Adjustable rate mortgages causing financial heartache, professor says
Adjustable rate mortgages fueled the boost in home ownership seen during the last three to five years. Many of those rates are due to be adjusted upward, and a University of North Texas professor of finance, real estate and law says it could pose big problems for homeowners.
John Baen points out that 41,000 homes in Texas, and 1.2 million homes in the nation, are currently in foreclosure.
"This is going to be a disaster," he says. "As some of these adjustable interest rates rise, the number of home foreclosures will rise."
One out of four home mortgages currently being written are now adjustable rate mortgages. As the Federal Reserve pushes interest rates higher, the adjustable rates rise. For example, the principle and interest on a 15-year, $150,000 loan at 4 percent would be about $1,110 per month. At 7 percent, the same principle and interest payment jumps to nearly $1,350 per month.
Baen says the "adjustment" in many of these mortgages is a one way street.
"Many of the adjustable rate mortgages have a ‘ratchet clause' in them. The interest rates go up but they never go down," he says.
According to the Mortgage Bankers Association, many of the 10 million adjustable rate mortgages went to borrowers with sub par credit ratings. The number of borrowers with financial problems is expected to increase starting this year and continue through 2008. Bane says several things contributed to the problems created by adjustable-rate mortgages.
"The mortgage originators are writing loans they wouldn't have written in the past, guarantors like Fannie Mae and private mortgage insurers are backing these questionable loans, and builders are making down payment ‘gifts' to homeowners to help homeowners get into these houses," he says. "Finally, the buyers knowingly bought homes they could not afford, rather than saving the money to make the down payments."
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