Copyright 2006 The New York Times Company. All Rights
Reserved.
CORRECTION APPENDED
An article today on the cover of Real Estate on adjustable-rate mortgages refers imprecisely in some copies to the current average interest rate for fixed-rate mortgages. It is 6.36 percent for 30-year fixed-rate loans, not for all fixed-rate loans.
CORRECTED BY THE NEW YORK TIMES Mon Sep 25 2006
FOR Inga Rogers, the party ends in 38 days.
On Nov. 1, the adjustable-rate mortgage, or ARM, she took out three years ago at the spectacular rate of 3.875 percent will get considerably more expensive. Ms. Rogers, a single mother of two living in a three-bedroom ranch in suburban Boston, faces a rate increase of three percentage points, raising her monthly house payment by $300, to $1,419, and putting her at a financial crossroads.
Her choices: keep the loan and run the risk of future increases, or ditch her adjustable mortgage in favor of a more stable loan with a higher monthly payment.
Ms. Rogers, a hairstylist working 32 hours a week, will have to work more in either case. The 6.85 percent 30-year fixed-rate loan she is considering would cost $100 a month more than her higher ARM payment, but it would at least protect her from future increases that could go far higher.
''I still might not be able to make the extra money, because with my job I don't have a set income,'' she said. ''So I have an adjustable salary, too. My whole life is a roller coaster.''
As housing prices shot up in recent years, ARM's gave borrowers a way to jump into the market while paying only a fraction of the interest that traditional mortgages require, at least for the first few years. But the risk they took — that rates would not rise too steeply when the loans entered their adjustable period — now haunts millions of borrowers, who have seen their monthly payments skyrocket. Now, if they can afford it, they are moving to 30-year fixed loans or ARM's that remain at the same rate for at least seven years.
ARM's have come in and out of vogue, but their latest surge began about five years ago, when the Federal Reserve Board started cutting key short-term interest rates in an effort to stimulate the economy. But now that the Fed's focus is on reining in inflation, rates have risen steadily.
The increases have caught many homeowners in a ''can't pay, can't sell, can't refinance'' vise, in which their ARM payments are outpacing their incomes and their homes have not appreciated enough to help cover the cost of a refinanced mortgage or to allow them to sell and walk away. For them, foreclosure looms.
But for most ARM borrowers whose house values rose sharply in recent years, there is ample fiscal room to switch to a loan with higher interest but lower angst. ''Instead of facing significant payment shock, a lot of people are looking to refinance because they're fearful of further increases,'' said Craig Focardi, an analyst with TowerGroup, a financial-services consultancy in Needham, Mass.
Some borrowers are simply taking out new ARM's, which carry a fixed rate for three years or less. ''But some of them are thinking, 'Do I really want to double-down?' '' Mr. Focardi said.
He said a borrower who took out a three-year ARM in August 2003 could expect initial interest rates of about 4.6 percent. On a $300,000 loan, the monthly payment was $1,610. That rate would rise this year to about 6.6 percent, leaving the borrower with a $327-a-month increase, plus the possibility of future annual increases (or decreases) of as much as two percentage points.
Nearly 37 percent of all loans taken out in a single week in late March 2005 were ARM's, roughly 10 percentage points higher than the same period a year earlier and 23 percentage points higher than the same period in 2003, the Mortgage Bankers Association says. The loans were most heavily concentrated on the East and West Coasts, economists said, where housing prices spiked more sharply.
There is no consensus on how many of those loans are nearing the so-called reset point, when rates are adjusted. Some economists estimate that next year anywhere from $162 billion to $1 trillion worth of adjustable-rate mortgages will be reset. Douglas Duncan, the chief economist of the mortgage bankers' group, said: ''The truth is probably somewhere in the middle of those estimates, but whatever the number, we've seen that consumers are already acting.''
And what they're doing is getting out of those ARM's. Refinancing activity is back up to nearly 44 percent of all loans, after slumping to about 33 percent in May, the lowest point since June 2004, according to the mortgage bankers' group. As of early September, slightly more than 25 percent of all loans were adjustable, the lowest level since October 2003. The rest are fixed-rate mortgages; the interest rate for 30-year fixed-rate loans now averages 6.36 percent.
According to lenders and mortgage brokers, borrowers who are staying with ARM's are divided into three groups: those for whom the possibility of higher interest rates is not a concern; those who know they will not be staying in their homes for long; and those who simply cannot afford higher monthly payments — people who are essentially at the mercy of the market.
In San Francisco, Marc Geshekter, a broker with Residential Pacific Mortgage, said of his ARM customers: ''A lot of them are just taking out a new five-year ARM at 6 or 6.25 percent rather than taking a chance on the current loan adjusting upward. Maybe they had a three-year ARM before, so they're opting for a slightly longer-term loan because they're wishing they had a few extra years now.''
