Saturday, October 07, 2006

Ouch! Your house payment just doubled

Big, fat surprises are ahead for about 20% of homeowners: Their complicated, often-risky adjustable mortgages are going to soar as introductory interest rates expire.


The mortgage party of 2003-06 is so, so over.

Darci Rickson now wishes that she'd looked closer at the fine print. So do Norman and Margaret Paige. And doubtless thousands of others -- soon to be millions -- whose cheap, fixed-rate introductory periods are about to expire.

The owners of about 7.7 million adjustable-rate loans taken out in 2004 and 2005 -- about $1.89 trillion worth -- face higher house payments in the next two to three years, says Christopher Cagan, the research director for First American Real Estate Solutions of Santa Ana, Calif. That's about a fifth of all mortgages outstanding in the U.S. right now.

These are not traditional mortgages. Rather, they are complicated, sometimes bafflingly intricate contracts loaded with changing rates and back-end details that trip up unsophisticated borrowers.

The plain old adjustable-rate mortgage spells trouble enough. But three high-risk loans are causing most of the trouble:

Teaser ARM. This loan features an alluring initial period of very low interest, around 1% to 2%, which later resets to market rates. About 1.4 million borrowers will be jolted back to reality in the next two to three years as their introductory periods expire. Payments on a $200,000 loan at 2% are about $725 a month; at 7%, they're $1,340.

Subprime ARM. Nearly half of loans due to reset are aimed at low-income people, minorities and people with bad credit -- folks who can't or just assume they can't get a bank loan at a reasonable rate. Many are in a shaky financial position to begin with and so are in greater danger of defaulting. Subprime (also called nonprime) ARMs start high -- 7% or more -- and go higher. And higher. They often feature a fixed, lower-rate introductory period. But when that ends, it's "just the old-fashioned squeezarooni," Cagan says.

Option ARM. This is the real killer. It gives homeowners the choice each month of paying the principal and interest, just the interest or an even-smaller minimum amount. Every month you pay the minimum, you're deeper and deeper in the red. And up to 80% of option-ARM buyers pay only the minimum, according to Fitch Ratings. Because the minimum payment doesn't cover the monthly interest, the deferred interest is added to the loan balance. After the loan balance grows to a certain point, the lender will demand that you start paying the full principal and interest -- on your now-bigger loan.

There are 400-odd varieties of mortgages, and some combine several nasty features in a single loan. One example: On a five-year teaser loan for $200,000 -- one with a 1.25% introductory rate, 7.414% fully indexed rate with a 2.75% margin and a 7.5% payment cap, if you're keeping score -- a homeowner could make minimum payments that rose from about $670 to $770 over the fixed term. At the end of five years, deferred interest would have inflated the balance on the loan to nearly $220,000. The new monthly payment, one that paid back all the interest plus the principal? About $1,600. Is there any wonder why buyers are confused?

How could things be worse?

Easy: Many of these loans also have prepayment penalties, so you're nailed with fat fees if you try to refinance or pay off the balance early

The story of a home

Norman Paige He and his wife, Margaret, have seen their mortgage payment go from $729 a month -- at a fixed rate of 7% in 2003 -- to $956 a month today, after their fixed-rate period ended in 2005.

The Paiges bought their home in 1974 with a government-assisted loan for veterans. They reared three children there and over the years refinanced it three times to pay for repairs and upgrades. Paige has lost track of how much equity they have in the house.

The Cleveland-area residents recently filed for bankruptcy and relinquished a rental house to foreclosure, so Paige doubts he could refinance again. "There's nothing I can do now," he says, but devote more of their $4,200 monthly fixed income to housing and be grateful that his pension is a good one. He is kicking himself:

"I just got messed up. You want to get mad, but you can't get mad at nobody but yourself."

Foreclosures in the U.S. jumped 24% from July to August. The 115,000 foreclosure filings in August were "the biggest spike we've had all year" -- a 53% increase in foreclosures from August 2005, says Rick Sharga of RealtyTrac, an online foreclosure marketplace. "The fact is, we've never had this many of this type of loan mature all at the same time, so there really is not a precedent for this."

