Americans are often stereotyped as over-consumers – wanting it all, wanting instant gratification. We’re known for ‘spending beyond our means’ and unfortunately, that is what has happened for many homebuyers. This problem doesn’t just affect one specific state – it is sinking in all over the U.S., particularly in those areas where home prices have risen rapidly, and ultimately have become too expensive for many people to live. To summarize the potential crisis in a nutshell: Many Americans purchased houses with Adjustable Rate Mortgages that used low, ‘teaser’ interest rates and ‘no money down’ offers that were common over the past 24 months. But these adjustable rates will rise at some point in the next year to five years, depending on the terms of the specific mortgage, and will have devastating consequences for many.

 

The rise in interest rate means that some people will not be able to afford their home. Especially if they bought a home at the high end of what amount they qualified for – in other words – they spent as much as they could.

 

Sub-Prime and ARM mortgages with low introductory interest rates meant that a couple, for example, could get a $300,000 house at a payment that you would previously have seen for a $215,000 house. Problem is, when the payment rises due to insurance and tax increases, AND the higher adjusted interest rate –the couple may not be able to afford the minimum payments.. Add to this the fact that most of these ARMs were for houses that appreciated rapidly during the recent real estate boom, and were used to finance houses at high valuations. Since those highs in 2005 and 2006, average home prices have slumped on average 3% - 4% according to the National Association of Realtors, with many markets having seen prices plunge as much as 25 percent. This means that many of those people that cannot afford the minimum payments, also have a mortgage that is greater than the house is worth. In this situation, these people are stuck. They can't refinance or sell unless they have enough cash to pay the lender the difference between what they owe and what the house is worth. They either have to keep making the payments or go through foreclosure.

 

And as often is the case with consumer issues, opportunistic, predatory companies are partially to blame – in this case, the “Sub-prime lenders”. These lenders unscrupulously make loans to just about anyone and everyone- regardless of their ability to meet the term of the loan over the long term. They offer mortgages with unrealistic payment options that only cover the interest of the mortgage, with interest rates that often drastically reset to much higher than the initial rate, and they give these to people who can’t qualify for a typical prime loan. The lender makes a quick buck and isn’t concerned about what will happen when the borrower can’t afford the loan anymore. We could also point a finger at the Federal Reserve and regulating officials who should have ‘kept an eye’ or at least a tighter rein on the smaller, secondary lenders. Note that many of these lenders are now out of business. The buying splurge is over and so is their profit stint.

 

Can we offer any guidance or assistance for those affected by these adjustable rate mortgage loans? Well, there are lenders who will provide a new, fixed rate mortgage for you if you qualify. But you’ll need closing costs and/or a reasonable amount of equity in your home. However, the cost of redoing your mortgage now can be less than the increased amount you’ll spend when your ARM payment goes up, so it is worthwhile to look into this option. In other words, don’t let the prepayment penalty scare you until you do the math.

 

However – consumers should also be warned that there are unethical mortgage brokers and lenders out there who are still offering loans to ‘help you use the equity in your home’ and ‘get you out of debt’. Some of these can legitimately help you but some will cost you your home. Be sure that if you look into any kind of refinance or mortgage loan, you do your homework, understand all the costs and terms, and check the company and individual you are dealing with. You can start at the Better Business Bureau. Mortgage scams have been on the rise for over a year.

 

If you have a subprime loan and believe that you may have trouble ahead, seek help. Do not wait until you are financially overwhelmed. Immediately call your lender and discuss your options.

Once you make contact with your lender or servicer, stay in touch with that contact until you are out of the woods. Document your contacts in writing so you and the lender have a documented record of your efforts.

If possible, consider restructuring or refinancing your loan -- but not to borrow more money. If you are saddled with two mortgages, do the math to determine if consolidating them will help. Likewise consolidate non-mortgage debts. Also consider extending a 15 year mortgage to 30 years or a 30 year mortgage to 40 years or longer. Examine how any restructured debt will play out if your situation worsens or improves. In each case, determine if restructuring is your best move, preferably before you miss a payment and damage your chances of landing a new loan.

Watch out for scams. When you are down on your dollars you are most vulnerable to debt-removal come-ons. You likely didn't get in over your head overnight. Don't expect a quick fix.

Get financial counseling. Certified (by state and federal agencies and recognized trade groups) consumer credit counseling services are often free or offered for only a nominal fee. They will teach you your rights and work with you and your creditors, say, to temporarily reduce payments or otherwise work out a payment plan that will keep you housed and your credit relatively intact.

Know your rights. If you are in the military, you have special relief under the Service Members Civil Relief Act (which strengthens the Soldiers' and Sailors' Civil Relief Act of 1940) to stop the foreclosure and you may be eligible for a reduction in the interest rate. Similar relief is available to those affected by hurricanes, earthquakes and other natural disasters.

If all else fails, bankruptcy is an option that can stop foreclosure, at least temporarily, and give you some leverage to resolve the foreclosure. However, there are pros and cons to either option. Research these carefully.

Selling the property is another end-game option, depending on your equity.

The bottom line is that there are options. If you are having problems, you need to educate yourself as to the best path forward, rather than just let your house be foreclosed. Take action soon.