As in other pricey real estate markets, ARM's are popular in New York. Steven Schnall, the president of the New York Mortgage Company, said ARM's represented 57 percent of its loans in New York, compared with 48 percent nationally.
New York, he said, has a higher percentage of affluent homeowners who are more mobile and therefore less likely to need a long-term mortgage. ''And they're more able to afford the risks associated with ARM's,'' he said.
Affluent they may be, but many New York borrowers are unwilling to accept sharp mortgage increases. Michael D. Cohen, a partner in Phillips Nizer, a New York law firm, will soon refinance the ARM on his five-bedroom apartment on Park Avenue. The new ARM has a 7 percent rate cap for 10 years. ''I've been receiving the benefits of low rates for years,'' he said. ''But you have to take the bad with the good.''
Others are more desperate. Stephen Parnell, the chief executive of the Lynxbanc Mortgage Corporation in Boca Raton, Fla., said some of his clients had taken out so-called ''option ARM's,'' wherein they can choose to pay less than the nominal interest rate on the loan, so the debt actually grows until it reaches a limit. After that, or after a certain period of time, the interest rate is locked in, often at a steeply higher level.
''Some people are taking that short-relief pain pill in a last-ditch effort to stay in the house,'' Mr. Parnell said. ''Their hope is that the real estate market in the next two to three years will be kinder to them.''
Some others are in more desperate situations. Mr. Parnell used an example of buyers who had used ARM's to buy homes in new developments last year, only to be facing payments they cannot afford. They would sell their houses to rid themselves of the loan, but the builders in those developments are selling off the last of their new homes for much less than what buyers paid last year, leaving the buyers with ARM's little choice but to drop their resale prices sharply to compete.
One such owner, who requested anonymity rather than risk the embarrassment of exposing a financial blunder, bought a house in Port St. Lucie, Fla., as an investment in April of last year and financed the $410,000 purchase with an ARM, with an introductory rate of nearly 7 percent. The loan was an afterthought, since he expected to sell the house almost immediately for a profit. He didn't, and now the developer recently sold a similar house in the neighborhood for $325,000.
''I just didn't know what I was doing, and I shouldn't have done it,'' said the man, who does not have enough equity in the house to refinance and who will run out of money to pay the mortgage in 10 months. ''Maybe the Lord will send a miracle.''
The more precariously positioned ARM borrowers are very much on the minds of economists, some of whom fear that masses of consumers will not be able to afford the new higher payments, setting off a recession. According to Christopher Cagan, an analyst with First American Real Estate Solutions, a housing consultancy in Santa Ana, Calif., about 19 percent of the 7.7 million ARM's taken out in 2004 and 2005 are at risk of defaulting.
But many more will escape these loans unscathed, Mr. Cagan said. Melinda Johnson, a dietitian who lives in the Phoenix suburb of Chandler with her husband and two children, recently refinanced to a 30-year fixed loan, six months after the rate on her ARM jumped to 5.85 percent from 3.85 percent.
''That was fun,'' Ms. Johnson said, referring to the initial interest rate, which ran for three years. ''But if the market climbed and we still had the loan, we could be at 9.85 percent in another two years.''
Ms. Johnson and her husband plan to own their home for the long term, so a 30-year fixed loan makes more sense, she said. But the $4,500 the couple spent on the refinancing probably erased most of the interest-rate savings from the ARM, she said.
''I'd do it again in the right circumstances,'' Ms. Johnson said. ''If rates are low and it's looking like the start of a great market, we might take that gamble.''
Ms. Rogers, of Stoughton, Mass., outside Boston, said she would give herself a little more time before deciding whether she could stomach the uncertainty of her mortgage. Others, like Richard and Sandra Strauss of Oakton, Va., are done with the drama.
About five years ago, the couple, who have lived in the same house for 22 years, took out an adjustable-rate mortgage with an introductory rate of 1.95 percent. Since then, the rate has climbed 13 times, to about 7.5 percent in August. They could have saved money simply getting a new adjustable-rate loan, but instead they opted for a 30-year fixed loan, cutting about one percentage point off the interest rate and saving hundreds on their previous monthly payment.
''We don't want to track rates regularly,'' Ms. Strauss said. ''And the rates on fixed mortgages are fairly decent.''
Mr. Strauss put it more bluntly. ''We're done with ARM's,'' he said. ''We don't want any more surprises.''
Photos: ONCE BITTEN, TWICE SHY — Richard and Sandra Strauss, above, shown with their daughter Stephanie at their house in Oakton, Va., opted for a fixed-rate loan instead of another adjustable-rate mortgage. Inga Rogers, left, of Stoughton, Mass., is wrestling with that same decision. (Photo by Steve Ruark for The New York Times); (Photo by Robert Spencer for The New York Times)(pg. 10)
