Monday, June 19, 2006

ARM Resets Squeeze More Homeowners

The Associated Press has this report on lending and foreclosures. "As more hybrid adjustable rate mortgages adjust upward and housing prices dip, many Americans can't refinance out of this squeeze. They are finding themselves trapped in too-high monthly payments, and some face foreclosures."

"In the last several years, millions of Americans took equity out of their houses and refinanced when interest rates were at historical lows and housing prices were at record highs. Many of them chose to refinance into hybrid ARMs that lenders were aggressively pushing. ARMs, which featured a low introductory interest rate that resets upward after a set period of time, were easier to qualify for than traditional fixed-rate loans."

"This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the MBA. Monthly payments will leap too, many beyond what homeowners can afford."

"In 2002, Christopher Jones refinanced into a hybrid ARM with plans to refinance again when the rate started to readjust. At the time, his downtown Atlanta house appraised for $108,000. Now, his monthly payments have shot up, but Jones can't sell his house for more than $84,000 and he can't get an appraisal for more than $85,000."

"The appraisal firm told Jones that the value of houses in his neighborhood have fallen victim to a cooling market. With no other options left, Jones has decided to pack it in and foreclose on the house. 'I'm just going to take the loss,' he said. 'That's all I can do.'"

"Some homebuyers, especially first-time buyers, may not have fully understood the risk of ARMs. In the rush to close on a house sale, especially in the frenzied market of the past few years, many first-time buyers often failed to get the full details of their loan from their mortgage broker. 'Sometimes buyers are very optimistic of how much mortgage they can handle, especially in a strong housing market with aggressive marketing of riskier mortgages,' said (credit counselor) Suzanne Boas."

"When Dora Angel of DeSoto, Texas bought her first home in 2003, she paid $141,000 for the brand new three-bedroom, two-bath home. At the time, her mortgage payment was $1,400 a month. DeSoto originally thought that she had a fixed-rate loan. But about five months ago, she noticed that her monthly payment kicked up to $1,900. She only made the monthly payments by sacrificing payments on her credit cards, which pulled down her credit rating."

"Now, DeSoto can't continue paying $1,900 each month, but, because of her credit ranking, she doesn't qualify for a fixed-rate mortgage."

"'I was a first-time buyer. I was blind. I didn't know what questions to ask,' she said. 'And the mortgage brokers are there telling you what you want to hear just to get you in the mortgage.'"

Unfortunately, during a runaway market, many buyers, sellers and mortgage brokers were more excited about making deals than making smart deals, and the fallout has just begun.

"'We are on the front of this ARM problem. It will roll out over the next several years,' Boas said. 'Owning a home is the American dream, but losing one is the ultimate nightmare.'"