Interesting article on ARMs resetting

[sweeps]

Foreclosures May Jump As ARMs Reset

[Diolla]

In 2002, Christopher Jones, 32, refinanced into a hybrid ARM with plans to refinance again when the rate started to readjust. At the time, his downtown Atlanta house appraised for $108,000.

Now, his monthly payments have shot up, but Jones can't sell his house for more than $84,000 and he can't get an appraisal for more than $85,000.

The appraisal firm told Jones that the value of houses in his neighborhood have fallen victim to a cooling market. With no other options left, Jones has decided to pack it in and foreclose on the house.

"I'm just going to take the loss," he said. "That's all I can do."

I wonder if he realizes that the lender can sue him for the difference between the selling price and the loan? He may still have to make payments on a house he doesn't own.

[slimcustomer]

A lot of people could buy some time refinancing into a new PenFed 5.5% 5/1 ARM with a 40 year amortization instead of resorting to more desperate measures.

[Elgin526]

We're going to see a lot more of this in the next 18 months. All the 3 year ARM's that were taken out durring the past 2 years will be coming up for rest in the near future. A lot of people will lose their shirts. Even if their house hasn't depreciated (and many haven't, even in a cooling market) many people will be forced into much higher payments. Even if they refinance, odds are their payments will go up, just because overall interest rates are higher than they were when they took out the loan, plus they'll have to pay closing costs. Only now, they'll have a higher mortgage payment at a time when fuel prices are higher (both for cars and home heating) overall inflation is growing (due to fuel prices) and most credit card minimum payments are higher. Not a good combination. I think personal bankruptcies will be on the rise, a sharp rise, in the next two years. Some people will be okay, their income increased they way they though it would and can handle the higher costs, other's will have moved to a new home like they anticipated, or they get lucky in someother way. But I see dark times ahead for a lot of people.

I got lucky. I bought my condo in '01 using a 5 year ARM. But I had every intention of doing a refi within two years. Once I had a record of ontime payments, I'd be able to qualify for a lower interest rate on a traditional 30 year. I did the refi 1 year after purchase, my payments droped by $250 a month (beter interest rate) AND I had the security of a 30 year fixed. It turns out I did move in 2005, so I could have kept the original 5 year ARM and made out okay had I chosen not to refi, but hindsight is 20/20. People need to understand that in exchange for a lower interest rate, they take a larger risk. I could have easily gotten burned if I hadn't been able to refi when I did, or if the housing market in my area had cooled. Luckily for me that didn't happen.

[boefixepa]

Why would you sign your life away without understanding the risks? Why do people choose to NOT educate themselves on what they are getting into? I can't understand how someone can not KNOW that they have an ARM! That's like saying I didn't know I needed to put gas in my car! I just don't get it....I don't.

If you understand the risk and it comes back to bite you...well you knew.

[jmjj215]

Originally Posted by Diolla

In 2002, Christopher Jones, 32, refinanced into a hybrid ARM with plans to refinance again when the rate started to readjust. At the time, his downtown Atlanta house appraised for $108,000.

Now, his monthly payments have shot up, but Jones can't sell his house for more than $84,000 and he can't get an appraisal for more than $85,000.

The appraisal firm told Jones that the value of houses in his neighborhood have fallen victim to a cooling market. With no other options left, Jones has decided to pack it in and foreclose on the house.

"I'm just going to take the loss," he said. "That's all I can do."

I wonder if he realizes that the lender can sue him for the difference between the selling price and the loan? He may still have to make payments on a house he doesn't own.

I think he understands that, as he said he's "just going to take the loss". Of course, foreclosure is usually a lot worse than just selling at a discount. I'd be hard-pressed to foreclose and would rather sell it cheap.

[34saving]

You sign your life away without knowing the risks because everybody you deal with in the process is a salesperson. Your agent, the selling agent, the mortgage broker . . . all of them will work hard to make sure that you feel comfortable -- often whether or not that requires lying.

[34saving]

jmjj -- That's great if your bank will do a short sale. However, if you sell at a loss you still owe x to your bank. The outcome to your financial situation is basically the same (including the hammering of your credit unless you've got the cash.)

[cashqueen]

Interesting. Is it ever ok to have an ARM? We bought our house with a 5 year arm at 4% thinking we would only be staying here about 3 years. Well, we are now on year 3. After 5 yrs our interest goes to 6%. We still may sell within the next 2 years but we are currently undecided. At most our plans are to stay here another 2-3 years. WWYD - refi now or wait it out for another 2 years?

[sweeps]

I'm in the same situation. I'm on year 3 in a 5-year ARM at 4%. But I'm planning on moving in the next year or two, so I'm fine with it.

It's your call, but if there's a good chance that you'll be moving before (or shortly after) your ARM resets, I wouldn't refi. Just make sure you're building up your savings in the meantime though.

