By Jesse Herman, contributing editor
According to a study by First American CoreLogic, 1.1 million additional home foreclosures are predicted over the next six years. This increase is due to a reset of higher payments for adjustable-rate mortgages.
Negative equity is soon to be a reality for many due to loans resetting, which is predicted to nearly double from 2007-2008, from 12.9% to 24.4%. Commonly used 2/28 mortgages and 3/27 mortgages, which call for 2 and 3 years of low payment and then higher payments for 28 or 27 years are to be the main culprits. Due to this reset, many borrowers simply won’t be able to keep up with new industry standards.
Many of the loans to blame are known as “teaser” loans, involving low introductory mortgage rates. The low-interest teaser rate loans are scheduled to reset to higher and longer term rates. Yet another negative cogitation can now officially be applied to the word “tease”. Perhaps borrowers should have known better than to invest into the once booming housing market.
According to Christopher Cagan, author of the report Mortgage Payment Reset, The Issue and the Impact, all things are not as bad as it may seem.
“It’s less than we spend on alcohol. It’s less than we spend on the lottery and gambling. The price of gasoline has far more impact. We have $60 billion a month in trade deficit that dwarfs this.”
It is a one-two punch for many borrowers as stagnant or fallen property values with little money down are going to leave them without equity, unable to float above the mortgage. These combined factors will be too much for some, accelerating foreclosure rates.
The report was specified for single-family residences and reviewed only the impact of loans that will reset to new rates. It was assumed prices of homes would stay level with those at the end of 2006, although, many forecasters are predicting an overall average increase of 2-3% for 2007. If it rose 1%, then 70,000 fewer loans would be lost to reset-driven foreclosures. If pricing declined 1%, then 70,000 loans would be forced into foreclosure.
According to the study there is still more than 93% of 32 million single-family residences and home loans that have positive equity. This signifies that while teaser loans have created a backlash, much of the market is in good hands.
"The problem is this falls on a slice of mortgage lenders, investors and borrowers -- 1 or 2% of them that gets stunned," Cagan said.
Undoubtedly, those select lenders are working fast with borrowers to adjust or refinance loans to avoid default.
