The affluent, too, couldn’t resist adjustable rates

The New York Times

Affluent consumers increasingly are ensnared in the home mortgage crisis thanks to adjustable-rate mortgages they can’t refinance. Here’s what some are doing about it.

They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.

These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.

People in all income categories “are facing the shock of new payments that can be twice as much as previous ones,” said Susan M. Wachter, professor of business and a real estate specialist at the Wharton School of the University of Pennsylvania.

Nor will falling interest rates help most of these homeowners, as their low initial payments skyrocket and the worth of their homes erodes, said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.

According to Loan Performance, a unit of First American CoreLogic, a real estate information company based in Santa Ana, Calif., about 870,000 borrowers took jumbo ARMs — mortgages of $417,000 or more — from 2005 to 2007.

In the fourth quarter of 2007, 8.10 percent were two or more payments late, it found, while 2.62 percent were in the foreclosure process and 1.35 percent had been foreclosed. All the numbers were up from the third quarter.


Mark Zandi, chief economist for Moody’s Economy.com, predicted that eventually 8 percent of these jumbo ARMs will be foreclosed. In the first quarter of 2008, “the delinquency and foreclosure rate will clearly be higher,” he said.

Today’s ARMs were “designed to fail, so you have to refinance,” Ms. Wachter said. “It shouldn’t be surprising that values go up and down in this kind of situation. And when you most need to refinance you can’t — the crux of the crunch.”

Jeffrey Conner, a San Francisco real estate lawyer, says he regularly hears from his clients “that lenders assured them they could always refinance.”

So what are these homeowners to do now?

Refinancing requires some equity. Even if homeowners put a substantial amount of money down, many have no equity because their homes are worth less than they owe. In real estate parlance, their mortgages are under water.

Richard Geller, founder of Mortgage Relief Formula, a for-profit venture based in Fairfax, Va., that counsels troubled ARM borrowers, said he received calls from affluent consumers in almost every major metropolitan area. At the moment, Manhattan appears to be the only exception in the weakening market, Mr. Geller said. “It’s really late in the schedule and will be the last place prices soften,” he added.

The first step for distressed homeowners, said Rhonda Porter, a certified mortgage planning specialist and broker in Seattle, is to pull out their loan documents and see what they say.

Sean O’Toole, founder of ForeclosureRadar.com, which tracks California foreclosures, divided borrowers into two camps. “If you have equity, you have choices,” he said. “If you don’t, you have to work on a loan modification with your lender.”

Consumers with substantial equity, high credit scores and documented income should be able to find conventional refinancing, he said.

Homeowners with at least 3 percent equity may qualify for refinancing through the Federal Housing Administration. On March 6, it began making loans up to $729,750, a new higher limit that expires Dec. 31 unless Congress extends it. Limits are 125 percent of median home prices, by county. Consumers can find their local limits at https://entp.hud.gov/idapp/html/hicost1.cfm.

To find a qualified lender or broker, consumers may call (800) CALL-FHA, look in the Yellow Pages or visit www.fha.gov for the four regional centers.

Loan modifications entail freezing or reducing interest rates and may also include balance reductions.

“But if your payments are still going to be more than half your gross income, the lenders won’t do it because they figure you’re going to default later,” Mr. Geller said. “It’s not rational to dedicate your life to making the next $5,000 monthly payment on an asset declining in value.”

Negotiating a loan modification means understanding that in most cases “the lenders really don’t want to force people into foreclosure because that virtually guarantees large losses in the market,” said Dean Baker, an economist with the Center for Economic and Policy Research in Washington.