An example may be a $150,000 mortgage with an initial rate of 5% making monthly payments about $805.23. But when the interest rate ticks up to say 8% the payments jump to $1100,65. And if the property ever hits the rate cap of say 12% the monthly payments would be $1542.92. The potential for mortgage payments to rise $737 exists for ARM users. (Perhaps these hard numbers of what a 12% rate cap payment would be should be in the mortgage documents at signing.)
When housing values only went one way and refinancing always seemed to be an open option the risks may have been worth it. But values are declining and refinancing is coming with tighter restrictions so refinancing these ARMs may not be possible.
And while ARMs may be big problems for owners when they reset. There are many owners still with un-reset ARMs that they can not afford anymore (or perhaps ever). Not all the problems with ARMs are the resets. As we can see in today's example some owners can not afford their ARMs or properties well before any reset occurs. Let's take a look -
Here is the property -
Here are the financials -
- The property was purchased for $405,000 in September 2005.
- The original mortgage at time of purchase was for $344,000 with Montgomery Mortgage Solutions using an ARM.
- In May 2006 the property was refinanced for $382,500 using an ARM with OMMB.
- In February 2007 the foreclosure process started with the filing of a Lis Pendens.
- The property is currently an REO for sale through a realtor for $319,900.
- Property taxes were $7,612.05 for 2008 but not yet listed for 2009.
The property was purchased at peak market price. But the owner seemed like a very serious buyer with a down payment of over 15% which was $61,000. This is a very respectable down payment - even pre and post bubble.
However the down payment did not stay as equity for too long. Since 8 months later $38,500 of the equity put down at time of purchase was extracted with a cash-out refi. But even with the withdrawal the owners still had over 5% of purchase price equity in their property.
But the refi did not work out so well since 9 months later the foreclosure process had started. This also tells us that probably only 5 or 6 mortgage payments were made after the refi.
This property was not lost to the reset of an ARM which we often hear about as a big culprit in the foreclosure process. This was an ARM where the original payments were no longer affordable for some reason. Maybe the reason was a true personal issue like illness or divorce. But often these cases look like mortgages given on asset values not ability to pay. Was this another case of that?
The owner will has already lost $22,500 during their ownership of this property, not to mention a hard hit to their credit score. The lender
will lost approximately $81,794 between the mortgage loss and standard realtor fees. Not a really bad hit compared to other properties, but this modest house in Wharton still lost various parties over $104,000 in less than 4 years.
Well, let's take a look at the purchase options for new owners. With a 20% down payment and today's 30 year fixed Bankrate of 5.06% a monthly payment would be $1383.23. Adding in the property taxes and the total monthly carrying costs - excluding utilities - would be about $2017 for this location.
We wonder what it will end up selling for...