Brace, Brace, Brace...

It is going to get much WORSE before it gets BETTER

"An important debate is raging inside the home mortgage market, though well beyond the earshot of most consumers."

"The issue: Wildly popular "payment-option" plans, including interest-only and negative amortization, and piggyback loans and the financial risks they pose. On the one hand, federal regulators say the risks are too significant to ignore. The regulators want to impose new creditworthiness restrictions and disclosure requirements, forcing lenders to be certain that borrowers understand the potential dangers."

"Banks and mortgage companies, on the other hand, aren't happy about the regulators' plans. They say new restrictions are unnecessary intrusions and could stifle free-market innovations that have expanded consumers' ability to afford today's high housing prices."

"Why all the fuss? And what might it mean for home buyers? The fuss derives from the fact that payment-option, piggyback and other creative loan concepts can prove toxic for applicants who really don't understand them. The question is whether most lenders are taking pains to educate borrowers about how the loans work, or whether they have been mass-marketing dangerous mortgages to people with borderline credit profiles, low down payments and minimal knowledge."

"Payment-option mortgages have soared in popularity in areas of the country such as California where real estate prices and appreciation rates have been high. Payment-option plans typically allow borrowers to choose among one of several payments each month: a "minimum" payment based on an artificially low start rate and negative amortization (buildup of principal debt); an interest-only payment involving no principal reduction; and traditional "amortizing" payments based on 15-year or 30-year schedules."

"Negative amortization options can add as much as 15% onto a home buyer's debt in the early years of the loan and can lead to monthly payment increases of 100% or more after the loan "resets" to market rates and a fully amortizing loan payment schedule. Interest-only loans cut monthly payments for up to 10 years by deferring principal reductions. At the end of the interest-only period, the original mortgage balance on the house remains to be paid and monthly payments can then jump."

"So-called piggyback loans allow buyers to combine a standard first mortgage equal to 80% of the property value with a home equity credit line or second mortgage equal to 10% to 20% of the home value. The arrangement allows buyers to avoid monthly private mortgage insurance premiums, requires little or no down payment and often qualifies "jumbo" loan borrowers to pay lower rates on the primary mortgage."

"Last year, 43 percent of all mortgages taken out were adjustable or exotic in nature (80+% in the bay area; 69% in Sonoma County)- such as those that require only the interest of the loan be paid for the first two years."

"But borrowing costs have been climbing for two years, in some cases to nearly double what they were in 2003 or 2004, just when the introductory low rates on adjustable mortgages are set to expire."

"That means homebuyers who were once paying just over 3 percent interest are suddenly facing rates that are at 5 or 6 percent and still climbing. As interest rates rise, late payments, also known as delinquencies, are becoming more common. After 90 days, foreclosure can begin."

"The low rates offered an alluring way for poorer Americans to get into a booming housing market, and many leapt at the chance. About a quarter of outstanding home mortgages nationwide carry adjustable interest rates, and the nation's homeownership rate has climbed to a record 70 percent."

"Economists are bracing for an onslaught of late payments and the inevitable worry among lenders and borrowers alike that failed loans will cause a consumer or housing collapse."

"The mortgage delinquency rate rose to 4.70 percent at the end of the fourth quarter of 2005 from 4.44 percent in the third quarter, according to The Mortgage Bankers Association, an industry group that tracks loan repayments."

"Vicki Nious joined a nonprofit agency last year to help low-income Americans buy and fix up homes. Instead, with interest rates rising, she's seeing more clients struggling to pay their mortgage and hang onto their house."

'"We've definitely seen an increase in delinquencies and even we have a few cases we may consider for foreclosure," said Nious, mortgage services manager for AHC Inc. in Arlington, Virginia. "Many families are having trouble because their adjustable rate mortgages are expiring and they need help."'

"Like a lot of Americans, many AHC clients got into the housing market in the last few years by taking out adjustable rate mortgages at extremely low "teaser" rates, sometimes half that of a traditional 30-year fixed mortgage."

"Anthony Chan, chief economist at JPMorgan Private Client Services, has done research to show that delinquency rates lag the increase in adjustable mortgage rates by about a year. That means delinquencies will continue to climb for as long as a year after mortgage rates have peaked."

'"Given that ARM rates are going higher, I think it's pretty straightforward to make the forecast that over the next 12 months, those delinquencies are moving higher, not lower than where they are today. So if we think they're bad now, they're going to be higher," Chan said."

"The Center for Responsible Lending, a Washington-based consumer protection group, knows many homebuyers are only now beginning to realize the risk they took on when they signed up for an adjustable rate mortgage."

'"I think that many people are very misled in terms of the initial monthly payment. We certainly hear from borrowers who didn't know until it adjusted that that's what was going to happen," said Debbie Goldstein, the center's executive vice-president."

"At AHC, Nious is working with low- and moderate-income families to refinance costly mortgages in a desperate bid to avoid foreclosure. But with fixed rates now above 6 percent, it may be a losing battle."

By the way...

"20% of mortgage fraud is "fraud for property," in which borrowers lie about their income or assets to buy a home."

"Lenders lost more than $1 billion to mortgage fraud in fiscal year 2005, up from $429 million a year earlier, and $156 million in fiscal year 2000, according to the FBI, which currently has 748 mortgage-fraud cases pending, up from 436 in 2003."

"But those dollar amounts understate the true damage, experts said, because the FBI's numbers are based solely on data provided by only about one-third of all mortgage lenders nationwide."

"Plus, mortgage fraud often goes undetected in hot housing markets: Inflated appraisals become moot if home values rise to match those figures."

"For borrowers who become unwitting victims, the effects can be devastating, including losing a home through foreclosure once it's revealed the house is worth far less than the mortgage loan. This usually happens when the borrower goes to refinance or sell and a true appraisal is done."

"Local homeowners may feel another pinch: A neighborhood where some houses have falsely-inflated appraisals can lead to higher tax bills for all, as happened in one Atlanta neighborhood, said Tim Doyle, senior director of government affairs at the Mortgage Bankers Association."

"Later, there's another problem: "They'll hit four or five properties in one small area, the properties will get foreclosed upon and get boarded up," he said. "That affects other people's property values."'

Advice to borrowers:
"Be wary of real estate "experts" who advise you it's OK to fudge the numbers, or those who promise that your investment in a particular property will yield huge profits."
See this FBI Web page for more information