Minnesota Mortgage Blog - MN Mortgage and Real Estate News

Adjustable (ARM) Loan Resets Cause Foreclosures - Fact or Fiction?

Saint Paul, Minnesota - Dec. 2007: A lot has been said from pundits everywhere, and support is growing on multiple fronts for home-owner-assistance programs with broader impact than the Bush Administrations 5-year interest rate freeze program.

The general belief is that homeowners are doing fine with their loans UNTIL their adjustable loans reset to higher rates.

According to recent nationwide data from Countrywide Financial Corp., one of the nations largest mortgage lenders, the No. 1 reason customers are defaulting on their home loans is because their income was cut. This accounted for just under 60% of Countrywide loans in default for the first 10 months of 2007. Once traditional causes of foreclosure are factored in (divorce, major illness), cash flow problems added up to a whopping 80% of all "causes" of defaulted mortgages nationwide.

Adjustable payment loans resetting to a higher payment alone accounted for just 2%, according to Countrywide data. Rather than being the cause, they appear to be the final straw that breaks the camels back.

My personal experience with customers calling for help, while I have no hard numbers, would seem to back that data up. Since FHA came riding up on a white horse to announce a new initiative alleged to save 240,000 homes owners called FHASecure, I have fielded many calls from people looking for help. The bulk of these people do not qualify for many reasons, but the No. 1 item I see that jumps out? They were in trouble far before any adjustable rate adjustments ever occured.

This fact also appears to be backed up by data from Fannie Mae. Florida and California are markets dominated by adjustable rate mortgages, while where I am at in Minnesota, and the upper Midwest in general, the vast majority of homeowners are more conservative and have fixed rates. Fannie Mae data shows the Midwest in general is suffering the largest loan losses. Of the top seven states, five are in the Midwest (In order: Ohio, Michigan, Minnesota, Indiana, California, Florida, and Illinois).

There are a lot of borrowers who are hurting out there, and as someone who talks to them daily, many of these stories really tear at the heart. Unfortunately, once you did deep into their full story, most of the time I hang up the phone wondering what ever happened to personal responsibility, how credit cards work, and living within your means?