Spikes in ARM Defaults Expected Next Two Years

Historically low mortgage rates caused a flurry of investment in real estate. A number of first-time homebuyers as well as many with damaged credit also took advantage of lower rates to get into new homes. Mortgage brokers worked diligently to find ways to qualify prospective homebuyers for mortgages. As a result, subprime lending soared.

Mortgage lenders had a couple of favorite products that were used to reduce initial monthly payments on mortgage loans. Interest-only loans were used to keep payments artificially low. Buyers were told that properties are appreciating so fast that there is no need to make principal payments to build equity. In some cases this was true, but housing markets have fluctuated wildly within the past 6 months. Market corrections have followed rampant speculation in many markets and some home prices have actually dropped.

Adjustable rate mortgages, or ARMs lured homebuyers with lower monthly payments. Many new homeowners were unaware at how high their mortgage payments could rise within just a couple of years. Some homeowners are already seeing increased mortgage payments of several hundred dollars per month. For many, this is definitely outside their affordability range, and they are already having difficulties making the payments.

Keith Leggett, senior economist for the American Bankers Association believes that ARM defaults could spike 15 percent over the next two years. The troubling aspect is that even if homeowners decide to sell, they may not be able to recoup enough money to cover their outstanding debt, plus any realtor fees. Most homeowners selecting ARMs in the subprime market put very little down and have little or no equity in the home.

Many homeowners will be in a tough position as their rates increase and payments jump. And with signs of cooling in many housing markets, there may not be enough buyers to fetch a good price. There is a real danger that many people will realize too late that they cannot afford their home. Once you receive notice of default, it may be too late to find a buyer that can close before foreclosure by the lender.

Homeowners with an ARM should estimate what their monthly mortgage payments will increase to and see if it fits within their budget. If you find that you will not be able to afford your mortgage payment, start looking at other options. Refinancing can be a good idea if your credit has improved substantially. Selling the home can also make sense in some situations. Also, if you find that your budget is high because of other debts, consider paying those down. Automobiles with high monthly payments could be replaced with more affordable vehicles. You should also consider taking steps to eliminate credit card debt. Seeking credit counseling can provide options for reducing debt and lowering monthly payments. Whatever you decide, make sure that you anticipate increases before they occur so that you are not caught off-guard.

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