Rates pinch homeowners

Lending boom's downside shows in delinquencies

Ruth Simon, The Wall Street Journal

Published August 11, 2006 at midnight

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Luisa Cordova-Holmes was looking to lower her monthly payments when she refinanced her $312,000 mortgage in 2004. Instead, she wound up digging herself into a ditch.

For their new loan, Cordova- Holmes and her husband chose a so-called option adjustable-rate mortgage, which carried an introductory rate of 2.35 percent and gave her multiple payment choices each month. "I had a lot of financial obligations," says Cordova- Holmes, an accountant who lives near Detroit.

Two years later, however, the interest rate on her loan has jumped to 8.75 percent, her loan balance has climbed to $324,000, and her minimum monthly payment has risen to $2,257. She says the terms of the loan weren't clearly spelled out.

Cordova-Holmes says she would like to refinance, but can't — in part because her loan carries a prepayment penalty that would force her to shell out thousands of dollars if she did. Instead, she's trying to sell her home. But with Detroit's economy slumping, she hasn't been able to find a buyer.

In recent years, homeowners such as Cordova-Holmes have embraced adjustable-rate mortgages — and such variations as option ARMs, interest-only mortgages and "piggyback" loans, which, respectively, allow borrowers to make a minimum monthly payment, pay interest and no principal in the loan's early years, or finance 100 percent of the purchase price. The growing popularity of these products has helped fuel consumer spending as well as double-digit home-price gains and rising homeownership rates.

The downside of the lending boom is starting to show. Rising interest rates are taking a toll on family budgets as growth in home prices flattens — and, in some areas, prices fall.

Mortgage delinquency rates hit 2.32 percent in the second quarter after bottoming out at 2.06 percent in the fourth quarter 2005, according to an analysis by Equifax/Moody's Economy.com.

The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 141 percent in the past year, according to a recent study by Credit Suisse that looked at loans made to borrowers with good credit. That compares with a 27 percent rise in such delinquencies for fixed-rate mortgages.

Many borrowers who run into trouble have relatively low incomes or scuffed credit records. But housing counselors say they are also hearing from a growing number of middle- and upper-middle-income borrowers who borrowed heavily to finance spending or buy a house they could barely afford.

NeighborWorks Homeownership Center in Sacramento, Calif., says that 38 percent of the borrowers it's seen this year have "moderate or above-moderate" incomes, up from 24 percent last year.

Until recently, most mortgage-payment problems were an unfortunate byproduct of major life changes, such as job loss, medical problems, divorce or a death in the family. But for the new wave of troubled borrowers, the problems stem largely, or in part, from the structure of their mortgage, housing counselors say.

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