Who's most in danger?

People who borrowed before 2003 are safest from the mortgage-reset problem, Cagan says, because they probably have built up equity that will help them refinance or, at worst, sell without losing money -- unless they are in a stalled real-estate market, that is.

But those with no equity are in riskier terrain. It's the people without equity who are in trouble: "You get into the situation where you can't sell, can't refinance, can't negotiate," Cagan says.

In 2005, he says, 29% of mortgage holders had no equity or, because of borrowing, owed more than their houses were worth, a situation known as negative equity. Nearly 11% of those with negative equity were down 15% or more below their home's value.

The Paiges did their borrowing from finance companies, whose higher-price loans target the subprime market -- those borrowers with less-than-sterling credit. But in the beginning, could not this career government worker with a working spouse have qualified for a bank loan at an affordable rate?

"I never really thought about going to the bank, to be honest," he says.

Paige, like many who bought subprime or teaser mortgages, says he did not fully understand what he was buying. (selber schuld!/donĀ“t blame others)

ARMs and their risky cousins

Darci and Jim Rickson can say just how tough things can become for borrowers with subprime loans. Darci, 35, and Jim, 37, were "just a young married couple" three years ago when they came into a $10,000 inheritance. As she recounts it, their credit "wasn't the best." She'd finished a repayment program the previous year to retire $15,000 in credit card debt. He simply had no credit. Still, "interest rates were low, and everyone -- our parents, friends of the family -- were telling us to buy instead of rent."

With the inheritance for a down payment, they bought a three-bedroom, two-bath house in Topeka, Kan., for $92,000. Banks wouldn't pre-approve them, but they found a mortgage broker to work with.

They bought an ARM. "At first, I thought she was going to get us 7% or 7.5% -- almost 8%. And then when we went to sign the papers, it was 9.75%,"

ARMs have been around for decades, but as recently as 1999, just half of subprime mortgages were ARMs. Now, however, ARMs -- though roughly a quarter of all U.S. mortgages -- account for three-quarters of subprime loans, according to the ACORN study.

A disproportionate number of ARMs now are sliding into foreclosure, says RealtyTrac's Sharga. He says his company has begun a nationwide analysis of foreclosures by looking at Cook County, Ill., which includes Chicago. There, "about 57% of the foreclosure properties were on some sort of adjustable-rate mortgage," Sharga says. "If that's any indicator, it suggests we could be in for a rough ride for the next couple years."

At first, the Ricksons' ARM, with its $829 payment, seemed affordable. Jim Rickson is a carpenter, and Darci Rickson was a stay-at-home mother with two preschoolers. After the two-year introductory period expired, the Ricksons figured, they'd refinance into a lower rate. The important thing was to get a toehold in the housing market.

The 14.75% mortgage Adjustable-rate loans frequently are marketed with the idea that the homeowner can use the introductory period to improve bad credit, then refinance the home into a fixed-rate mortgage when it ends. But as the Ricksons discovered, trouble can throw that plan into chaos for families without a fat emergency account.

Jim Rickson lost his job, and the couple fell behind on the mortgage. Their broker called two years later, as promised, to discuss refinancing, but by then their credit was shot. They are now stuck with the ARM, which left its two-year fixed-rate period and is rising every six months. In June, it went to 14.75% interest -- $1,162 a month.

"If you are paying 30% of your income just for the minimum (payment), and it doubles, it's pretty obvious that a family can't pay about 60% of their income on housing," Cagan says.

Six months behind on the mortgage and faced with foreclosure, the Ricksons filed for Chapter 13 bankruptcy in 2006. Now, Jim is back to work, but it's a fragile time. "If we miss a payment, within 15 days, they're taking our house,"

"When we bought this house, we didn't have student loans, we didn't have credit-card debt, we saved our money, we figured out what we could pay. Now, here we are -- we're scrambling," Darci Rickson says.



Blogger beebs said...

Hello from the USA.

I heard all the ads for the teaser rates the last few years and thought there was a catch.

Now I know.


10:44 AM  

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