Home Foreclosures Up as Mortgage Rates Climb

May 10, 2006 — -- As interest rates increased steadily over the past year and the explosive growth in housing prices declined, many Americans fell behind in their mortgage payments. Now some have defaulted on home loans and could lose their homes due to foreclosures.

When home prices soared at double-digit rates during the recent red-hot housing market, many Americans stretched themselves financially to purchase a home. The use of lower-interest adjustable-rate mortgages, or ARMs, interest-only mortgages or option-ARMs that allowed home buyers to choose how to pay each month soared during the same period.

According to the Mortgage Bankers Association of America, ARMs now represent 25 percent of the more than $8.5 trillion in outstanding loans.

Economists with Moody's Economy.com forecast that the interest rates on $2 trillion of those mortgage loans could be reset in 2006 and 2007.

And that could become a problem if interest rates continue moving higher.

Today the Federal Reserve increased a key interest rate by a quarter-point for the 16th time since June 2004. The federal funds fate -- which is what banks pay for overnight loans -- now stands at 5 percent. Mortgage rates will not be directly affected by today's decision but tend to move in the same direction as the fed funds rate. That could soon translate into increased mortgage rates.

Homeowners who negotiated ARMs in 2004 and 2005 could face interest rate increases that boost monthly payments by as much as 50 percent. One in eight of these people is expected to default on their loans -- as many as 1 million, according to First American Real Estate Solutions, which compiles national real estate data.

RealtyTrac, a California organization that tracks foreclosed properties nationwide, found that the foreclosure rate in March of this year was up 63 percent compared with last year. The company's foreclosure data includes a variety of categories: homes that enter the foreclosure process, homes that are actually foreclosed on and homes that are returned to the banks.

But that doesn't mean that all of those people are left homeless. When people default on their mortgages and go to foreclosure, not all those borrowers will lose their home. Some are able to sell their homes before foreclosure. Others are able to work out a payment plan with the lender. And in many states, filing for bankruptcy will stop any foreclosures.

It's estimated that up to half of all borrowers who default on their loans will actually lose their homes to foreclosure.