ARMs lead to Foreclosures

Over 2 million subprime Adjustable Rate Mortgages are going to reset at significantly higher rates in the next few months, which could possibly worsen an already slumping housing market and cause more foreclosures. Borrowers that took out hybrid ARMs in 2004 and 2005 who liked the low “teaser” rates that they had for the first 2-3 years of the loan, but in the next few months these borrowers could see their monthly mortgage payments rise by 35% or more. Many politicians and consumer groups are concerned that hundreds of thousands of borrowers with subprime ARMs will not be able to keep up with their mortgage payments, which could cause them to lose their homes to foreclosure. According to the co-founder and chief economist of Moody’s Economy.com, Mark Zandi, more than $50 billion in ARMs will reset in October. A borrower with bad credit and limited means might have possibly signed on for a $200,000 2/28 hybrid ARM, which would have locked in a fixed interest rate of 4% for 2 years in 2005. If the borrower was paying $955 a month, the borrowers monthly mortgage payment would rise to $1,331 in October-a 39% increase. In the past, rising home prices bailed out ARM borrowers who were in danger of losing their homes to foreclosure. These borrowers could refinance with cash-out options, or also home-equity credit lines. If borrowers were unable to do those options, they could always sell the house, and make some money of the sale. However, this year, prices have flat lined, or even fallen in many states. Because of the slumping housing market, the chief economist for the Mortgage Bankers Association (MBA), Doug Duncan, believes that over half a million home owners will fall behind on their mortgages, meaning more foreclosures for the nation. Zandi believes that lenders approved many borrowers who were unlikely to be able to afford the mortgage payments in 2-3 years. Lenders approved loans to borrowers without having proof of their assets or income (also known as “Liar Loans”), as well as borrowers who were barely able to afford the mortgage payments at the low teaser rate payments. Many borrowers even chose interest-only ARMs, which meant the principal of the loan was left untouched. Tightening standards for mortgage loans could also mean trouble for borrowers with ARM mortgages, as many might be unable to qualify for refinancing if the regulations are stricter, locking these borrowers into loans that are unaffordable, possibly causing them to lose their homes to foreclosures.