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Homeowners in Harm's Way

By Albert B. Crenshaw
Sunday, April 3, 2005; Page F01

There has been plenty of wailing in recent months over the soaring property tax bills that homeowners have been receiving, thanks to their similarly soaring home values. Families complain of being "taxed out" of their homes through no fault of their own.

But less attention is being paid to a group of homeowners who could be in even greater peril: those who stretched themselves thin to buy an expensive house that they could afford only by borrowing on a low-interest, adjustable-rate mortgage.

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Interest rates now appear to be starting back up, and many of these borrowers will soon face higher mortgage payments, often accompanied by those higher taxes.

It's hard to tell exactly how many such homeowners there are, but if the popularity of adjustable-rate mortgages is any indication, there are a lot.

According to an analysis by Barry Glassman of Cassaday & Co., a McLean-based financial advisory firm, adjustable-rate mortgages (ARMs) last year took a startlingly large share of the mortgage market, accounting for roughly a third of new originations for much of the year and topping out at 36 percent in October.

That finding is counterintuitive. One would think that as fixed-rate loans reached lows unseen in decades, borrowers would be hurrying to lock them in. After all, if you miss and rates keep falling you can always refinance. The time to take an ARM is when rates are high and you think they will fall.

One worrisome possibility is that the surge in ARMs reflects buyers stretching to the limit to buy a house they can barely afford, or to buy any house before prices, which have been rising faster than incomes in many markets, leave them permanently behind.

"Not too many things make me nervous, but this does," Glassman said.

In addition to ARMs, today's housing market is seeing a growing number of interest-only loans -- which must be refinanced at some point, perhaps in a bad market -- and the return of "negative amortization" mortgages, in which the payment is low but the principal may actually grow.

To the extent that all these types of loans become a more common way of financing a house, they represent yet another instance -- like the substitution of 401(k) plans for traditional pensions -- of Americans taking on risk that in the past was borne by someone else.

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