Foreclosures May Jump As ARMs Reset

Anita Britten, left, plays with her niece Amber Britten, 3, at her home in Lithonia, Ga., Saturday May, 20, 2006. As more hybrid adjustable rate mortgages, or ARMs, adjust upward and housing prices begin to dip, many Americans can't refinance out of the this riskier type of loan. As a result, they are finding themselves trapped in too-high monthly payments, and those that can't afford them may face foreclosure. (AP Photo/John Amis) (John Amis - AP)

Last year, foreclosures hit a historical low nationwide at about 50,000. But that number has more than doubled since then, according to Foreclosure.com.

And delinquency rates appear to be rising, as well. While delinquency rates fell for most types of loans from the fourth quarter of 2005 because of a stronger economy, delinquencies for both prime and subprime ARM loans increased year-over-year in the first quarter, according to the MBA.

The hardest hit states so far are those that have experienced the roughest times economically. Michigan, Texas and Georgia lead the pack, specifically around Detroit, Dallas and Atlanta, whose major employers have run into strikes, bankruptcies and industry downturns.

But as the housing market slows, experts expect foreclosures to skyrocket in those areas that have experienced the highest appreciation rate _ like California, Florida, Virginia and Washington, D.C.

"There is a direct correlation between foreclosure sales and market activity," said Dr. James Gaines, a research economist at The Real Estate Center at Texas A&M University. "If the rate of appreciation is not there, then there is an increase in foreclosure sales."

Gaines pointed out that although California's default notices are rising by the thousands, actual foreclosure sales remain in the hundreds. Because of California's still-active housing market, homeowners there can sell their properties before going into foreclosure.

On the flip side, in less active markets like Texas and Georgia, homeowners can't find a buyer in time and are forced into foreclosure.

But as the housing cools in these once hot markets at the same time that ARMs reset, many homeowners may be unable to dump their properties before going into foreclosure, Gaines predicts.

Additionally, Gaines pointed out that these same real estate markets also boasted a higher percentage of ARM originations, because most buyers could only get into their homes using an unconventional loan.

California, where the median home price reached $468,000 in April, leads the nation in the percentage of homes purchased with adjustable rate mortgages. Nationwide, ARMs account for 24 percent of all home loans.

"In our zeal to make mortgage lending more available to a greater number of people, it's normal to expect the foreclosure rate to go up," Gaines said.

Even investors in foreclosures are having a harder time finding good deals, as the housing market cools. Many homes that do end up in foreclosure auctions are saddled with more than one mortgage and have little or no equity _ so the investors take a pass.