The Struggle To Save Homeowners From Out of Control "Arms"
Monday, December 18, 2006PAUL KANGAS: A disturbing trend is emerging in home ownership these days and for many people that American dream is becoming a nightmare. New figures show a growing number of home owners are having a tough time paying the mortgage and delinquencies and foreclosures are on the rise. As Stephanie Dhue reports, rising mortgage rates and falling home values are taking their toll.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fernande Clerizier bought her house just before hurricane Wilma struck Florida last fall. She wiped out her savings repairs the damages and is now behind on her mortgage and facing foreclosure. The downturn in the south Florida real estate market makes it difficult for her to sell.
FERNANDE CLERIZIER, HOMEOWNER: The offer that they give me is like I'm going to have to pay, because the offer that they give me not enough to cover everything that I owe the bank. They want to buy the house for less and (AUDIO GAP) owe money.
DHUE: The economics of home ownership have changed dramatically in the last year, as interest rates have climbed higher and the rapid run-up in prices has disappeared. New figures show an increasing number of people are late on their mortgages or not paying them at all. That's especially true for people with poor credit. More than 13 percent of borrowers with sub- prime loans are delinquent; nearly 4 percent are in foreclosure. Mortgage Bankers economist, Doug Duncan, says the increase is not surprising.
DOUG DUNCAN, CHIEF ECONOMIST, MORTGAGE BANKERS ASSOCIATION: We've made a lot of adjustable interest rate loans over the last three years and the Federal Reserve has been raising short-term rates, not in the most recent four months or so, but for a couple of years before that, a steady march upward in short-term rates. That meant we were going to see adjustments upward in payments for people with adjustable rate mortgages.
DHUE: Many of these loans are known as 2/28 loans. Typically, they have an initial interest rates 2 or 3 percent above conventional mortgage loans. On average, they adjust 2.5 percent higher after two years. This fall, regulators told lenders to better qualify borrowers for these loans, but FDIC chief economist Richard Brown says it's unclear if that's happening.
RICHARD BROWN, CHIEF ECONOMIST, FEDERAL DEPOSIT INSURANCE: CORPORATION: It's hard to say if lenders are tightening up. But certainly in the last couple of years, we've seen a fairly permissive lending environment fueled by the appetite on the part of the credit market participants for mortgage backed paper backed by sub-prime and low doc mortgages.
DHUE: The average debt-to-income ratio in the sub-prime market is now 41 percent. With higher interest rates, some buyers could be faced with 80 percent of their income going to pay the mortgage. Allen Fishbein is director of housing policy for the Consumer Federation. He's concerned many borrowers believe banks won't lend them more than they can repay.
ALLEN FISHBEIN, HOUSING POLICY, CONSUMER FEDERATION: The market has shifted in recent years. Lenders used to be the gatekeepers of credit and borrowers had to convince them to make a loan. But the mortgage market has gotten very adept at pricing for risk.
DHUE: Next year, a trillion dollars in adjustable rate mortgages will reset. For sub-prime borrowers, that's certain to be a financial strain and could lead to even higher foreclosure rates. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
