It is possible there will be trillions in default in home loans over the next year or so.
2 Trillion Dollars worth of home loans that are ARM will be exploding beyond their affordable levels this year alone. Most will be several thousand per month higher than they originally signed for on their contracts, a great majority are going in default. Many signed on for the adjustable rate to kick in after 5 years, and others on 3 year adjustables, when there was extremely low interest. The non prudent sheeple have been taken again for a ride, as most of these 2 trillion are in default, and there is no relief in sight. Read a local news story below. - michael1
http://www.rockymountainnews.com/drmn/real_estate/article/0, 1299,DRMN_414_4695955,00.html
By John Rebchook, Rocky Mountain News
May 13, 2006
Thousands of Denver homeowners gambled on adjustable rate mortgage loans three years ago.
Now those bets are coming up short. These homeowners are facing the hard truth that their ARM mortgage payments are going up several hundred dollars more each month as their rates adjust skyward.
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 a sense, they were really playing Russian roulette," said Ed Jalowsky, owner of Classic Advantage Realty in Denver.
"Russian roulette is a form of gambling, and that's what they were doing - they were gambling."
An estimated $2 trillion in home loans nationwide is expected to adjust upward in 2006 and 2007, according to Moody's Economy.com, a research firm based in West Chester, Pa.
The Denver area may be hit particularly hard because homeowners in Colorado on average have little equity in their homes.
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.
This lack of equity is one of the driving forces behind the rising Denver-area foreclosure rate, according to many experts.
This year is on track to eclipse 2005 as the second worst ever for foreclosures. 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.
Next, the downward spiral begins: They can't afford the higher payment, they can't sell their homes for a profit, or they can't refinance because they have little or no equity in their houses or they're precluded from refinancing because of pre-payment penalties.
"People were still riding the euphoria of the late '90s (three years ago), when they thought housing prices were just going to keep going up quickly." So they locked in adjustable rate mortgages that had fixed below-market rates for three, five and seven years, Jalowsky said.
Jalowsky estimates that 75 percent to 80 percent of homeowners defaulting on their mortgages in the Denver area took out ARMs in recent years.
Jalowsky is listing a home for one client who is going to see his monthly mortgage payment rise by $1,000 on June 1, when his ARM adjusts.
Brian Bartlett, of RE/MAX Southeast, agrees.
"It is absolutely mortgage roulette," Bartlett said. "Either buyers were not informed by the mortgage broker or all they chose to hear was the answer to the following question: What is my initial monthly payment? 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."
That's when the local housing market crashed.
Keith Gumbinger, vice president of New Jersey-based HSH Associates, which tracks mortgage rates around the country, said a typical borrower who took out a three-year ARM in 2003 at 4.18 percent could see that loan rise to 6.18 percent this year and 7.625 percent next year.
The first bump would drive up the monthly principal and interest on a $240,000 loan by $296, to $1,467, a 25 percent jump.
And next year, they could see their monthly payment rise to $1,699, a $528 increase from the initial amount, a 45 percent increase.
Even worse, thousands of homeowners chose so-called "option ARMs," which gives consumers the choice of making minimum payments, minimum payments with interest, or payments with interest and principal.
They can choose whether to amortize the loans on a 15-year or 30-year basis. 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. That is called "negative amortization," which means the loan can actually grow with every payment.
"The option ARM is the temptress," said Pete Lansing, owner of locally based Universal Lending.
He wasn't a big fan of option ARMs two years ago, when they were popular, and he lost business to other companies that pushed them.
Now, he said, he is getting phone calls from people who want to refinance out of option ARMs into fixed-rate mortgages.
"Usually, they're pretty short conversations, because they can't do it because of stiff pre-payment penalties," Lansing said.
Now, people are wondering why they didn't lock in fixed rates at 40-year lows around 5.5 percent.
"One of the issues I hear over and over again from the people is that they now feel really stupid," Lansing said.
But it's not entirely doom and gloom for the Denver housing market.
Dan Jester, a spokesman for Moody's Economy.com, said the Denver area is in decent shape because it didn't see the huge run-up in prices that other areas have seen, so it's unlikely to experience the big crashes that could occur on the coasts.
"If you were Orange County, (Calif.), I'd be a lot more concerned," Jester said.
First American Real Estate Solutions' Cagan, in a 32-page report issued in February, said that 7.7 million borrowers took out $1.88 trillion in ARMs in 2004 and 2005.
Cagan describes $368.3 billion of that amount as "loans with equity difficulty" that are at risk of going into default.
"Some of these homeowners will be able to find help from increased income, from tightening their lifestyle, or from relatives or close friends," Cagan writes in the report.
Also, some people will be able to renegotiate terms with their lender "to avoid a default and foreclosure - which is painful and costly to the lender as well as the homeowners."
Cagan also doesn't think the hangover from people overindulging in low-rate ARMs will bring the economy to its knees.
He said that if $110 billion in homeowner equity is lost over the next few years, that would only account for about 1 percent of the $11 trillion of home equity in the U.S., and the economy would be able to absorb the loss.
Still, that's little comfort if you're facing the prospect of rising rates.
Lou Barnes, principal of Boulder West Financial Services, said he already is getting calls from people who bought ARMs that had rates fixed for three or five years between 2002 and 2004.
While some of them can keep the low rates until 2008, they're already worried.
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?"
"The straight answer is that the interest rate forecast is so murky, there isn't any way to know what to do," Barnes said.
However, he added, "The longer you plan to be in your house, abandoning what you have today and getting into a fixed-rate loan as quickly as you can probably makes sense."
For rates to come down, you have to be betting that the economic recovery will reverse and slump, he said.
"But all of the data is showing the economy is just smoking," he said, which probably means more interest rate increases as the Fed looks to slow inflation.
Lansing, of Universal Lending, said it is too harsh to say homeowners who took out risky ARMs several years ago were playing Russian roulette.
Rather, he said many of the borrowers had been lulled by years of low or falling rates and probably didn't fully understand the risks.
But now they aren't seeing their income rise by as much as they thought, or they are getting divorced or dealing with an unexpected illness, making it more difficult to deal with a bigger mortgage payment, he said.
"Life happens," Lansing said. "Now they are paying the piper."
[email protected] or 303-892-5207
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