Teaser Rates on Colorado Home Loans: Trouble Ahead
Uh-oh.
One out of three mortgages made during the past three years with “teaser” interest rates below 4 percent are expected to go into foreclosure due to rising payments, according to a study Tuesday from FirstAmerican CoreLogic.
Overall, CoreLogic estimates rising mortgage payments from adjustable-rate mortgages (ARMs) will trigger 1.1 million foreclosures representing $326 billion in loans. The loss to lenders and investors after they sell the foreclosed properties: $112 billion.
“This does not break or dominate the market,” said Chris Cagan, the study’s author. “It is part of the market. But there is that slice that is exposed.”
The study doesn’t break out state numbers, but it points to another wave of foreclosures this year and next for the Colorado housing market, which reported more than 28,000 foreclosures last year.
Zachary Urban, director of housing counseling with Brothers Redevelopment in Denver, estimates that about 40 percent of Colorado home loans made in the state during the past three years were subprime, adjustable-rate or otherwise “exotic.”
Urban, who oversees the Colorado Foreclosure Prevention Hotline, 1-877-601-4673, said more calls are coming in from people desperate because their mortgage payments are rising beyond what they can afford.
“We are seeing a lot more people in that position who are current but they are caught by the rate adjustment,” Urban said. “They are slammed.”
Weak home-price appreciation along much of the Front Range has left many homeowners without enough equity to refinance home loans; or sell with enough of a cushion to cover selling costs and the loan.
How bad will it get? CoreLogic estimates that about 32 percent of teaser-rate loans, or 460,996, will be foreclosed; 12 percent of adjustable-rate subprime loans, or 385,524; and 7 percent of market-rate adjustable rate loans, or 264,184 loans.
The study assumes Colorado housing prices stay flat with December 2006 levels. Each 1 percent drop in the value of homes will result in another 70,000 loans falling into foreclosure. Conversely, each 1 percent rise in home values will keep 70,000 loans from foreclosure.
Aurora resident Kevin Bell suffered payment shock just a month after refinancing into an option ARM loan with a low teaser rate in March 2006. Like the majority of option-ARM borrowers, he is taking the minimum-payment option most months, adding principal back to his mortgage.
Bell said he is trying to get other debts paid off so he can mortgage refinance. But time is running out - either a refinancing or a day of reckoning will come next year.
CoreLogic, based in Santa Ana, Calif., looked at 26 million mortgages, focusing on 8.37 million adjustable-rate mortgages worth $2.2 trillion.
SOURCE: The Denver Post