Many families who bought homes using an adjustable rate mortgage in the past several years face a Catch-22 situation highlighted by today’s home sales and price data: they face a rate reset with payments they can’t sustain, they will have difficulty refinancing their current mortgage because they now have negative equity, and they will be unable to sell quickly because of the glut of homes in the market. With seven consecutive months of declining sales and house prices below 2005 levels, even the rosiest spin from the National Association of Realtors is unlikely to provide much comfort for troubled borrowers trying to assess their options.
· Borrowers face a rate reset with payments they can’t sustain.
There are more than 2.8 million families with mortgages that reset in 2007 or 2008. The average monthly payment these loans will spike 37 percent when the reset happens. It is estimated that the new payments will cost the average family an additional $10,000 per year in mortgage costs.
· Borrowers will have difficulty refinancing their current mortgage because they now have negative equity.
Nationally, the median house price has fallen to below 2005 levels. This means that there is an increased likelihood that borrowers who had high loan-to-value ratios to start with are now “under water,” i.e., they owe more than their homes are worth. A 5 percent drop in house prices would leave 21 percent of borrowers with ARMs from 2005 and 38 percent of borrowers with ARMs from 2006 with no equity in their homes.
Prices of homes nationwide fell 4.2 percent in September versus last year, with the greatest drop in the West, at 8.8 percent. The Midwest, home to many troubled borrowers in Ohio and Michigan, saw slight increases in the nominal median price (1.4 percent) over last September. But with inflation in the Midwest running at 3.1 percent over the same period, there was a decline there, too, in real dollar terms.
· Borrowers will unable to sell quickly because of the glut of homes in the market.
With 4.4 million homes in unsold inventory, there is currently a 10.5 month supply of homes on the market. Selling a home in the current market is going to be difficult at best, and the asking price necessary to entice buyers for a quick sale is likely to be far below what these families need to pay off the loan balance.
A solid analysis of September’s Existing Home Sales data only reiterates that the mortgage crisis is neither wholly contained nor likely to abate in the near future. The number of families who will be unable to seek relief through any of the current programs that encourage refinancing and who are unlikely to be offered loan modifications by their lenders or servicers grows with each passing day. Default and foreclosure loom ever more menacingly as borrowers are unable to find a reasonable payment option and unable to sell their homes; it is time to consider direct public intervention.
Andrew Jakabovics is the Associate Director for the Economic Mobility Program at the Center for American Progress.