Adjustable Florida Home Loan Losses to be Spread Out Over Next Few Years

Since 2004, there have been 7.7 million adjustable rate home loans procured nationwide. As the interest on those mortgages begins to rise, there’s been fear that the losses could significantly affect the economy.

But there needn’t be. As payments on Florida home loans of this nature - as well as those from around the country - increase, even the expected $110 billion losses combined over the next five years (via defaults) will be less than one percent of all the home loans sold since 2004. These numbers are couresy of Christopher Cagan, author of “Mortgage Payment Reset,” a study by First American Real Estate Solutions.

The delinquency rate on ARMs

Economy.com, an independent research provider, says the overall delinquency rate for mortgage loans “is pretty much a straight upward path in between now and the end of 2007,” according to Celia Chen, its director of housing economics.

The main reason why these loan losses won’t break the economy is because they’ll be spread out over the next four to six years - not all distressed borrowers will find themselves in trouble at the same time, Cagan said.

Adjustable-rate mortgages are popular for those looking to save on their initial monthy bills. Borrowers are able to make little or no down payments, along with long monthly payments, for a fixed initial period. When this period ends, the payments adjust upward based on prevailing interest rates. Borrowers are then sometimes left with three options:

1. Refinance to a fixed rate Florida home loan
2. Adjust payments according to the new structure of the mortgage
3. Default on their Florida home loan

Cagan says that loan delinquencies will go up. But, because the delinquencies will be a “time release” over the next four to five years, the economy will be able to weather the problems.

Evaluating the risk of certain home loans

Cagan says his study is the first to calculate the amount of loan risk based on homeowner equity associated with hybrid ARMs - exotic, dangerous home loans that allow borrowers to make little or no down payments and low monthly payments for the initial period.

Using data from LoanPerformance, Cagan found that the ARMs most at risk of default were those with low initial “teaser” rates of 2 percent or less, whose borrowers had less than 15 percent equity. This group represented about $70 billion in potential losses, out of $1.8 trillion, in ARMs issued in the last two years.

Not ALL adjustable rate Florida home loans are risky, of course. “If a person has a loan at 5 percent and it goes up to 6 percent, it’s not dangerous,” said Cagan.

If a borrower possesses equity and suddenly his payments skyrocket because the loan has adjusted, he can simply refinance to a longer-term, 15- or 30-year loan and bring payments into line – or, if all else fails, they can sell their home.

“But if they have no equity, it’s hard to sell and you can’t refinance,” Cagan said. People in this position are the ones most likely to default, he said. This is becoming more of a problem recently as Americans are taking longer and longer to pay off their loans.

Summary: A significant aspect of this issue plays to the role of housing affordability. Many are seeking a Florida home loan, yet lack the funds needed to afford curent mortgage rates. Therefore, they settle for adjustable mortgages and hope they can handle the future bill increases.