Interest rate cuts in adjustable rate mortgages have had no effect on foreclosures. Foreclosures march on to scale new heights. 1 million are under its cloud. The foreclosure crisis initially began by focusing on sub-prime borrowers who could not manage increase in interest rates. But today the foreclosure virus has spread its tentacles to slow down the economy. The fall in the real estate market is making refinancing impossible even at reduced rates. The value of the property has fallen below the loan amount making it senseless to continue with the mortgage.

During the first quarter of 2008 nearly 2.47% of house mortgages were in the foreclosure net. This was an increase of 1.28% from the previous year and also a record since 1979, the year from which Mortgage Bankers Association started keeping record of numbers. About 6.35% of the house mortgages have gone delinquent but not entered the foreclosure zone as yet. It is a jump of 4.84% from 2007. Counted together about 9% of all the house mortgages across the country are in troubled waters – this is despite the rate cuts by Federal Reserve.

Of the loans rushing into foreclosures 60% emanate from adjustable rate category of sub-prime loans. But today the problem is no longer focused on ‘rate shock’ as forecast previously. New developments in the economy have taken place. Thus concentrating on the rates will not bear fruit against this changed scenario, commented Guy Cecala of Inside Mortgage Finance.

If reset today, a typical borrower of a sub-prime ARM, will have to pay an increase of $70. In December 2007 the amount of increase would have been $450. This is as per the calculations of American Securitization Forum. Thus the rate shocks can no longer be held responsible for galloping defaults leading to foreclosures comments professor Christopher Mayer of Columbia Business School. Today prime borrowers too are beginning to feel the pinch and starting to stumble in mortgage payments. In fact during the first quarter the number of offending prime borrowers outpaced those in the sub-prime group.

However the rate cuts have benefited some borrowers. But those who were saddled with artificially low teaser rates are still struggling to keep their heads above water as the rates continue to be high. The increase may be modest but it is still unaffordable by many who had so far enjoyed absurdly low rates.

The slightest increase is compounding with rising food and fuel prices to make a cocktail of woes.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Netvouz
  • description
  • ThisNext
  • MisterWong
  • Wists