Homeowners now pay for years of low rates
Dorothy Bourdet / The Detroit News
For Amy and Randy Greenwood, an adjustable-rate mortgage was a way to consolidate bills even with less-than-perfect credit.
A so-called ARM helped Detroiter Amanda Pena realize a dream: a home for her family.
For the Hamiltons, it was a savvy finance management move, given they didn't plan to stay in their Livonia house too long.
The deal worked like this: get lower interest rates on your loan for several years, but risk higher payments after that time is up and your interest rate readjusts.
Time is up for the Greenwoods, Pena and millions of others like them, who planned to refinance before they faced higher rates but couldn't and got hit with sticker shock when the mortgage bill arrived.
"It's going to make it harder. It will take away some extra money that we would like to save," said Amy Greenwood, whose mortgage bill jumped from $1,100 to $1,359 after the interest rate on the loan jumped 3 1/2 percentage points.
Monthly payment hikes could scarcely come at a worse time for many Michigan families who face falling home values, job loss and a stale real estate market.
"We have the combination of (adjustable-rate mortgages) and the combination of a depressed real estate market. I'm seeing people all the time now that I just can't help," said Mark Chessman, a Roseville bankruptcy attorney. "It's just the kiss of death."
Several years ago, when mortgage rates scraped bottom, thousands of Metro Detroiters opted for adjustable-rate loans to buy a home at the initial low rates they offer, as well as to refinance out of other higher-interest mortgages, consolidate and pay off credit card debt, or to take out home equity credit lines for improvement projects.
Now, interest rates on an estimated $500 billion to $800 billion of those loans will readjust in 2007, according to the Mortgage Bankers Association. Freddie Mac estimates that $494 billion will reset this year.
The sometimes staggering increases in housing payments that come with adjustable-rate mortgages are at least partly to blame for a 17 percent, third-quarter jump in foreclosures reported this month by RealtyTrac Inc., an online firm that tracks foreclosures. Year over year, foreclosures are up 43 percent nationally.
"With the volume of these loans -- more than $1 trillion of them due to adjust over the next 15 months -- this is a trend that definitely bears watching," said James J. Saccacio, chief executive officer of RealtyTrac.
Values below what they owe
Median home prices in Metro Detroit dropped 8 percent -- the biggest decline since 1989 -- in the second quarter of this year, compared to the same period last year, according to the National Association of Realtors.
Those falling home prices, coupled with mortgages with no down payments or maxed-out home equity lines of credit, has left stranded many homeowners whose home values now fall below what they owe.
"Home prices are not rising the same as they are across the nation. We haven't had that home explosion like they have in Nevada or Arizona," said Carlo Dall'Olmo, a broker with 1st Metropolitan Mortgage in Farmington Hills.
Many people with adjustable-rate mortgages are now scrambling to get into a fixed rate or sell their home, which can also be difficult, said Akua Ofori-Mensa, who works in the GreenPath Debt Solutions Westland office.
"Because the market has depreciated so much, there's not equity in people's home and you need equity to refinance," Mensa said. "I've seen a lot lately too that people want to sell their house, (but) they can't sell it for what the mortgage value is."
'I worry about it every day'
It's that frightening seesaw of rising costs and lower home equity that has Ken Hamilton worried.
At first, an ARM on his home was a smart move, Hamilton said, enabling his family to save money on a mortgage they didn't plan on keeping long term.
By the time his seven-year ARM begins readjusting in two years on his $225,000 Livonia home, he fears it could be tough to sell since homes are not appreciating enough.
"I worry about it every day," said Hamilton, who plans to put up a "For Sale" sign in the next few weeks.
"If we were smart and watched (interest rates) when they got down to the fours, we should have locked in. But we didn't pay that close of attention," he said. "Hopefully, by the time we do sell in eight to 10 months, it will have turned some for Michigan."
Last month, the Greenwoods saw the monthly payment on their Warren ranch jump from $1,100 to $1,359 as their ARM reset.
Poor credit is preventing the couple from refinancing, but Amy Greenwood said they are managing the bills because they were prepared for a reset when they took the loan.
