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)

Falling home values are also affecting homeowners' ability to refinance into a traditional 30-year fixed rate loan to avoid foreclosure.

In 2002, Christopher Jones, 32, refinanced into a hybrid ARM with plans to refinance again when the rate started to readjust. At the time, his downtown Atlanta house appraised for $108,000.

Now, his monthly payments have shot up, but Jones can't sell his house for more than $84,000 and he can't get an appraisal for more than $85,000.

The appraisal firm told Jones that the value of houses in his neighborhood have fallen victim to a cooling market. With no other options left, Jones has decided to pack it in and foreclose on the house.

"I'm just going to take the loss," he said. "That's all I can do."

Some homebuyers, especially first-time buyers, may not have fully understood the risk of ARMs. In the rush to close on a house sale, especially in the frenzied market of the past few years, many first-time buyers often failed to get the full details of their loan from their mortgage broker.

"Sometimes buyers are very optimistic of how much mortgage they can handle, especially in a strong housing market with aggressive marketing of riskier mortgages," said Suzanne Boas, president of Consumer Credit Counseling Services of Greater Atlanta.

When Dora Angel of DeSoto, Texas bought her first home in 2003, she paid $141,000 for the brand new three-bedroom, two-bath home. At the time, her mortgage payment was $1,400 a month.

Angel originally thought that she had a fixed-rate loan. But about five months ago, she noticed that her monthly payment kicked up to $1,900. She only made the monthly payments by sacrificing payments on her credit cards, which pulled down her credit rating.

Now, Angel can't continue paying $1,900 each month, but, because of her credit ranking, she doesn't qualify for a fixed-rate mortgage.

"I was a first-time buyer. I was blind. I didn't know what questions to ask," she said. "And the mortgage brokers are there telling you what you want to hear just to get you in the mortgage."

Unfortunately, during a runaway market, many buyers, sellers and mortgage brokers were more excited about making deals than making smart deals, and the fallout has just begun.

"We are on the front of this ARM problem. It will roll out over the next several years," Boas said. "Owning a home is the American dream, but losing one is the ultimate nightmare."

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AP Business Writer Alex Veiga in Los Angeles contributed to this story.