Foreclosures rising among high-risk US mortgages
Loans made to people with weak credit during the housing boom have pushed more than 20 companies into bankruptcy.
from the March 2, 2007 edition
Page 3 of 4
The Mortgage Bankers Association (MBA), which represents the nation's major lenders, points out that deregulation has helped create record homeownership.
And the market is already correcting itself, says Kurt Pfotenhauer, the MBA's senior vice president for government affairs. Investors are now requiring stricter standards and mortgage companies are weeding out overly aggressive brokers.
"Government regulation of this market will result in fewer people having access to credit," he says. "If you care about people having access to credit you shouldn't regulate the market."
Rate hikes could cause more defaults
The catalyst for a lot of defaults will be a change in the interest rates many borrowers pay. This year, holders of some $250 billion in ARMs will see their interest rates rise – perhaps by as much as 1.5 percentage points.
Hugh Moore, an investment manager who runs Guerite Advisors in Greenville, S.C., estimates as many as 1.4 million subprime borrowers will face the prospect of higher interest rates. "I don't know if that constitutes a tidal wave, but you have to believe a number of those people don't have a lot of additional cushion," he says.
Take Mr. Silva's case. In 2004, he was paying 7.6 percent on his $139,000 ARM. Last summer, the two-year teaser interest rate ended and his mortgage jumped 2 percentage points to 9.6 percent. His payments went from $920 to more than $1,200.
The interest on his mortgage, along with his monthly payments, will increase every six months until it reaches a high of 13 percent – if interest rates continue to climb.
"I had wanted a 30-year fixed rate and they told me I'd qualify for one," he says. "Then when I got to the closing they told me I could only qualify for the adjustable rate."
Silva initially walked away. But he had some debts to pay that were due from a stint of unemployment after the dotcom crash in 2000. After two days, he returned and signed the new mortgage.
"I felt like it was a switch and bait," he says.
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