An Adjustable-Rate Florida Mortgage Story Gone Bad

The official-looking notice appeared in his mailbox last year. To Denith Harrigan, the promise of a Florida mortgage rate as low as 1 percent was too good to ignore.

Disabled and on a fixed income of $2,100 a month, Harrigan could finally pay off credit card debts and fix his leaky pool. What a deal.

Or so he thought.

Now just a few months into his new Florida mortgage loan, Harrigan is in serious risk of losing his house. In less than three years, his payment could grow to equal his total income.

“I got into something I had no intention of getting involved in,” said Harrigan, 36, who lives alone in a ranch-style house in Lakewood Estates. “I believe this should be against the law.”

Harrigan is among a growing number of home buyers who, knowingly or not, have taken out adjustable rate mortgages known as ARMs, often lured by introductory offers that they didn’t fully understand. Industry insiders say both sides share blame: the consumers who want to believe the sales pitch and those brokers and lenders who snare uninformed customers in search of bigger-than-normal commissions.

On Tuesday, Gov. Charlie Crist signed into law a bill requiring brokers and lenders to explain better the risks of such Florida home loans.

“Ninety percent of mortgage brokers are hard-working, committed people. But sadly, there are a few that have sold [Florida mortgages] to families who are totally unaware of the consequences of an adjustable rate mortgage,” said Sen. Mike Fasano, R-New Port Richey, one of the bill’s sponsors. “I’ve heard some horror stories.”

The popularity of ARMs, experts say, is contributing to the surge of foreclosures in Florida and other states.

In May, the Sunshine State led the country with nearly 30,000 homes entering the foreclosure process, according to data assembled by Bargain.com, of Goleta, Calif. And while 35 states saw a decline in new foreclosures last month, Florida’s rose 22 percent.

“Foreclosures are only going to increase when you have more of these loans resetting to their higher rates,” said Ira Rheingold, executive director of the Washington-based National Association of Consumer Advocates.

Option ARMs, like Harrigan’s, give buyers the choice each month of paying interest and principal, interest only or an amount less than the actual interest. But if the home buyer picks the minimum payment - as most do - their Florida mortgage debt grows.

For Harrigan, the lower interest rate initially decreased his mortgage payment from $1,495 to $1,005. But if he covers only the minimum payment, his principal will grow by about $1,000 a month, and in less than three years his payment will equal his total income.

“There are so many people underwater right now,” Rheingold said. “How are people going to [Florida refinance] or sell when their mortgage is worth more than the house?”

Complaints from buyers like Harrigan, who say they were misled about their loans, have grabbed the attention of government. In September, federal regulators advised banks to improve explanations of nontraditional mortgages and assess a borrower’s ability to pay the fully adjusted payment - not just the teaser interest rate.

Consumer advocates say disclosure requirements, like those Crist signed into law Tuesday, are good but won’t do nearly enough to rein in abuse. Florida mortgage lenders can easily bury the facts in an avalanche of paper or whitewash them in their sales pitches.

“People don’t stand a chance,” Rheingold said. “When I refinanced, I didn’t understand it all and I know this stuff. … Yes, some consumers may have understood the loan, but the majority of people are getting screwed royally. It’s a myth to say consumers are choosing these mortgages.”

Brokers and lenders alike are quick to point out that option ARMs fill a need. For investors, borrowers with fluctuating incomes or people with a lot of home equity and an immediate need for extra cash, the Florida mortgages work.

“It’s a pay-now-or-pay-later situation, and ultimately it’s always the customer’s decision which is best for them,” said Patrice Yamato, president of the Florida Association of Mortgage Brokers.

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