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."
Not Unique
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.
Increasing Delinquencies
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.
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 last week 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.
George Roddy has tracked the real estate industry in the Dallas-Fort Worth region for nearly three decades. For the 18 counties he recently surveyed, delinquency rates were up more than 15 percent for the first quarter of 2006 compared to the same time period last year. Just under half of those will end up in foreclosure proceedings.
"There's a certain percentage of the population that's going to be impacted by ARMs as the interest rates go up, impacted by the interest-only loans as the interest rates go up," he explained. "Even at current interest rates, it's a chore in some cases to make that monthly payment."
Ticking Foreclosure Bomb?
"I think it's a bomb waiting to go off," said William Apgar, reflecting on the future of interest rate increases for those with ARMs. Apgar has studied foreclosures in Atlanta and Chicago as a lecturer at Harvard's Kennedy School.
He worried that any hiccup, from medical problems to job loss, combined with a spike in interest rates, could result in disaster. "Foreclosures have been trending up for several years."
Currently, foreclosure rates are up to nearly 1 percent of current outstanding loans that were made nationwide at the end of 2005, according to the MBAA. That represents a slight increase from September, but was actually down from a year ago.
What to Do
Homeownership advocates remain worried. They see delinquency and foreclosure rates increasing in states like Ohio, Michigan and Georgia.
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 explained. "That's critically important, and oftentimes people don't seek help until it is really too late."
Walking Away
Sometimes, however, that may not be enough and the worst can still happen. Heidi negotiated terms with her bank, but she and husband still could not afford the higher monthly payments.
They put their dream home on the market, but as many of her neighbors had also lost their residences to foreclosure, housing prices had dropped. Their home would have sold for less than their outstanding loan. After several months on the market with no offers, she and her husband moved to a rental home.
"I finally, just, you know, had to make my peace with the fact that we were going to lose our house, so that's what we did and we just had to walk away."
She may still owe money on the property, and she knows that her credit will be damaged. She only hopes she'll be able to own a home again, but with one noticeable difference.
"I would not get an adjustable-rate loan," she promised. "I would get a conventional loan, a fixed loan."
For more on this story, please tune in to World News Tonight on Tuesday at 6:30 p.m. ET.