Rising Mortgage Rates and Predatory Lending
According to the Wall Street Journal, homeowners have embraced adjustable-rate mortgages in recent years, and other variations such as option ARMs, interest-only mortgages and "piggyback" loans, which, allow borrowers to make a minimum monthly payment, pay interest and no principal in the loan's early years, or finance 100% of the purchase price, respectively. The growing popularity of these products has helped fuel consumer spending, as well as home value gains and rising homeownership rates. However, the downside of this lending boom is that interest rates are taking a toll on family budgets as home prices stabilize or fall in some areas.
According to a recent study by Credit Suisse, the portion of adjustable-rate mortgages that were at least 90 days past due has climbed 141% in the past year, compared to a 27% rise in such delinquencies for fixed-rate mortgages.
Although many borrowers with such problems have low incomes or flawed credit histories, housing counselors say that many middle and upper-middle income borrowers are also starting to get trouble as they buy homes they can barely afford. Such borrowers may have taken out loans that did not require them to document their income, thus resulting in their overstating their earnings, according to Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago.
Steven Schwaber, a bankruptcy attorney from Pasadena, California, says that he has been getting more calls from small-business owners who refinanced and tapped into their equity in order to keep their businesses afloat, making their home payments go up by 25 to 30 percent.
Credit-counseling agencies say that they have seen a growing number of homeowners get pinched by rising mortgage payments, due to the structure of their mortgage, and not what is usually the source of a problem such as a major life change including job loss, medical problems, divorce or death.
Recently, the mortgage payment has become more variable than any other expense for millions of people, according to Elizabeth Warren, a Harvard Law School professor who has studied consumer bankruptcies.
Rising mortgage rates are mostly a problem for borrowers if they did not understand the risks of their mortgages, or closed a loan deal that was not what they expected, or did not have a cash cushion to cover higher mortgage payments. According to a recent study by Macquarie Mortgages, USA, more than 30% of mortgage brokers believe their clients do not understand the mortgage they selected.
Jordan Ash, director of the Acorn Financial Justice Center, an advocacy group that focuses on predatory lending issues, says that the reason why a borrower is placed into an ARM or interest-only loan is because that is the only way they could be qualified.
When borrowers miss payments due to a sudden interruption in income, a lender may structure a repayment plan to allow the borrower to catch up, such as adding unpaid debt to the loan balance. However, if the problem is a result of rising mortgage rates, a borrower will have to get a second job or cut spending to catch up on payments.
To help resolve this problem, some lenders are making an effort to alert borrowers to payment resetting in advance. Lenders also offer refinance options that will allow a switch from ARM to to fixed-rate interest-only mortgages. But according to Doug Duncan, chief economist of the Mortgage Bankers Association, there may not be a solution for some borrowers, since ARMs always have higher delinquency and foreclosures than fixed-rate mortgages.
Some borrowers have chosen to sell the homes they can no longer afford, which opens the door in California for example, for short sales, transactions in which the sale price of the home is not enough to cover the loan balance.
The lesson should be to not buy more home than one can afford, shop around, carefully review loan documents and get second opinions before signing.