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Written by UMO contributor Diontre Pewitte

Isn’t it funny how old songs can apply to new problems no matter when they were recorded? One of my favorite groups of all time, De La Soul had a smash hit in early 2000 with a track called, “All Good”. The title sounds well enough, but the lyrics actually presented a different story. “It ain’t all good, that’s the truth things ain’t going like things should” is the hook that was melodically bellowed by Chaka Kahn. While this hook could be applied to just about any industry trial or tribulation, it couldn’t be more representative of what’s going on in the adjustable rate mortgage industry.

Adjustable rate mortgages (ARMS) are mortgage products that allow borrowers to take advantage of promotional rates for a fixed period of time and after the promo is up then the rate will adjust based on a predetermined rate index. The ARM product was supposed to allow people the chance to get more house for less money and as their incomes increased they would be able to handle the higher payment.

During the residential mortgage boom consumers were jumping into adjustable rate mortgages with the quickness. Lenders were greedy for more deals and consumers were overly ambitious about their future financial situations. It got so bad that people who were making $30K/year were buying $215K houses with the assumption that they could just sell it when the rates adjusted. This was a really bad idea, when the bottom fell out of the housing market home values were one of the first things to go. Home values have actually begun to decrease in many markets around the country leaving many people upside down in their homes.

Mortgage Fact:

• Approximately twenty percent of all ARMs are currently in the foreclosure process
• Approximately 10 percent of ALL mortgages are delinquent, 2-1/2 percent of mortgages are in foreclosures.

For example:

John, who was mildly credit challenged took out a $200,000 mortgage with a 2/28 term @ a 4% fixed rate promo. He was paying the loan back at 4% for the first two years with the understanding that the rate would adjust for 28 straight years after the 2^nd years promo was completed. Based on his promo John is paying about $954/mo, which is not bad for a $200,000 house. Fast forward two years in the future and now it’s time for his first rate adjustment (did I mention that the rate can adjust up to 4 times in one year). Let’s say the rate adjusts to 7.25%, John’s payment has just jumped from $954/mo to $1354/mo (+$400). Ugh, that’s a hard pill to swallow even before we start talking about the increases in the price of gas, food and insurance.

John’s situation is a very common problem for people who bought homes in the lenient lending era of 2004-2006. Recent reports have estimated that more than 600,000 homeowners will have issues with adjusting rates mortgages and of that 600,000, 50% will probably lose their homes to foreclosure. Common sense would suggest that if you’re stuck in an ARM that you should just go ahead and refinance. That’s a good idea in theory, but the reality of the housing market is that home values have begun to stabilize and even decrease in some markets. Additionally, due to the uncertainty of the housing market many lenders have substantially tightened their lending guidelines. As a result it’s become very difficult for credit challenged borrowers to secure financing.

Tips to managing your ARM:

• See if you’re in a position to refinance your loan, make sure you do your research. You’ll want to see what similar homes have sold for in your area, check to see if you have a pre-payment penalty on your existing ARM.
• Proactively adjust your monthly budget to accommodate the increases in payment
• Consider adding a housemate to help subsidize the increased cost of your mortgage
• If you’re having trouble making the payments contact your mortgage company, despite what most people think your house is worth more to you than it is to the bank and they really don’t want it. Ask them if they will work out a temporary reduced payment arrangement for you.
• If you already in trouble and need outside assistance contact the local ACORN group in your area an see if they can provide you with assistance. ACORN is a not-profit organization that designed to assist low to moderate income individuals in many different areas. In light of the current anticipated foreclosure rates in low to moderate income neighborhood areas AKORN has taken a strong stance against predatory lending practices and the after effects of it.

As always if you want more information come check us out at Urban Money Online

(image from businessweek.com)