"We planned on it going up. It wasn't like a big surprise," she said. "I do think that people go out there and get mortgages on their home and then they can't afford it."
Low rates fueled boom
Adjustable-rate mortgages offer a low fixed-interest rate for as little as a month to up to 10 years. After the fixed terms ends, interest rates usually reset to higher rates at yearly intervals, though some reset every six months.
While ARMs have been around for several decades, they enjoyed a boom in popularity in recent years as mortgage rates plummeted, even as home sales stayed strong and home prices steadily rose. Those low rates, shy of 4 percent on some hybrid ARMs, lured many buyers who stretched to buy a pricey home that they otherwise probably couldn't afford.
ARMs now make up 25.03 percent of mortgages, up from 17.8 percent just three years ago, according to the Mortgage Bankers Association.
"Interest rates remain relatively low, but people were turning to these products in many markets because home prices were accelerating faster than their incomes were, so there was this evolution," said Allen Fishbein, director of housing and credit policy at Consumer Federation of America.
ARMs often attracted consumers who went payment shopping and picked their loan based on the lowest monthly payout, said Greg McBride, senior financial analyst at Bankrate.com.
"If you cannot afford the monthly payment on a 30-year fixed-rate mortgage, that's a red flag that you cannot afford that home," he said. "Now that short-term interest rates have really increased ... those same homeowners are now looking at some steep payment increases."
Variations have higher risk
While homeowners with traditional, hybrid ARMs are beginning to feel the pinch of higher mortgage payments, those with relatively new variations, called interest-only and option ARMs, are hurting even more.
Considered two of the riskiest loans, they allow borrowers to pay off only the monthly interest on their mortgage or pick from a series of payments each month.
Products like these -- once used by sophisticated borrowers with plenty of discretionary income -- are now heavily marketed to middle- or low-income borrowers who need low monthly payments.
The lowest possible payment on the option ARM, with a 1 percent interest rate, doesn't even cover interest, and the remaining balance is tacked on to the back of the loan. Over time, borrowers can end up with a larger loan than they originally took out.
"What's being advertised on the TV and radio are these ridiculously low (interest) loans," said mortgage broker Dall'Olmo. "People go in thinking this is what the rates are. Not everybody does explain it properly."
Subprime borrowers at risk
Also particularly vulnerable are home buyers who are considered higher credit risks, who typically can't qualify for the lower interest ARMs. They often are sold so-called subprime mortgages with higher rates and more frequent adjustments.
Amanda Pena, a Detroit single mother of three, is one of those. She filed for bankruptcy after the monthly payment on the two-year ARM for her $112,000 house readjusted from 7.5 percent to 10 percent in October, pushing her payment up $180 from $640 to $820.
"When I tried to (refinance), I had no equity in the house. They told me I couldn't refinance, so I was stuck," she said. "That's what pushed me to file for bankruptcy. I already knew it was going to be hard to keep up with the payments."
There's legitimate concern for subprime borrowers in households that have low to middle income who have gravitated toward these loans because they aren't in a position to handle a $300 per month payment increase, McBride said.
Watching the Fed
In 2004 and 2005, 7.7 million or $1.88 trillion in adjustable-rate loans were taken out. Of those, about $300 billion are at risk of defaulting as they reset over the next five years, according to Chris Cagan, economist with First American Real Estate Solutions.
An estimated $600 billion to $700 billion of adjustable-rate mortgages will be refinanced before they're due to reset in 2007, according to the Mortgage Bankers Association.
Some are optimistic that borrowers have seen the last of interest rate hikes by the Federal Reserve, at least for a while.
"We think they're going to hold rates steady at least for the next year and if they do change rates, they're likely to lower them instead of raise them," said Mike Fratantoni, senior economist with the Mortgage Bankers Association.
That's good news for borrowers like Ken Hamilton, whose mortgages won't reset for another year or two. If rates go down, it could even mean lower monthly payments when his loan rate adjusts.
But for now, McBride said, borrowers should do their homework and use caution when considering an ARM.
"They're like steak knives," he said. "You use it the right way, it's a great tool; you use it the wrong way and you can get hurt pretty bad."
