Newsweek: Adjustable mortgages + home equity loans = foreclosures [View All]

[Human Torch]

House Broke
Millions of Americans bought into the real estate boom with adjustable mortgages and home equity loans. Now rising interest rates are forcing them into agonizing financial choices.

WEB EXCLUSIVE
By Jennifer Barrett
Updated: 3:35 p.m. MT Aug 8, 2006

http://www.msnbc.msn.com/id/14251743/

Aug. 8, 2006 - When Shawn Howell saw the house in the summer of 2004, he thought he couldn’t lose. The location-close to family and in an upscale subdivision in Louisville, Ky.,—was perfect; the three-bedroom plus loft was just right. The price was a little high at $217,000—especially as Howell's wife, Niki, had just given birth to their second child. But the couple learned they could purchase it with no money down by taking out two adjustable-rate mortgages. The monthly payments would start at a manageable $1,100. And Howell figured the value of their home could only go up in the five years they planned to live there. Instead, two years later, the family have put their home on the market for less than they paid for it—desperate to find a buyer before the bank forecloses on the property. "Looking back, I wouldn't advise anyone to do what we did," says Howell, an Iraq war vet who worked two jobs but still fell short on the monthly payments after they jumped by more than $300. "We just couldn't afford the house anymore."

Across the country, millions of homeowners are finding themselves in a similar situation. Real estate purchases that once seemed like such moneymakers have become financial burdens instead. U.S. homeowners now owe about $9 trillion in mortgage debt. Of that, about $425 billion in adjustable-rate mortgages-initially pegged at historically low rates, but designed to shift with market trends after periods ranging from one to 10 years—will reset sometime this year, according to Freddie Mac, a government-sponsored housing financing company. Another $600 billion in home equity lines of credit (or HELOCs) and second-lien mortgage loans, which became popular when rates were low as a means of paying off credit card debt or financing home improvements, are also being readjusted. Those with fixed-rate mortgages payable over 15 or 30-year periods may be seeing little change, but those who banked on rates remaining near the 4.6 percent lows of 2003, are getting some unpleasant shocks when their mortgage bills arrive in the mail. As their payments rise, many are struggling to keep up. Foreclosures and delinquency rates are rising. And with the markets cooling in many regions—existing home sales across the country have slipped for three months straight and new home sales nationwide have declining as well—there are growing fears of a looming crisis. Howard Dvorkin, president and founder of Consolidated Credit Counseling Services, a nonprofit debt management organization, says up to 10 percent of those now seeking counseling are being squeezed by adjustable-rate mortgages or home equity loans. "And this is just the tip of the iceberg."

Fannie Mae, the country's largest source for home mortgage funding, estimates that nearly one-third of the total outstanding mortgage debt is set at an adjustable rate. So even more loans and mortgages will re-adjust in the next few years—and almost certainly in an upward direction. The Federal Reserve has raised interest rates 17 times since the summer of 2004. And though rates stayed unchanged at this week’s meeting, many experts believe there are still more hikes in store. "Unless we see some serious moderation in inflation moves real quick, I don't think we're done," says Greg McBride, senior financial analyst at Bankrate.com.

The resulting jump in both adjustable and fixed mortgage rates is already crimping the housing market. Existing home sales in June (the most recent month for which figures are available from the National Association of Realtors) were down 8.9 percent from June 2005, while the number of existing homes on the market last month was up nearly 40 percent from a year earlier. "That cannot make anyone feel comfortable about the stability of this market," says Joel Naroff, president and chief economist of Naroff Economic Advisors. "It appears that anyone who has any hope of getting out has put their home on the market."



The Howells are selling their Louisville home in the face of foreclosure