Millions of Americans stand to face enormous financial strain or foreclosure
when their adjustable-rate mortgages reset this year. The number of mortgage
holders slipping behind in monthly payments rose steadily throughout the winter,
according to major foreclosure tracking companies. As federal interest rates
continue to increase, the number of borrowers defaulting on their mortgages
is certain to grow.
In the short term, higher interest rates are the most direct source of strain
on mortgage holders. There are several types of unconventional loans that proliferated
in the late 1990s after lending standards were relaxed. These loans served to
decrease initial mortgage payments, but at the expense of greater risk for much
higher payments in the future. The most popular are interest-only and adjustable-rate
mortgages (option ARMs).
Option ARMs have been attractive during the low-interest rate period of the
past few years because with these loans mortgage payments follow the prevailing
rates, varying from month to month. The introductory rates tended to be extremely
low, sometimes half that of the traditional 30-year mortgage rate, which itself
reached historic lows last year.
But when interest rates increase, as has been the case in the last quarter
of 2005 and into this year, many homeowners are confronted with much higher
Interest-only loans allow borrowers to pay only the interest for a set period,
leaving the principal payments as optional. The most common type of interest-only
loan is called a 2/28, with a two-year interest-only period on a 30-year mortgage.
Millions of buyers relied on this type of loan in the last two years.
For interest-only mortgage holders who made only the minimum payments during
the past two years, the principal has actually grown enormously. Now the initial
interest-only period is ending for many of these borrowers. According to Economy.com,
more than $2 trillion in US outstanding mortgage debt, nearly a quarter of all
mortgage debts, are of the interest-only variety passing the two-year introductory
period in 2006 and 2007. The Wall Street Journal reported March 11 that these
borrowers will face drastically higher interest rates that may cause their monthly
payments to rise by up to 50 percent.
The fluctuations in the housing market are exacerbating the problem. In most
areas of the country, average home prices ballooned by thousands of dollars,
far outpacing inflation and wages over the past five years. Average monthly
payments rose from the already high $779 to more than $1,000. Meeting the average
monthly prime mortgage payments in 2003 required an income of around $37,000,
according to National Association of Realtors data. By 2005, buyers needed a
qualifying income of nearly $50,000, well above the national median income.
For this reason, first-time or poor credit buyers relied on nontraditional
loans in order to afford monthly payments because they would pay only the interest
during the introductory period. Meanwhile, the remaining principal on such mortgages
grew on interest, presenting an insurmountable burden to borrowers. As home
prices in some areas now begin to deflate, many homeowners will find themselves
locked into a mortgage worth more than the home’s resale value.
The Journal cited a study conducted by First American Real Estate Solutions,
a subsidiary of home title insurer First American Corporation, which projected
that one in eight households with adjustable-rate mortgages that originated
in 2004 and 2005—when home sales and home prices both peaked—will
default on their loans in the near future. Because the housing market is slowing,
reselling a home without taking a loss will be less likely as time goes on.
Most at risk are the so-called sub-prime borrowers, those with weak credit
histories, both because they depended upon non-traditional loans and will now
be charged the higher sub-prime interest rates, and because as these rates and
bills mount they will face difficulty gaining refinancing approval because of
their sub-prime status.
Released March 17, 2005, fourth-quarter foreclosure and mortgage delinquency
data from the Mortgage Bankers Association (MBA) underscore the reality of financial
constriction. Mortgage payments were behind on an average of 4.7 percent of
all residential homes, up from 4.44 percent in the third quarter and 4.38 percent
in the fourth quarter of 2004. One in every hundred mortgage loans was in some
stage of the foreclosure process—more than 4 million homes.
“The increase in delinquencies is not surprising,” MBA vice president
and chief economist Doug Duncan remarked in the press release announcing the
figures. “We have been expecting an up-tick in delinquencies due to a
number of factors: the seasoning of the loan portfolio, the increased shares
of the portfolio that are ARMs and sub-prime mortgages, as well as the elevated
level of energy prices and rising interest rates.”
Regulators have been well aware of the trends, their painful consequences,
and the risks predatory lending poses to home-buyers. For this reason, the banking
industry has pressed the Federal Reserve Board to impose tighter lending standards.
These would restrict refinancing from those borrowers who fall behind, leaving
them wide open for foreclosure and seizure of property.
Other policy changes are also contributing to the debt burden of average US
households. Under a law that took effect January 1, minimum monthly payment
requirements have doubled for many credit card users. This follows last October’s
bankruptcy law changes, which make it more difficult for struggling debtors
to hold on to homes or other assets, and with which the increase in foreclosures
As significant as the national data is, foreclosure and delinquency
rates for regions most neglected, abandoned, or destroyed by consequences of
capitalism are the most revealing. The MBA survey found nearly 76,000
households in Louisiana and Mississippi were seriously delinquent in late December
of last year. A payment 90 days or more overdue constitutes serious delinquency.
In the month after Hurricane Katrina struck, nearly a quarter of all Louisiana
mortgages and 17.4 percent of those in Mississippi were delinquent, or 30 days
past due. Most of those have fallen into serious delinquency. At the end of
the year, more than a fifth of Louisiana mortgages remained delinquent, and
Mississippi’s proportion of delinquencies had fallen by only half a percent.
A third of all sub-prime loans in both states were in this category. Clearly,
thousands of families continue to suffer without adequate assistance, months
into the supposed reconstruction process.
Foreclosure.com data for Michigan indicates that from February 2004 to 2006,
the number of homes foreclosed doubled, making the state’s foreclosure
rate two and a half times the national average. Michigan’s foreclosures
currently make up 8.6 percent of the national total. The state’s share
of the national population, however, is slightly less than 3.5 percent. The
unemployment rate in the state is also substantially higher than the official
US average, and is expected to continue climbing as the manufacturing sector
continues to suffer.
In Wayne county, including the city of Detroit, foreclosed properties are extraordinarily
high. The Associated Press recently reported that the county sheriff’s
office oversaw the auction of 379 homes in a single day last month. Gary Meyers,
a Venturi Realty foreclosure specialist present at the sales, told the AP that
it was by far the worst he’d seen. “I’ve been all over the
US, and the most I’ve ever seen in a day is 30.”
Latest data from Foreclosure.com indicate that western states such as California,
Arizona, and Nevada—among the states which saw explosive growth in construction
and inflated home prices in recent years—experienced a wave of new foreclosures
in February. Foreclosures in California increased by 150 percent from January
to February; Arizona saw a rise of 161 percent for the same period; Nevada experienced
a 99 percent increase.