Housing Woes: Interest Rate Increases and Foreclosures

March 21, 2006 — -- Heidi never imagined that she could lose her home outside Dallas. But rising interest rates and skyrocketing monthly mortgage payments have left her staring at foreclosure. She's just one of many Americans who might be forced to move as the housing market cools.

"I loved my home, and I felt very comfortable here, and my dogs loved it here, and my husband loved it here and this was my home and now we've lost it," she said, trying not to get emotional as she stood in her former kitchen.

The vivacious New York transplant, who, for privacy reasons, did not want her last name used, lost her recently built, 2,800-square-foot, three-bedroom home to foreclosure. Because of rising interest rates, the monthly payments on her adjustable-rate mortgage ballooned over the past several years and made the home unaffordable. It will be auctioned to the highest bidder on April 4 or revert to the bank.

"We couldn't keep up with the payments," she explained one dreary, wet Sunday morning in late winter. "The payments went from $1,700 a month almost to $3,000 a month, so this being my first home, my dream home, I had to lose it."

Heidi's situation is not unique. She is one of millions of Americans who took out ARMs to purchase a home during the recent housing boom.

As those initially low monthly interest rates started to get reset, homeowners could see their monthly payments rise to levels beyond their ability to pay. Interest rates for nearly a quarter of all mortgage debt, or $2 trillion, will be reset in 2006 and 2007, according to Moody's Economy.com.

People like Heidi will face the choice of making higher payments, selling their homes or, in the worst cases, foreclosure.

"Once the adjustable rate kicked in, it just got from bad to worse," Heidi said.

As home prices soared at double digit rates during the recent, red-hot housing market, many stretched themselves financially to purchase a home. The use of lower-interest rate 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.