Who is at risk of Foreclosure?

According to Christopher Cagan, the director of research and analytics for First American CoreLogic, homeowners who got an Adjustable Rate Mortgage, or ARM between 2004 and 2006 and had a “teaser rate” of less than 4% are 3 times more likely to lose their homes to foreclosures. Homeowners that got a subprime ARM with a  higher interest rate than 4% between 2004 and 2006 have only a 1 in 8 chance of losing their homes. Cagan studied 8.4 million ARMs that were given in 2004, 2005, 2006, and believe that 1.1 million homeowners will lose their homes by 2014 because of the rising interest rates. Because of the current housing market, property values will stay flat, and if they start to fall (as they have already started to in many areas of the country), even more homeowners will lose their homes to foreclosures. Without the growing equity in their homes, many borrowers are unable to refinance to a lower interest rate, meaning they are stuck paying the higher payments when their loans reset. Cagan only studied losses from resetting interest rates, not from job loss, divorce, fraud, illness, or death-meaning that there will be more than 1.1 million foreclosures in the next 6-7 years, but those numbers are unpredictable. For example, the rate of foreclosures in Detroit is at an all-time high, but this has more to do with job losses in the area than low-rate ARMs or subprime loans. According to Cagan, the majority of the foreclosures will occur over the next 2 years, with the most foreclosures occurring during 2008. Next year will be the year when the foreclosures crunch is most felt as 2/28’s were originated in 2006 when the market was at its peak, and the rates are going to rise early in 2008. 2/28 mortgages are ARMs that start out with a beginning low interest rate that lasts for 2 years and then are adjusted every 6 to 12 months for the next 28 years. Many homeowners took out 2/28 loans with the intention of refinancing after cleaning up problems on their credit history, which would give them a better interest rate. However, because of the slowness of the housing market, many homes have lost value, and they are unable to refinance. Even despite the recent attention to the abusive sub prime lending industry, lenders are still pushing subprime and ARM loans to those who would otherwise be unable to purchase a house.