It's all about your risk tolerance Cashqueen as well as how definite your future plans are for the home (except that in my world, there are no such things as definite future plans).

I think logic would indicate an ARM makes more sense when rates are middling (kind of like now) so that you stand to benefit if they drop some but you won't take too bad a hit if they go up a little more. Then again, you lose much of the premium on rates in this environment since the lenders stand to gain less from you. Likewise if rates move really high, the ARM becomes a less attractive option for lenders since they have next to nowhere to go but down.

With the exception of an expected quick sale in a few years, I can't for the life of me understand why you would have wanted one when rates were so low knowing that they didn't have anywhere to go but up when you could have locked in a frighteningly low rate for 15 or 30 years.

Unfortunately, I think a great many people got "talked into" them these last few years without doing any homework about what they entail. Then again, I have no doubt the hybrids were put to good use by flippers during the same period and more power to them.

It's never black and white, that's for sure.

[sweeps]

rexdart, maybe I'm misinterpreting what you're saying, but just to clarify... a 5/1 ARM means that for 5 years your rate is locked (at a level below the fixed rates at the time). Then after the 5 years the rate begins to float.

[jmjj215]

Originally Posted by 34saving

jmjj -- That's great if your bank will do a short sale. However, if you sell at a loss you still owe x to your bank. The outcome to your financial situation is basically the same (including the hammering of your credit unless you've got the cash.)

Yeah, but can't you get a better deal selling at a discount vs. letting the bank auction it?

[34saving]

Yes, but (at least around here) most people in foreclosure have no ability to pay back anything. So, whether they owe the bank $20,000 or $40,000 really doesn't matter. They're not going to pay it back anyway. In the meantime, since foreclosure takes 6 months or more at least they can stay in their homes for a lot longer than if they sold it at a loss. It will be interesting to see if banks start doing more short sales as the foreclosure rates increase . . .

Originally Posted by Sweepsplayer

rexdart, maybe I'm misinterpreting what you're saying, but just to clarify... a 5/1 ARM means that for 5 years your rate is locked (at a level below the fixed rates at the time). Then after the 5 years the rate begins to float.

no, you got me Sweeps, and in the case where you know...KNOW you will be selling and moving sure it would have made sense.

my point was that for me there is just nothing that certain in my life and my financially conservative nature would have much preferred the low (although slightly higher at first) fixed rate that I knew would never change vs. the risk of what would happen after those five years on the ARM were up and what kind of shape I might be in to deal with it at that time (what if I couldn't even re-finance at that time?)

I think I just carry a naturally pessimistic streak in me that is certain there's a train up around that curve ahead.

[debtfreeme]

with the slowing of the real estte market here in sacramento and the inceasing threat of foreclosures, i am hopinh that i will be able to find something around here cheaper through foreclosure. It is hard to take someones homes, but why wait until the end to do anything as so many people have done? Why lock in an ARM if you have no intention of changing anything.

As for the ARM that goes to 6 in a couple of years, is that set in stone never to be moved again? It is a pretty low rate and who knows where rates will go with everything on the rise. We are starting to see the shift upward in martgage rates so 6 sounds good but if you refi you might be able to get 5.5 or 5.25 which could equal thousands saved.

[flash]

ARMs are great if rates are high and expected to fall...we did this maybe 10 years ago at a very low rate, and at the end of the term, the rates had fallen dramatically. We could either lock in the low rate, or pay it off, which we did. ARMs make sense if you are PLANNING to sell, refinance, or change before the end of the term.

[VJW]

HOMEOWNERS STRUGGLE TO KEEP UP WITH ADJUSTABLE RATES

(USA TODAY) – For 45 years, Robert and Lorraine Brown have lived in their ranch-style home in Florissant, Mo. One of their four children was even born there. But for the past eight months, the couple have been locked in a sleep-wrecking race to keep up with their rising mortgage bills. They've switched to cheaper phone service, cut back on groceries and sometimes put off ordering medicine.

When they refinanced their home two years ago to pay off some bills, Robert, now 78, was working as a deliveryman. But his employer went out of business last April. Now he and Lorraine, 72, a retired nurse, are both seeking work. The rate on their mortgage has jumped from 7% to 10.5%.

"Within the last year, I would say 60% to 70% of calls to our hotlines are issues related to ARM (adjustable-rate mortgage) loans," says Chris Krehmeyer, executive director of Beyond Housing, a non-profit group that offers homeownership support services in St. Louis. "That's significantly higher than in years past, because the ARMs are coming home to roost."

What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That's the highest such rate in the country.

Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won't be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan's research.

USA TODAY

#

[b4freedom]

This is good news for long term real estate investors. In another year, you’ll be able to buy foreclosed properties for a good discount. However, I do feed badly for all of those people stuck in the ARM trap.

[VJW]

It’s why the wealthy made out like bandits during the Great Depression. They had the funds to buy assets for pennies on the dollar and then were able to WAIT.

#