ARM Interest Resets Aren’t The End Of The World, But To Unprepared Homeowners, It May Feel Like It

When Adjustable Rate Mortgage (ARM) interest rates reset, many homeowners will see a marked hike in their monthly payment. Not all will be prepared to make the higher payments and many may face the loss of their homes in foreclosure. It’s a frightening trend that’s been on the upswing nationwide. While Washington has one of the lowest foreclosure rates, our numbers are on the rise.  

The Department of Financial Institutions (DFI) wants to assist consumers in preparing for the resets. Owning a home, and keeping it, is an important part of the American way of life. We’d like to help you keep it.

How did we get here?

In the past 10 years, a burgeoning non-fixed interest rate market allowed many consumers to purchase homes they would not otherwise have been able to own. Temporary payment terms with lower interest rates, or in some cases interest only payments, allowed many to become homeowners when they were not eligible for traditional fixed interest rates.

Consumers with less than perfect credit and little or no money saved for down payments were able to realize the dream of owning a home.

Lenders aggressively pursued this growing market, giving thousands the opportunity to realize The American Dream. Wall Street investors purchased these higher-risk loans in portfolios while companies like Freddie Mac or Fannie Mae purchased the more traditional fixed interest loans.

Everyone was getting what they wanted. Consumers were becoming homeowners and lenders were making money. Within a few years, however, the lower introductory interest rates ended. Monthly payments jumped, in some cases doubling or even tripling, as interest rates reset. Additionally, the stock market stopped buying the higher-risk loans, forcing lenders to maintain the risk on their own.

As homeowners began seeking fixed rate loans to avoid future increases, they found lenders less than willing to refinance with consumers who were unable to meet their current obligations, leaving many trapped in home loans with soaring monthly payments. Thousands of Americans watched their dream of homeownership become the nightmare of foreclosure.

What’s happening today?

As the number of foreclosures rise, so do reports of mortgage fraud, predatory lending tactics and other unethical and in some instances illegal practices conducted by lenders. State and federal organizations are conducting investigations, levying fines, censuring and in some cases, closing several lending companies.

Unfortunately, even when restitution is issued, consumers often find themselves in financial ruin and no longer able to own a home.

States are responding to the situation, implementing tighter restrictions and additional regulations. Washington implemented a new requirement that all loan originators regulated under the authority of the Mortgage Broker Practices Act doing business in the state be licensed with the Department of Financial Institutions Division of Consumer Services.

More than 100 mortgage companies nationwide have either closed or been sold, according to the Wall Street Journal (http://online.wsj.com). The site indicates two companies in Washington State have closed — Mortgage Investment Lending Associates and Millennium Funding Group. The site indicates two companies in Washington have sold — Reverse Mortgage of America and All Fund Mortgage. According to the Mortgage Bankers Association’s most recent report on housing activity, Washington state ranked 47th in delinquencies and 49th in foreclosure activity.

While foreclosure rates throughout the country have steadily risen, Washington has enjoyed a more stable market than elsewhere, in large measure due to a strong economy and housing market. That is expected to change, however, as more consumers are faced with increases in their non-traditional loan payments.

What can homeowners do?

Homeowners need to make sure they understand the details of their loan, what increases may be coming their way, when and what their options are. Start communicating with your lender now. Don’t wait.

If you have an adjustable rate mortgage that will reset soon, make the required adjustments to your monthly household budget now to prepare for the increase. Start saving money today for the increase and the impact it will have on your household budget. If you are eligible, you may consider refinancing with a fixed interest rate to avoid future increases.

You’re not alone: help is available. The U.S. Department of Housing and Urban Development can help connect you with a local housing counseling agency for a more detailed assessment of your specific situation. Many of these agencies offer services free of charge.

Additional helpful information:

Points To Remember

• Don’t damage your credit rating by losing your home.
• If you get behind on your payments, call or write your mortgage lender immediately.
• Stay in your home to make sure you qualify for assistance.
• Arrange an appointment with a housing counselor to explore your options.
• Cooperate with the counselor or lender trying to help you.
• Explore every alternative to losing your home.
• Beware of foreclosure rescue scams.
• Don’t sign anything you don’t understand.
• Remember that signing over the deed to someone else doesn’t necessarily relieve you of your loan obligation.
• Act now! Delaying can’t help. If you do nothing, you will lose your home, the money that you’ve put in your home, and your good credit rating.

Alternatives to Foreclosure

• Special Forbearance. Your lender may be able to arrange a repayment plan that would be based upon your current financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you’ve recently experienced an involuntary reduction in income or an increase in living expenses.
• Mortgage Modification. You may be able to refinance the debt and extend the term of your mortgage loan. This will help you catch up by possibly reducing the monthly payments to a more affordable level. You may qualify if you’ve recovered from a financial problem but your net income is less than it was before the default.
• Partial Claim. Your lender may be able to work with you to obtain an interest-free loan from HUD to bring your mortgage current, if you qualify.
• Pre-Foreclosure Sale. This will allow you to sell your property and pay off your mortgage loan to avoid foreclosure and damage to your credit rating. If you’re unable to afford the house long-term, you may sell the house yourself before the foreclosure sale and save some of your equity.
• Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily “give back” your property to the lender. This won’t save your house, but may help your chances of getting another mortgage loan in the future.

General Tips From DFI

• Lenders don’t have to accept all proposals and are not obligated to do so. So don’t wait till the last minute to contact your lender.
• If the lender refuses to take partial payments, you should put this money aside to help negotiate with the lender later.
• If you’re a senior citizen or are disabled and are facing a foreclosure action because of unpaid property taxes or special assessments, you may be eligible to postpone payment of your property taxes or special assessments under two programs in Washington. Contact your local County Assessor’s Office or an attorney for more information.
• The foreclosure process will continue despite the possibility of a workout agreement. Therefore, you should not wait to hear back from the lender, you should contact the lender early and try and come up with a solution as soon as possible.

Be informed

For more information, visit the Department of Financial Institutions Web site at http://dfi.wa.gov/consumers/mortgage_increases.htm