I recently took notice of a post on Kevin Chern’s Bankruptcy Lawyer’s Blog in which he wrote about the “ARM boom” of the early 2000’s and how almost $1 trillion of ARM loans would adjust (upwards) in 2006 and 2007.
The bankruptcy implications of these ARM adjustments will be numerous, including:
- some homeowners will not be able to afford to stay in their homes
- bankruptcy relief will be more difficult to obtain because of burdensome changes to the bankruptcy filing rules
- Chapter 13 repayment plans will necessarily become very complex, requiring on-going plan adjustments by bankruptcy counsel, and increased bankruptcy legal and administration costs.
With the proliferation of radio and tv ads from mortgage brokers encouraging homeowners to refinance (more recently I am hearing ads extolling the virtues of repeated refinancing “without closing costs” whenever interest rates dip downward), I wonder if any of these mortgage brokers or the mortgage lenders themselves fully explain what it means to purchase an adjustable rate mortgage or a hybrid adjustable rate mortgage.
Professor Elizabeth Warren, in the Credit Slips blog notes that more and more ARM mortgagees simply roll into a new ARM when the rate adjusts, but that when housing prices level out, these refinancing opportunities will disappear, leaving the homeowner with no equity and the loss of the home or bankruptcy.
It seems to me that the popular hybrid ARM loans have the most potential for trouble. In a hybrid, the mortgage rate is fixed for a set period of time (perhaps 2 to 5 years) then it becomes adjustable. The problem from my perspective as a bankruptcy lawyer is that most people budget based on their income and expenses today. When that mortgage becomes adjustable in 5 years, these families are already tied into car notes, furniture debt, and other monthly obligations and they cannot absorb an extra $500 or $800 a month.
In other words, sellers of hybrid ARMS take advantage of the short term thinking that exists in just about every market, including real estate. And the dozens of disclosures mandated by federal law don’t really serve any purpose as no one reads them and closing attorneys zoom through them without any real explanation.
Rather than seeing your home as a long term, “permanent” purchase, sellers of mortgage products have subtly chaged terms of the discussion. Here is the pitch for a hybrid ARM from a popular mortgage site:
The ideal mortgage for such borrowers is one that has a fixed rate for an initial period of years that coincides with the borrower’s intended time horizon in the home. Only then does the rate become adjustable. What results is a mortgage that has a fixed rate for the time the homeowner expects to occupy the home, with any rate adjustments not due until after the homeowner intends to move on. The clincher is that the initial fixed rate is lower than what is found on a traditional 30-year fixed rate mortgage. (emphasis added)
How many of us can say with any degree of certainty what our “intended time horizon” for living in our home will be? Given that most of your mortgage payment during the first 10+ years goes to interest, and transaction costs are usually rolled into the mortgage balance, who really benefits when homeowners do not stay in one place for more than a few years? Certainly not the homeowner.
Clearly, each of us is responsible for making our own decisions about when and where to buy a home and how to finance that purchase. Speaking from the perspective of a bankruptcy lawyer, however, I think that far too many people end up in my office because they have not thought through their decisions carefully.
Recently, a writer for a well known business magazine contacted me to ask if I knew of any homeowners who felt that they had been misled by either their mortgage broker or a mortgage lender when entering into a hybrid ARM mortgage loan. If you fall in this category and would be interested in speaking to this reporter, please email me or call me and I will put you in touch.