Vicki Nious joined a nonprofit agency last year to help low-income Americans buy and fix up homes. Instead, with interest rates rising, she's seeing more clients struggling to pay their mortgage and hang onto their house.
"We've definitely seen an increase in delinquencies and even we have a few cases we may consider for foreclosure," said Nious, mortgage services manager for AHC Inc. in Arlington, Virginia. "Many families are having trouble because their adjustable rate mortgages are expiring and they need help."
Like a lot of Americans, many AHC clients got into the housing market in the last few years by taking out adjustable rate mortgages at extremely low "teaser" rates, sometimes half that of a traditional 30-year fixed mortgage.
The low rates offered an alluring way for poorer Americans to get into a booming housing market, and many leapt at the chance. About a quarter of outstanding home mortgages nationwide carry adjustable interest rates, and the nation's homeownership rate has climbed to a record 70 percent.
Last year, 43 percent of all mortgages taken out were adjustable or exotic in nature -- such as those that require only the interest of the loan be paid for the first two years.
But borrowing costs have been climbing for two years, in some cases to nearly double what they were in 2003 or 2004, just when the introductory low rates on adjustable mortgages are set to expire.
That means homebuyers who were once paying just over 3 percent interest are suddenly facing rates that are at 5 or 6 percent and still climbing. As interest rates rise, late payments, also known as delinquencies, are becoming more common. After 90 days, foreclosure can begin.
Worse before better
Economists are bracing for an onslaught of late payments and the inevitable worry among lenders and borrowers alike that failed loans will cause a consumer or housing collapse.
The mortgage delinquency rate rose to 4.70 percent at the end of the fourth quarter of 2005 from 4.44 percent in the third quarter, according to The Mortgage Bankers Association, an industry group that tracks loan repayments.
While at least part of the increase was due to Hurricane Katrina, the group said the rising share of adjustable and subprime loans was also driving up delinquencies.
Anthony Chan, chief economist at JPMorgan Private Client Services, has done research to show that delinquency rates lag the increase in adjustable mortgage rates by about a year. That means delinquencies will continue to climb for as long as a year after mortgage rates have peaked.
"Given that ARM rates are going higher, I think it's pretty straightforward to make the forecast that over the next 12 months, those delinquencies are moving higher, not lower than where they are today. So if we think they're bad now, they're going to be higher," Chan said.
But there is some good news. Official interest rates have nearly peaked, and the Federal Reserve is more likely to be cutting rates than raising them next year, Chan believes.
What's more, the traditional link between market rates like mortgages and official interest rates has been broken, so higher official rates may not feed into the mortgage market. After all, official interest rates have nearly quadrupled in the last 2 years, while mortgage rates have not quite doubled.
"That's going to rescue a lot of people. If that link were to reemerge, then we have a problem," Chan said.
Still, the Center for Responsible Lending, a Washington-based consumer protection group, knows many homebuyers are only now beginning to realize the risk they took on when they signed up for an adjustable rate mortgage.
"I think that many people are very misled in terms of the initial monthly payment. We certainly hear from borrowers who didn't know until it adjusted that that's what was going to happen," said Debbie Goldstein, the center's executive vice-president.
At AHC, Nious is working with low- and moderate-income families to refinance costly mortgages in a desperate bid to avoid foreclosure. But with fixed rates now above 6 percent, it may be a losing battle.
"For many, they can't afford even a loan at 1 percent," Nious said. "But we do everything we can to assist them, we sit them down and do counseling to see if we can do anything, even modify a note to see if they can pick up the payments if they had a loss of job and they weren't able to pay."
"Foreclosure is a last resort for us."