Home Foreclosures Up as Mortgage Rates Climb

By
ABC News
June 20, 2006, 5:20 PM ET
4 min read

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.

A Big Increase in 2006

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.

American Concerns Slightly Higher

Despite the potential for more foreclosures, only a small number of Americans have become more concerned about making their monthly home payments.

There are 122 million housing units in this country. In Gallup polling data from last month, 11 percent of Americans were "very worried" about being able to pay their rent, mortgage or other housing costs -- that number has been stable in annual surveys each April since 2001. However, 27 percent said they were very or moderately worried; the previous range had been 22 to 25 percent.

A Los Angeles Times/Bloomberg poll in March focused specifically on people who have ARMs. Twenty-six percent of them were either "not too confident" (21 percent) or "not at all confident" (5 percent) about being able to make their mortgage payments if rates went up (how far up was not specified). But 74 percent were confident. And just 10 percent of all respondents had an ARM in the first place.

Should We Be More Worried?

But as interest rates steadily increased over the past year, and the explosive growth in housing prices declined, more Americans started to fall behind in their mortgage payments.

Doug Duncan, chief economist at the Mortgage Bankers Association, reported in March that delinquencies now total 4.7 percent, up from 4.38 percent a year ago. For homeowners with ARMs, the rate is 5.72 percent, up nearly 1 percent from the previous year.

Ken Wade, CEO of NeighborWorks America, said that homeowners do have options if they fall behind in their monthly payments.

"Early contact with either your mortgage servicer or a housing counselor is critical, because the longer you wait, the less opportunities you have to work out the situation," Wade told ABC News. "That's critically important, and oftentimes people don't seek help until it is really too late."

A quick look at the reasons foreclosure rates have increased:

  • People stretched themselves financially to get into homes using adjustable rate mortgages, interest-only mortgages and more exotic loan products.
  • Banks relaxed lending standards to make it easier for people to purchase homes; however, for some of those homeowners, once they have an unexpected financial hardship, such as medical bills, a lost job or necessary car repairs, they stop making mortgage payments.
  • Many homeowners put little to no money down when they bought their homes and currently have little or even no equity in their home and thus nothing to fall back on. And in some cases, these homeowners then took out home equity loans or lines of credit and now owe even more.
  • Homeowners have relied on the recent double-digit increases in home prices to build up equity in their home instead of paying down more in principal. As housing prices increase more slowly, many homeowners will not be able to rely on high home values to cover their debt loads.