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Monday June 19, 1:12 pm ET
By J.W. Elphinstone, AP Business Writer
AP Centerpiece: Foreclosures Expected to Jump As Riskier Adjustable
Mortgages Reset
NEW YORK (AP) -- In 2003, Anita Britten refinanced her two-story brick
cottage in Lithonia, Ga. using a hybrid adjustable rate mortgage, or ARM.
Her lender reassured her that she could refinance out of the riskier loan
into a traditional one when her interest rate started to reset.
Three years later, Britten can't get a new mortgage and her monthly payment
has jumped by a third in six months. She can't afford her payments and may
face foreclosure if her financial situation doesn't change.
As more ARMs adjust upward and housing prices begin to dip, many Americans
like Britten can't refinance and are finding themselves trapped in too-high
monthly payments. For those who can't make their payments, foreclosure is
the only way out.
Foreclosure figures just released by the Mortgage Bankers Association show
that foreclosure activity fell in the first quarter of 2006 over the first
quarter of 2005 for all loan categories except subprime loans. The MBA
didn't specify how many of subprime loans were adjustable rate mortgages.
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.
ARMs are now starting to fall by the wayside as the difference in interest
rates narrows. The average rate on a 30-year fixed rate loan in May was 6.60
percent compared to 5.63 percent on a one-year ARM, according to Freddie
Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs
carried a 3.76 percent rate.
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.
For example, Britten's monthly payment jumped from $1,079 to $1,340 at the
beginning of this year. It rose again on June 1 by another $104 and is
scheduled to increase again in December. Britten, who is also paying off
student loans, went to a credit counseling service to help her avoid
foreclosure.
"I've gotten rid of all my credit cards and I'm not supposed to refinance
for another year," she said. "All I can do is tread water right now."
"ARMs are a ticking time bomb," said Brad Geisen, president and chief
executive of property tracker Foreclosure.com. "Through 2006 and 2007, I'm
pretty sure we'll see a high volume of foreclosures."
Last year, foreclosures hit a historical low nationwide at about 50,000. But
that number has more than doubled since then, according to Foreclosure.com.
And delinquency rates appear to be rising, as well. While delinquency rates
fell for most types of loans from the fourth quarter of 2005 because of a
stronger economy, delinquencies for both prime and subprime ARM loans
increased year-over-year in the first quarter, according to the MBA.
The hardest hit states so far are those that have experienced the roughest
times economically. Michigan, Texas and Georgia lead the pack, specifically
around Detroit, Dallas and Atlanta, whose major employers have run into
strikes, bankruptcies and industry downturns.
But as the housing market slows, experts expect foreclosures to skyrocket in
those areas that have experienced the highest appreciation rate -- like
California, Florida, Virginia and Washington, D.C.
"There is a direct correlation between foreclosure sales and market
activity," said Dr. James Gaines, a research economist at The Real Estate
Center at Texas A&M University. "If the rate of appreciation is not there,
then there is an increase in foreclosure sales."
Gaines pointed out that although California's default notices are rising by
the thousands, actual foreclosure sales remain in the hundreds. Because of
California's still-active housing market, homeowners there can sell their
properties before going into foreclosure.
On the flip side, in less active markets like Texas and Georgia, homeowners
can't find a buyer in time and are forced into foreclosure.
But as the housing cools in these once hot markets at the same time that
ARMs reset, many homeowners may be unable to dump their properties before
going into foreclosure, Gaines predicts.
Additionally, Gaines pointed out that these same real estate markets also
boasted a higher percentage of ARM originations, because most buyers could
only get into their homes using an unconventional loan.
California, where the median home price reached $468,000 in April, leads the
nation in the percentage of homes purchased with adjustable rate mortgages.
Nationwide, ARMs account for 24 percent of all home loans.
"In our zeal to make mortgage lending more available to a greater number of
people, it's normal to expect the foreclosure rate to go up," Gaines said.
Even investors in foreclosures are having a harder time finding good deals,
as the housing market cools. Many homes that do end up in foreclosure
auctions are saddled with more than one mortgage and have little or no
equity -- so the investors take a pass.
Falling home values are also affecting homeowners' ability to refinance into
a traditional 30-year fixed rate loan to avoid foreclosure.
In 2002, Christopher Jones, 32, 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 Suzanne Boas, president of Consumer Credit Counseling
Services of Greater Atlanta.
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."
AP Business Writer Alex Veiga in Los Angeles contributed to this story.