Study Reveals Affects of Rate Shock on Adjustable Florida Home Loans

It’s not the best time to possess an adjustable rate Florida mortgage loan. As a recent study by the Association of Community Organizations for Reform Now (ACORN) depicts, a slew of owners have taken out these types of home loans.
And recent interest rate hikes could make it financially dangerous to be included in this group.

In the survey, ACORN noted that, while adjustable rate Florida home loans represent about 24 percent of all mortgage nationally, in some communities and among some demographic groups they account for a much larger percentage of the mortgage pool. Moreover, ARMS make up about 75 percent of all sub-prime loans, a 50 percent increase since 1999.

Adjustable rate Florida home mortgage loans: The popularity and danger

The report stated that “until this year there has been little recognition of the prevalence of adjustable interest rates in sub-prime loans and the danger posed by these ARMS.” The focus instead has been on predatory lending practices such as excessive fees, high interest rates, and balloon payments.

Sub-prime loans are generally tailored for a market where people cannot obtain a conventional loan at a standard rate, but Freddie Mac and Fannie Mae have estimated that at least one-third of sub-prime borrowers could actually have qualified for a lower cost mortgage. Therefore, it would seem that a “large number of the borrowers who have received ARMS should not have been in the sub-prime market.”

They were taken advantage of.

The ACORN study found 32 markets where at least one out of three loans given out was high cost and thus subject to rate reset shock. In ten of these markets, high cost loans represented two-fifths of the home purchase and refinance mortgages. Fortunately, none of the markets included were located in Florida.

The borrowers affected by these mortgages have certain things in common, as well. ACORN found that minority neighborhoods are at a great risk of payment shock because of the extent of high cost loans. More than half of the high-cost refinance loans in 67 of the areas examined in the study were in minority communities.

However, the risk was not limited to the low income in minority areas. Upper-income minority borrowers were found to be at greater risk than white borrowers of similar income. In 12 metropolitan areas, upper-income African-Americans were at least three times more likely than their white counterparts to receive high-cost refinance Florida home loans and in 15 metropolitan areas upper-income African-Americans were at least five times more likely to receive a high-cost purchase loan than upper-income whites.

In other words: it’s a class - not race- issue.

Why are these Florida home loans so risky?

The ACORN report cited the phenomenon of “layered risk” where high cost loans are layered with multiple features, such as interest-only requirements, prepayment penalties and option payments. Lenders are also offering low initial “teaser” rates which adjust to higher rates after the initial “introductory” period.

The study quoted a Federal Reserve report that found an estimated 35 percent of ARM borrowers did not understand the maximum amount their Florida mortgage rate could rise at one time or even how to calculate what the maximum rate would be. This is certainly a problem.

Borrowers with prepayment penalties and minimum equity may be unable to be approved for a Florida home loan refinance. The study quotes research by First American Real Estate Solutions that up to 1 million households are in danger of losing their homes through foreclosure over the next five years because they will not be able to afford new payment levels and will owe more on their homes than they can recoup through a sale or refinance.

Such an impact of rate reset shock may be concentrated in certain metropolitan areas, neighborhoods, and among certain demographic groups. But it’s something EVERYone with a Florida home mortgage needs to bear in mind.