ARMs Starting To Hurt... Causing Increases To House Foreclosures

House Foreclosures on the rise due to increase in ARM rates

I read an article today at www.rockymountainnews.com titles "Those Arms Starting To Hurt"
It goes into many of the factors I've been discussing which contribute to sharp increases in home foreclosure rates in the past few month.

Here is a snippet of the article:

"Thousands of Denver homeowners gambled on adjustable rate mortgage loans three years ago.

The higher payments are expected to cost many homeowners in the metro area tens of millions of dollars in higher mortgage payments and drive up the already near-record number of foreclosures

In Colorado, 28.5 percent of homeowners have 5 percent or less equity in their homes, and 47 percent have 15 percent or less equity, according to a report released earlier this year by Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions in Santa Ana, Calif.

Only Tennessee homeowners, on average, have less equity in their homes, the report said.
Last year, more than 14,000 Denver-area homeowners defaulted on mortgages.

Increasingly, people who locked in three-year ARMs with rates in the 4 percent range are finding loan rates rising by 50 percent or more.

Jalowsky estimates that 75 percent to 80 percent of homeowners defaulting on their mortgages in the Denver area took out ARMs in recent years.

"It is absolutely mortgage roulette," Bartlett said. When you combine ARMs, 100 percent financing, negative amortization, seller-paid closing costs, rising rates, falling prices, rising inventory and a continuing sluggish Denver economy, you have a recipe for 1987 to 1990 revisited."

Sometimes the rates change every month.

If you only make the minimum payment, the interest you don't pay is added to your loan amount. Now, he said, he is getting phone calls from people who want to refinance out of option ARMs into fixed-rate mortgages.

Now, people are wondering why they didn't lock in fixed rates at 40-year lows around 5.5 percent.

Cagan also doesn't think the hangover from people overindulging in low-rate ARMs will bring the economy to its knees.

The question he hears: "Do I swap my low rates for a 6.75 percent, fixed-rate loan today and pony up the extra dollars, or do I hold on to the low rate until the last minute, knowing that there's a good chance that rates will be even higher when the rates reset?"

Filed under: foreclosure investing