ARMageddon Looms… Will You Be Ready?

This topic has been on my mind the past several months. When the housing market exploded a few years ago and homebuyers squeezed into homes with Adjustable Rate Mortgages (ARMs) with seductive initial interest rates, I said to myself, “In 2 or 3 years when those ARMs come due, there are going to be a lot of unhappy people.”

The recent follies in the sub-prime mortgage market were an omen of trouble on the horizon and in a few more months that trouble will burst onto the mortgage scene with reckless abandon. According to this latest article from CNN.com more than 600,000 homeowners will be affected by the resetting mortgage rates.

“Delinquency rates will probably peak by the end of the year,” said Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), “and foreclosures in 2008.”

Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets (”liar loans”) and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched.

The epitome of the “liar loan” fiasco is probably best displayed by Casey Serin of IAmFacingForeclosure.com, a self-proclaimed real estate entrepreneur who acquired 8 properties and $2.2 million in debt in a whirlwind of bad decisions fueled by “liar loans.” His story and on-going road to recovery (albeit laced with self-promotion) is an interesting read.

The most troubling part of the article is when Mark Zandi, chief economist and co-founder of Moody’s Economy.com, says that 75% of sub-prime ARMS loans were made in California, Nevada, Arizona, Florida and Massachusetts.

In the Tucson market housing inventory has risen to almost ten thousand active listings, three times as many as there were two years ago. I’ve seen listings where I’ve walked in and wondered how the sellers think they can get away with asking as much as they were. After a bit of homework, I find they either refinanced their home recently, pulling out all of their equity, or bought at the height of the market. Now they can’t fetch the same prices that were existent a few years ago and may very likely fall into a short-sale situation.

For those homeowners who currently have an Adjustable Rate Mortgage and/or those of you looking to refinance, there is a great post over at BlownMortage.com entitled “Blown Mortgage’s 8 Step Program Will Save You $2,500 on Your Mortgage Refinance.” Stop by and take a look if you get a chance.

The big question is how large of an impact these ARMs will have not only on the housing market, but on the US economy in general. With some housing markets already depressed, an influx of homes on the market will send prices even further downward.

Has anyone seen a rise of short-sales in their housing market?

Technorati Tags: Adjustable Rate Mortgages, ARMs, sub-prime mortgage, liar loan, Casey Serin, short-sales

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