Rates are resetting higher, and in some cases, the monthly mortgage
payments that were so affordable in 2004 or 2005 when the loan was
signed will push homeowners to their limit or beyond.
What is a borrower to do? You can try to make ends meet by cutting back
on expenses. Shut off HBO and the premium cable channels, skip your
Starbucks run and bring your lunch to work rather than eating out and
you might have enough to cover the bump-up in your mortgage payment.
Don’t despair. There is another way to look at this problem. You, the
borrower, are not powerless. “Consumers get the feeling it is a lost
cause to do anything, but it is pretty much the opposite,” said Harry
H. Dinham, president of the National Association of Mortgage Brokers.
“The most motivated people are the lenders.”
Homeowners should seek a lower rate or switch to an interest-only loan
for a spell. They might even ask for more time to pay, just as long as
it does not create “negative amortization,” that is, letting the amount
owed increase with each payment.
Mr. Dinham has been through six real estate cycles since 1967 and every
time the market goes sour, he said, consumers make the mistake of
avoiding the loan officer.
But know this: lenders do not want to get stuck with a property. They
have to maintain it and then try to sell it on the open market, usually
at a loss. Some industry analysts say that it costs a bank an average
of $40,000 to foreclose on a loan. That amount gives the borrower that
much more room to negotiate.
About 1.1 million homeowners will lose their homes to foreclosure
because of a mortgage resetting to a higher rate over the next six to
seven years, said Christopher L. Cagan, director for research and
analytics at First American CoreLogic, a mortgage industry research
firm in Santa Ana, Calif.
He studied two databases with information on 58 million mortgages and
sees a wave of mortgage resets moving through the system, first the
mortgages with low teaser rates, followed by subprime loans and
finally, as the decade comes to a close, the loans to homeowners with
good credit.
This pig-through-the-python transition is not enough to hurt the
overall economy — about $112 billion will be lost, he calculated — but
it is a world of pain for the households involved.
Almost all of the teaser loans issued this decade — those mortgages
offered for less than 3 percent — have reset in the last two years.
Rates for most of the homeowners with good credit who obtained
adjustable-rate mortgages during the boom years of the housing market
will reset from 2008 to 2010. Mr. Cagan said he thought only 7 percent
of these loans would default because of the reset.
He concluded that “2008 is the pinch year.” If he were a gambling man —
or a real estate investor, but really, what’s the difference? — he said
he would start buying residential properties in 2009.
The bulk of the subprime adjustable-rate mortgages, those made to
people with less-than-sterling credit reports, are resetting this year
and next. About 12 percent of the subprime mortgages will default, he
predicted.
Subprime borrowers are particularly vulnerable to resets because the
interest rates they were originally paying were higher than market
rates. People who were subprime borrowers are, by definition, those who
have had trouble with money. Some were already on the edge when they
borrowed. For instance, an adjustment on a $300,000 loan to 9.5 percent
from 7 percent leads to a 26 percent increase in the payment, to $2,523
from $1,996.
The way to look at resets, whether they are subprime or prime, is what
percentage of income is going to the mortgage. Assume that the lender
determined when it granted the loan that the borrower was paying 30
percent of income to mortgage payments. Using the example above, upon
reset, the borrower is paying 7.8 percent more of their income to the
mortgage, that is 30 percent times 26 percent.
It becomes scarier when a borrower originally devoted 50 percent of
income to mortgage payments, a rate not uncommon on the coasts where
housing is more expensive. Multiply 50 percent times 26 percent and you
reach the sad fact that the person has to pay 13 percent more of income
to cover the mortgage. “At 50 percent of your income there is not that
much you can cut,” Mr. Cagan said.
Catherine Williams, the vice president for financial literacy at
Consumer Credit Counseling Services in Houston, said, “We can all have
a great garage sale, but, sadly, that only works once.”