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October 26, 2007

Three-Quarters Of ARM Borrowers Are Clueless Economy

Hundreds of billions of dollars worth of adjustable rate mortgages are going to reset in the next six months. Are people ready? No. And they don't even know it. CNN (via Cryptogon):

About $50 billion in adjustable rate mortgages reset this month, driving interest rates up for many borderline borrowers. And despite efforts to raise awareness, it doesn't look like anyone is really prepared for what's to come.

"I don't know if there's anything much [borrowers] can do," said Keith Gumbinger of HSH Associates, a publisher of mortgage related information. "Hopefully, they've been prudent about preparing for it, building a nest egg or refinancing the loan."

But most borrowers are likely to just scramble to pay the higher expenses - some of which will jump by 50 percent and come as a big surprise.

According to a survey conducted last month for the AFL-CIO by Peter D. Hart Research Associates, three quarters of borrowers have little clue about how much their payments will increase when their loans adjust. Nearly half don't know how their loans actually reset. [...]

When asked whether they were confident or worried about making their monthly mortgage payments over the next few years, 41 percent of homeowners whose adjustable rate mortgages (ARMs) had already reset said they were worried. Only 18 percent of pre-reset borrowers were concerned. [...]

But the mortgage situation can't hope to improve until banks tighten lending practices, and it doesn't look like they're quite on track. This past summer, the Mortgage Bankers Association revealed that delinquency rates for loans made in 2006 were rising.

And a new report from investment bank, Friedman, Billings, Ramsey, suggests that as conditions began to collapse during the first half of 2007, lenders still failed to vet borrowers carefully.

According to the report, lenders did not tighten underwriting standards until July or August, when the subprime crisis came to a head. As a result, delinquency rates for these most recent loans are even higher than those for 2005 and 2006.

With so many poorly underwritten loans, future delinquency rates and foreclosures could soar. And while October will be the peak year for resetting ARMs in 2007, new records will be set in early 2008; March will see more than $100 billion in resetting loans. [Emphasis added]

I love that "Hopefully, they've been prudent about preparing for it, building a nest egg or refinancing the loan." Please. If three-quarters of borrowers don't even know how much their payments will increase, I think we can assume they haven't been taking steps to prepare. They took ARM mortgages in the first place because that's all they could afford. Makes building a nest egg a little tough.

Posted by Jonathan at October 26, 2007 05:16 PM  del.icio.us digg NewsVine Reddit YahooMyWeb


Are you really surprised? Look around. I'm a banker and I'd say it's more about ignorant, keeping up with the Jones's, info-tainment driven, want it now consumers than the mortgage industry - they aren't guilt free either but the consumer wants a scapegoat and if they can find one then the government will come in and make it all better.

Three-quarters of all consumers are pretty close to clueless. Financial education K-12 is one term in many school systems, covering everything from home-ec, how to shop and cook food, to paying bills, to buying cars and homes and investing for your retirement - all in one term. No wonder most people have no idea about the cost of debt. Have a hissy-fit when lettuce goes up 30 cents a head, when they've got a $400 a month car payment. And can't separate a want from a need.

The government and consumer are running their financial house the same way and are headed for the same day of reckoning. The sad part is that it will take down the minority of responsible consumers and savers with it.

Posted by: David at October 29, 2007 08:03 PM