In Alexis McGee’s view, the trend toward adjustable-rate mortgages will lead to one thing–more mortgages in default and more foreclosures.
That’s because as interest rates inch up, so will the cost of those riskier loans, which varies over time unlike fixed-rate mortgages. Consumers are often attracted to ARMs because they can cut borrowers’ monthly payments, allowing them to save that money for other purposes.
“My concern is that too many people are opting for them,” said McGee, president of Foreclosures.com. “And they’re opting for them not to save money on the payments, but to get more house.”
The latest mortgage applications survey released by the Mortgage Bankers Association showed that ARM applications had increased to 33.3 percent of total applications. Just six months ago at the end of January, ARM applications made up 26.3 percent of total applications.
In that time mortgage interest rates have risen. At the end of January, the 30-year fixed rate was 5.58 percent; two weeks ago it was 5.97 percent. By contrast, the average contract interest rate for one-year ARMs was 4.04 percent two weeks ago. That initial basis point difference has made ARMs more attractive to consumers. Lenders also have increasingly marketed the loans as a way for consumers to get a lower rate right now.
Not everyone agrees, however, that the increase in ARMs will inevitably lead to more loans in default and more foreclosures.
For example, Ken Goldstein, an economist with The Conference Board, believes that if mortgage rates go up and income doesn’t increase, “then you’ve got a story.” But if the job situation continues to improve at the pace it did earlier this year, then those people who have opted for ARMs are likely “to be impacted by the improvement in the labor market.” That would make them less likely to fall behind in their mortgage payments, he said.
More ARMs could mean more foreclosures under certain conditions: if one looked simply at mortgage rates, if one made the case that people used ARMs to go in over their heads in debt and if the labor market stays where it was in July.
“Look at the number of ‘ifs’ you have to have to get there,” Goldstein said. That’s simply too many conditions, he said, to make it a high probability scenario.
Doug Duncan, MBA’s chief economist sees another reason why increased delinquencies overall aren’t a given now that ARMs are increasing. Housing values are still appreciating, incomes will likely rise and the types of ARMs available now are almost like fixed-rate mortgages. Many ARMs lock in a rate for three, five or seven years before becoming a true adjustable rate.
In fact, Duncan predicts a modest overall decline in delinquencies over the next few years. He does expect subprime delinquencies to rise, but those will be outweighed by the decline in prime mortgage delinquencies.
Bob Caruso, national servicing executive with Bank of America, expects delinquency rates will increase as interest rates rise, but said the increase could be offset somewhat by continued house appreciation. Still, some less sophisticated borrowers who aren’t experienced enough to understand all the costs of owning a house may feel financially strapped once their ARMs adjust upwards a couple of times, he said.
For many borrowers, Caruso said, ARMs are a great option. But with the interest rates on fixed-rate mortgages still fairly low by historical standards, the lender is working to make sure ARMs are the best fit for those who have them or are interested in them. If they aren’t, there’s still time to get the borrower into a fixed-rate mortgage.
“I really think that if we continue to work at this stuff, we have a good chance to mitigate that increased foreclosure activity,” Caruso said. “That’s not to say I don’t think it will go up, but I don’t think we’re in a doom and gloom situation, not by any stretch of the imagination.”
McGee might see the situation differently, but she’s quick to point out that she’s not complaining about a rise in the number of foreclosures. More foreclosures mean more deals for investors like her. She has her “shopping bags” ready.
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