Dorothy Bourdet / The Detroit News
For Amy and Randy Greenwood, an adjustable-rate mortgage was a way to consolidate bills even with less-than-perfect credit.
A so-called ARM helped Detroiter Amanda Pena realize a dream: a home for her family.
For the Hamiltons, it was a savvy finance management move, given they didn't plan to stay in their Livonia house too long.
The deal worked like this: get lower interest rates on your loan for several years, but risk higher payments after that time is up and your interest rate readjusts.
Time is up for the Greenwoods, Pena and millions of others like them, who planned to refinance before they faced higher rates but couldn't and got hit with sticker shock when the mortgage bill arrived.
"It's going to make it harder. It will take away some extra money that we would like to save," said Amy Greenwood, whose mortgage bill jumped from $1,100 to $1,359 after the interest rate on the loan jumped 3 1/2 percentage points.
Monthly payment hikes could scarcely come at a worse time for many Michigan families who face falling home values, job loss and a stale real estate market.
"We have the combination of (adjustable-rate mortgages) and the combination of a depressed real estate market. I'm seeing people all the time now that I just can't help," said Mark Chessman, a Roseville bankruptcy attorney. "It's just the kiss of death."
Several years ago, when mortgage rates scraped bottom, thousands of Metro Detroiters opted for adjustable-rate loans to buy a home at the initial low rates they offer, as well as to refinance out of other higher-interest mortgages, consolidate and pay off credit card debt, or to take out home equity credit lines for improvement projects.
Now, interest rates on an estimated $500 billion to $800 billion of those loans will readjust in 2007, according to the Mortgage Bankers Association. Freddie Mac estimates that $494 billion will reset this year.
The sometimes staggering increases in housing payments that come with adjustable-rate mortgages are at least partly to blame for a 17 percent, third-quarter jump in foreclosures reported this month by RealtyTrac Inc., an online firm that tracks foreclosures. Year over year, foreclosures are up 43 percent nationally.
"With the volume of these loans -- more than $1 trillion of them due to adjust over the next 15 months -- this is a trend that definitely bears watching," said James J. Saccacio, chief executive officer of RealtyTrac.
Values below what they owe
Median home prices in Metro Detroit dropped 8 percent -- the biggest decline since 1989 -- in the second quarter of this year, compared to the same period last year, according to the National Association of Realtors.
Those falling home prices, coupled with mortgages with no down payments or maxed-out home equity lines of credit, has left stranded many homeowners whose home values now fall below what they owe.
"Home prices are not rising the same as they are across the nation. We haven't had that home explosion like they have in Nevada or Arizona," said Carlo Dall'Olmo, a broker with 1st Metropolitan Mortgage in Farmington Hills.
Many people with adjustable-rate mortgages are now scrambling to get into a fixed rate or sell their home, which can also be difficult, said Akua Ofori-Mensa, who works in the GreenPath Debt Solutions Westland office.
"Because the market has depreciated so much, there's not equity in people's home and you need equity to refinance," Mensa said. "I've seen a lot lately too that people want to sell their house, (but) they can't sell it for what the mortgage value is."
'I worry about it every day'
It's that frightening seesaw of rising costs and lower home equity that has Ken Hamilton worried.
At first, an ARM on his home was a smart move, Hamilton said, enabling his family to save money on a mortgage they didn't plan on keeping long term.
By the time his seven-year ARM begins readjusting in two years on his $225,000 Livonia home, he fears it could be tough to sell since homes are not appreciating enough.
"I worry about it every day," said Hamilton, who plans to put up a "For Sale" sign in the next few weeks.
"If we were smart and watched (interest rates) when they got down to the fours, we should have locked in. But we didn't pay that close of attention," he said. "Hopefully, by the time we do sell in eight to 10 months, it will have turned some for Michigan."
Last month, the Greenwoods saw the monthly payment on their Warren ranch jump from $1,100 to $1,359 as their ARM reset.
Poor credit is preventing the couple from refinancing, but Amy Greenwood said they are managing the bills because they were prepared for a reset when they took the loan.
