Monday, July 09, 2007

ARMageddon: Record bill due

More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.
Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low "teaser" rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.

Consumer groups and politicians worry that hundreds of thousands of subprime ARM borrowers will be unable to keep up with their mortgage payments and will lose their homes.

"In October alone more than $50 billion in ARMs will reset," according to Mark Zandi, chief economist and co-founder of Moody's That's a record, according to Zandi.

A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1,331, a 39 percent increase.
I posted this article as a complement to the one posted earlier today about the effect of foreclosures on Atlanta. It is obvious by the numbers of foreclosures already filed and the possibility of hundreds of thousands more that the housing industry is just starting its downturn.

This will eventually cause trouble throughout the economy as loans adjust. It will certainly leave less money for discretionary spending and could cause the economy to slip into recession. Two thirds of the economy is consumer spending and if mortgage payments rise as much as expected it will have to have an effect on spending.

Hopefully this experience will lead to tighter lending practices and more stable home prices but if there is money to be made by screwing the middle class, the corrupt practices will continue.

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