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Foreclosures in the forecast

With rates shooting up on adjustable-rate mortgages, hordes of homeowners are facing skyrocketing mortgage payments they can barely afford.

By ASSOCIATED PRESS
Published June 24, 2006

NEW YORK - 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, some 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.

Although it's not a big problem, some indications are that it could become one. 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.

In the past 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 feature a low introductory interest rate that resets upward after a set period of time, were easier to qualify for than traditional fixed-rate loans.

This year, more than $300-billion worth of hybrid ARMs will readjust for the first time. That number will jump to about $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 start of this year. It rose again June 1 by $104 more 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 .  

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 prime and subprime ARM loans increased year-over-year in the first quarter, according to the MBA.

The hardest hit states are those that have experienced the roughest times economically. Michigan, Texas and Georgia lead the pack, specifically around Detroit, Dallas and Atlanta.

But as the housing market slows, experts expect foreclosures to skyrocket in those areas that have experienced the highest appreciation rate — like Florida, California, Virginia and Washington, D.C.

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 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.”

[Last modified June 24, 2006, 19:39:21]