"We planned on it going up. It wasn't like a big surprise," she said. "I do think that people go out there and get mortgages on their home and then they can't afford it."
Low rates fueled boom
Adjustable-rate mortgages offer a low fixed-interest rate for as little as a month to up to 10 years. After the fixed terms ends, interest rates usually reset to higher rates at yearly intervals, though some reset every six months.
While ARMs have been around for several decades, they enjoyed a boom in popularity in recent years as mortgage rates plummeted, even as home sales stayed strong and home prices steadily rose. Those low rates, shy of 4 percent on some hybrid ARMs, lured many buyers who stretched to buy a pricey home that they otherwise probably couldn't afford.
ARMs now make up 25.03 percent of mortgages, up from 17.8 percent just three years ago, according to the Mortgage Bankers Association.
"Interest rates remain relatively low, but people were turning to these products in many markets because home prices were accelerating faster than their incomes were, so there was this evolution," said Allen Fishbein, director of housing and credit policy at Consumer Federation of America.
ARMs often attracted consumers who went payment shopping and picked their loan based on the lowest monthly payout, said Greg McBride, senior financial analyst at Bankrate.com.
"If you cannot afford the monthly payment on a 30-year fixed-rate mortgage, that's a red flag that you cannot afford that home," he said. "Now that short-term interest rates have really increased ... those same homeowners are now looking at some steep payment increases."
Variations have higher risk
While homeowners with traditional, hybrid ARMs are beginning to feel the pinch of higher mortgage payments, those with relatively new variations, called interest-only and option ARMs, are hurting even more.
Considered two of the riskiest loans, they allow borrowers to pay off only the monthly interest on their mortgage or pick from a series of payments each month.
Products like these -- once used by sophisticated borrowers with plenty of discretionary income -- are now heavily marketed to middle- or low-income borrowers who need low monthly payments.
The lowest possible payment on the option ARM, with a 1 percent interest rate, doesn't even cover interest, and the remaining balance is tacked on to the back of the loan. Over time, borrowers can end up with a larger loan than they originally took out.
"What's being advertised on the TV and radio are these ridiculously low (interest) loans," said mortgage broker Dall'Olmo. "People go in thinking this is what the rates are. Not everybody does explain it properly."
Subprime borrowers at risk
Also particularly vulnerable are home buyers who are considered higher credit risks, who typically can't qualify for the lower interest ARMs. They often are sold so-called subprime mortgages with higher rates and more frequent adjustments.
Amanda Pena, a Detroit single mother of three, is one of those. She filed for bankruptcy after the monthly payment on the two-year ARM for her $112,000 house readjusted from 7.5 percent to 10 percent in October, pushing her payment up $180 from $640 to $820.
"When I tried to (refinance), I had no equity in the house. They told me I couldn't refinance, so I was stuck," she said. "That's what pushed me to file for bankruptcy. I already knew it was going to be hard to keep up with the payments."
There's legitimate concern for subprime borrowers in households that have low to middle income who have gravitated toward these loans because they aren't in a position to handle a $300 per month payment increase, McBride said.
Watching the Fed
In 2004 and 2005, 7.7 million or $1.88 trillion in adjustable-rate loans were taken out. Of those, about $300 billion are at risk of defaulting as they reset over the next five years, according to Chris Cagan, economist with First American Real Estate Solutions.
An estimated $600 billion to $700 billion of adjustable-rate mortgages will be refinanced before they're due to reset in 2007, according to the Mortgage Bankers Association.
Some are optimistic that borrowers have seen the last of interest rate hikes by the Federal Reserve, at least for a while.
"We think they're going to hold rates steady at least for the next year and if they do change rates, they're likely to lower them instead of raise them," said Mike Fratantoni, senior economist with the Mortgage Bankers Association.
That's good news for borrowers like Ken Hamilton, whose mortgages won't reset for another year or two. If rates go down, it could even mean lower monthly payments when his loan rate adjusts.
But for now, McBride said, borrowers should do their homework and use caution when considering an ARM.
"They're like steak knives," he said. "You use it the right way, it's a great tool; you use it the wrong way and you can get hurt pretty bad."
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