An Adjustable-Rate Mortgage Can Put a Borrower in a Bind
The most important word in the phrase “adjustable-rate mortgage” is the first: adjustable.
Scores of Americans are learning that the hard way. Home foreclosure rates are up nationally and in Douglas County, Ks., and experts are pointing to people being caught unprepared for increases in their adjustable rate mortgages, according to the Lawrence Journal-World.
“It is just the nature of a lot of folks to not plan, and they haven’t planned for their payments to increase,” said Dan Immergluck, an associate professor at Georgia Tech who specializes in foreclosure research. “They have more disposable income and they have grown used to spending it.”
Through October, bankruptcies are up 27 percent nationally from the same period a year ago. In Douglas County, 77 foreclosure auctions have taken place through October, up from 52 a year ago.
Nonetheless, Robert Baker, education coordinator for Lawrence’s Housing and Credit Counseling, said he didn’t think the increase represents signs of a distressed Kansas mortgage market.
“Listings are taking longer to sell, but it is really just longer by Lawrence standards. It’s still a pretty healthy market. We’re still pretty blessed in Lawrence,” Baker said.
The number of people coming to his office seeking counseling on issues related to default — which usually happens when a homeowner has fallen behind on payments for 90-120 days — has “slowly but surely” increased.
There always will be a fair number of foreclosures related to unexpected hardships, such as job losses or unexpected medical bills. But Baker said many are homeowners seeking help after taking advantage of loans that have been heavily marketed on the radio, TV and Internet as amazingly low-rate options.
“Those commercials like to tell you how much you can save on your mortgage. There’s usually a lot of fine print on the TV screen,” Baker said.
Most heavily promoted loans are adjustable rate mortgages, which normally work by locking in a rate for the first 1-3 years. But after that, rates can rise by up to 2 percent a year based on interest rate markets.
Those loans can be fine for people who are expecting to move in a 1-3 year period, or for people who really plan and know they’ll convert the loan into a traditional fixed-rate mortgage before their rates rise.
Some promotional loans also are interest-only mortgage loans, which allow borrowers to pay only the interest for the initial portion of the loan.
Others offer a “teaser rate” or temporary rate in the 4 percent range, to entice people to doing business with a particular mortgage lender. When those rates increase from 4 percent to 7 percent or 8 percent, the monthly payment easily can increase by 50 percent or more.
Immergluck said a large influx of Wall Street money has been invested into the mortgage industry, which has given mortgage lenders an ample supply of cash to loan. That has caused some mortgage lenders to become more lax in the standards they use to determine whether a person can take on debt.
Immergluck said federal regulators could improve the industry by creating a debt-to-income ratio that lenders must follow, especially when lending to low- to moderate-income consumers.
But Rick Sharga, V.P. of RealtyTrac, said home buyers are partly to blame, too.
“I hate to sound cruel, but at the end of the day, the ultimate responsibility does rest with the consumer. We always look for a bad guy, but if you are a homeowner, you have to educate yourself. In most cases, it will absolutely be the largest investment you ever make,” Sharga said.