Posted on 07/31/2006 6:55:22 AM PDT by Hydroshock
Call it the worst worst-case scenario.
The interest rate on your adjustable-rate mortgage jumps just as the housing market enters a prolonged slump.
Then something really bad happens: You lose your job. There's a medical emergency. You get divorced. You fall behind on your mortgage payments, and the bank forecloses on your home.
Those scenarios are now playing out for growing numbers of homeowners. Nearly 90,000 homes entered foreclosure in June, about a 17 percent increase over a year ago, according to RealtyTrac. Especially hard hit are homeowners in Massachusetts, where foreclosure filings jumped 66 percent in the second quarter as the housing market continued a sharp downturn. Foreclosure rates could increase more over the next year or so, "especially if we end up in a recession and see a lot of job loss," says Doug Duncan, chief economist with the Mortgage Bankers Association.
Warning. In the past, foreclosures have largely been the result of a bad economy. Yet this time around, with a record number of borrowers exposed to rising mortgage payments through adjustable-rate and subprime mortgages, the increase in foreclosures could be a bad omen.
Adjustable-rate mortgages worth over $1 trillion are due to reset in the next two years. "We've never had such a high percentage of loans come due at the same time, so no one really knows what will happen," says RealtyTrac Vice President Rick Sharga.
Currently, foreclosures represent only about 1 percent of all outstanding loans, far below the rate after the last big real- estate downturn began in the late 1980s. Yet borrowers who take out adjustable-rate and subprime mortgages tend to default more often than those with conventional fixed-rate loans. Some worry that mortgage defaults could flood the market with inventory just as demand is cooling.
Lenders have little incentive to force that situation, especially now--when the properties they repossess could end up languishing on the market. Instead, some may be willing to restructure the loan or reduce payments in the short run if the borrower makes them up later. Even in the worst situations, lenders sometimes will accept a "deed in lieu of foreclosure," in which the property is returned to the lender without leaving an indelible black mark on the borrower's credit rating.
"I understand the embarrassment of not being able to meet your obligations, but the smartest thing you can do if you're having trouble is to call your lender and ask what your options are," says Duncan. "Unfortunately, a lot of people wait until it's too late."
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PING
If I had overpaid for one of those ugly McMansions in a cul-de-sac ville I'd probably walk away from the mortgage too. By the way, ever notice that all the families on shows like "Nanny 911" live in such places?
They spend to much time getting a house and not enough time making a home.
This would be the time of the year when foreclosures really spike up. If many houses are sold in April-June, and close in May-July, then many adjustable mortgages have just done their yearly adjustment. (In most cases, this would be at least two percent from last year's rate.) In CA, three months of missed payments and your house is sold out from under you. That would be August-October.
Ping
In Texas and other states with normal 2-3% appreciation, it's already hitting home. Foreclosures in Texas are exceeding those in the 80's.
Yeah, and usually no trees. Trees get in the way of the $7,000 John Deere lawn tractor when mowing the perfect sprawling chemically fertilized lawn. LOL.
And I always thought that banks foreclosed on people, just for fun.
ARM's are a tool; problem is they're misused. fixed rate's are another tool; having one doesn't imply u r more sane....
If this goes as bad as I think it can this will not make a difference.
Sorry about that, we are normal middle class folks and not wealthy enough to pay cash for a home. :)
I know, we're doomed.
RE is heading south in many areas with all the speed and damage of the union army in Georgia
Wow, that sounds scary!
This is only the beginning of it. A whole lot of arms and interest only loans are due to reset in the next 2 to 3 years. And I am not even going to post my comments on how stupid it is to buy an arm at a tiem of 40 year historic low interest rates.
The rates on 30 year mortgages have been going down the past couple of weeks along with the 10 year bond. Adjustable rate mortgages have peaked and will be lower next year.
Maybe, but foreclosures are still way up.
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