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Adjustable loans endanger homes for many in U.S
March 21, 2007 / 7:52 PM / in 11 years

Adjustable loans endanger homes for many in U.S

FOLSOM, California (Reuters) - Andrew Thompson fears his mortgage lender is poised to foreclose on his Folsom. California, home because he will not be able to make his monthly loan payment when it jumps to $3,200 from $2,100.

“As of May 1, I‘m dead in the water,” said Thompson, already behind on payments as the deadline nears for a higher interest rate on his mortgage. “I don’t think I‘m going to be able to keep it.”

He is not alone. An estimated 1.1 million U.S. mortgage holders are at risk of losing their homes as rates reset on adjustable-rate mortgages originated between 2004 and last year, according to First American CoreLogic, a Santa Ana, California, firm that tracks property financing trends.

“Foreclosure rates are rising and they’re expected to go on rising for the next couple of years,” said Christopher Cagan, the firm’s director of research and analytics.

Adjustable-rate mortgages helped fuel the recent U.S. housing boom with financing for buyers lacking cash for down payments and credit histories to qualify for fixed-rate mortgages.

Thompson’s mortgage had an initial two-year no-interest term. An adjustable interest rate of 6.9 percent then kicked in, but that has now increased to nearly 10 percent.

Like Thompson, many borrowers have found their new rates too costly and mortgage defaults have soared -- especially among subprime borrowers charged high interest rates to offset weak or spotty credit backgrounds.

That has pushed at least 20 lenders in the subprime mortgage sector out of business over the past year and prompted concern that turmoil in the home-financing industry may worsen the housing slump and hurt the broader economy.

The turbulence in the industry tracks Thompson’s troubles, revealing how risky adjustable-rate mortgages can be for borrower and lender. “It’s just hit so hard and so quick,” he said in an interview in his home in Folsom, a town just east of Sacramento, California’s capital.

SLIPPING INTO DEFAULT

Thompson, 36, met his mortgage payments until an accident at work in September. The journeyman electrician fell into a hole at a work site, trapping one leg. Wresting himself out, he severely injured his back and went on disability.

With his income down, Thompson had to stretch to make mortgage payments. “That’s what killed me,” he said. “As long as I was working they were manageable.” He Plans to return to work after physical therapy, which could last up to 12 weeks.

Expecting he would fall behind on payments, Thompson listed his house for sale late last year. It’s still on the market.

The three-bedroom, two-bathroom 1950s-era house is a single-story of 1,100 square feet in contrast to nearby new homes with two-stories and up to three times the space.

Thompson bought it in 2004 for $289,000 and won praise from neighbors for at least $60,000 worth of renovations. “I gutted the interior,” he said. “I’ve really tried making this house the best it could be.”

Thompson is resigned to losing money on the house. He has cut its price from $360,000 to $307,000, which would provide enough for him pay off his mortgage and other debt he took on for the house and prevent a default that could mar his credit. “I would have $1,000 left over to move,” he said.

But a sale before foreclosure is uncertain. Seven similar homes within a two-block radius have “for sale” signs on lawns and Folsom has an abundance of new homes for sale.

Meanwhile, analysts see the Sacramento region’s inventory of homes on the market rising because of so-called short sales -- home sales at prices less than the owner owes on a mortgage, but conducted with the blessing of lenders who want to avoid a foreclosure.

Deutsche Bank analyst Nishu Sood painted a bleak picture of Sacramento’s homes market: ”New home inventories remain elevated, while resale inventories are even more worrisome, with significant investor overhang and mounting distressed listings.

“And all of this is before the effects of the subprime situation have begun to be realized in the market. Significant further price declines are likely,” Sood wrote.

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