Thursday, April 20, 2006


The ARM Disaster

Adjustable Rate Mortgages are coming due in a rising rate enviroment.

I can't imagine why a bank would lend money to people who would take out a loan with little money down and the possibility that payment could rise by 50 - 100%. Wouldn't you think that a borrower that needs to rely on financial slight of hand to buy a house is a disaster waiting to happen?

Borrowers who chose ultra-low teaser rates of 1% to 2% in the last couple of years could be among those most at risk, Cagan said. One in five such borrowers who took out loans in 2004 and 2005 was underwater as of September. These borrowers face the sharpest payment increases as their loans reset to market rates.

A 1% teaser rate on a $300,000 mortgage that rose to a market rate of 6%, for example, would increase a family's monthly payment by 86%, from $965 to $1,799 a month. If the old payment represented 30% of a family's gross income, the new payment would represent over 55% -- a squeeze that few families could endure for long, Cagan said.

Do these banks not realize they could be left with a lot of homes to unload in a falling market? Here's the silver lining:

Big upticks in foreclosures have repercussions that extend beyond the families that lose their homes. Lenders that wind up with too many foreclosed properties may cut prices by up to 20% to sell the houses quickly, which can depress house values in surrounding neighborhoods.

For a glimpse of what could happen, take a look at Michigan. Foreclosure rates there have soared as the auto industry sheds jobs and reduces paychecks. One of every 408 Michigan homes was in some stage of the foreclosure process in February, RealtyTrac said.

The uncertain local economy and a huge inventory of unsold and bank-owned homes are depressing real-estate values throughout Michigan.

When Robert Darmanin refinanced his mortgage earlier this year, for example, he was told his home was worth $12,000 less than a year ago. His appraiser said her situation was even worse; her home had lost $20,000 in two years.

"We had all gotten so used to house appreciation," said Darmanin, director of corporate relations for LaSalle Bank in Troy, Mich. "It's quite shocking."

How is this good news? It is if you are house shopping in Michigan. :-P


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