Foreclosures Rise, And Adjustable Loans are Partly to Blame

By David Darman on Tuesday, March 27, 2007.

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The Federal government reports that sales of new homes have declined for two months in a row.

Meanwhile in New Hampshire, news of a sales decline comes after reports that twice as many houses went to foreclosure in the first few months of 2007 than did during the same period last year.

That increase has been blamed on a preponderance of subprime loans.

Those are high interest, high fee mortgages that some lenders have made available to people with risky credit ratings.

But thereâ€™s evidence that more conventional loans have also played a part in the sharp rise in foreclosures.

Lenders have foreclosed on more than twelve-hundred foreclosures in New Hampshire since the beginning of the year.

Most of them were in Hillsborough, Stafford and Rockingham Counties.

Carol Stacy, the Registrar of Deeds in Rockingham County says sheâ€™s seen the numbers take off from last year.

Well, weâ€™re talking in January, 2006 there were fifteen foreclosures, and in January, 2007 there were 35 foreclosures. In February 2006 there were 13. And in February 2007 there were 28. Thatâ€™s pretty substantial.

Many of the houses in Rockingham County that have gone to foreclosure were paid for with adjustable rate mortgages.

And although subprime lenders have faced most of the blame, many of those loans were written by New Hampshire banks and mortgage companies.

Gerry Little, president of the New Hampshire Bankers Association says these kind of loans arenâ€™t at all unusual.

Adjustable rate mortgages are a traditional mortgage product thatâ€™s been around for a very, very long time, and when a consumer takes one out, theyâ€™re, theyâ€™re sort of taking a bet. Theyâ€™re betting that interest rates will stay flat, or go down. Hopefully stay flat long enough for them to generate equity in the home that theyâ€™ve purchased so that they can later on refinance into a fixed rate mortgage.

Nationwide, more than 650 billion dollars worth of adjustable mortgages are due to reset this year at an interest rate that will probably be higher than when they were first written.

That means there are plenty of house owners who are looking to refinance.

A couple of years ago, lots of homeowners did just that, as interest rates were falling and property values were rising.

Now, homeowners with adjustable rate mortgages are finding a climate of rising interest rates and declining, or leveled off property values.

Those circumstances have caught some people in a bind.

Dave Deziel is with Consumer Credit Counseling Service of New Hampshire and Vermont.

We had one family come in a couple of months ago for example who had found they were in an adjustable rate mortgage that resets every six months. And they had just absorbed a 200 dollar increase in their monthly mortgage, and they had just gotten notification that the adjustable rate mortgage was going to increase again, and increase an additional 150 dollars. So in the course of about half a year, their monthly mortgage went up 350 dollars, which is a huge piece of a lot of peopleâ€™s budgets.

Of course, homeowners in this predicament could sell their houses to get out of absorbing huge increases.

But in much of the state, selling a house isnâ€™t as easy as it was just a few years ago.

Jane Law of New Hampshire Housing Finance says thatâ€™s a prescription for real problems for anyone holding an adjustable rate mortgage.

If real estate prices are falling and interest rates are going up then you may be having a harder time selling that home and â€¦youâ€™re stuck, or you need to refinance it and you canâ€™t get as good a deal.

New Hampshireâ€™s Banking Department has been reviewing a number of the adjustable rate loans that have been made in the past few years.
Commissioner Peter Hildreth says theyâ€™ve found some loans probably shouldnâ€™t have been made, but thereâ€™s little the state can do about them.

He says in a few other cases, there is something his department can do.

You know weâ€™re helping or weâ€™ll try and help citizens who there is some kind of fraud, the rules and laws werenâ€™t complied with for some reason. I mean, we are finding some of those based on complaints or based on our normal examination procedures and weâ€™ll take action on them.

The state could see more foreclosures in the next couple of years, unless the real estate market picks up.

There are plenty of homeowners who still hold adjustable rate mortgages, and many of them should expect to pay more if interest rates continue to rise.