proportions. Government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, as well as lenders such as Countrywide Financial and Wells Fargo, are all looking at foreclosure-prevention strategies, according to Sharga. 'The GSEs and lenders are developing novel solutions on workout programs to prevent people from going into foreclosure,' he says. 'Because if the number of foreclosures is too great, it drives down the market and they find themselves stuck with a lot of depreciating property on their hands. It is much more in their interest to educate homeowners on what their options are and come up with ways to help them keep their homes.'"