If you’re one of the millions of homeowners who bought a home in recent years with an adjustable-rate mortgage, and now find yourself over your head with rising mortgage payments, President George Bush recently unveiled a plan that could help you.
Bush announced a proposal to expand the role of the federal government in an effort to stem the wave of mortgage defaults that is causing a ripple effect in the U.S. economy.
The president’s proposal is targeting the estimated 2 million homeowners who are at risk of foreclosure because of the high payments they face on adjustable-rate mortgages taken out in 2005, 2006 and 2007.
These adjustable-rate mortgages, also known as “variable” mortgages, or ARMs, do not have set interest rates as do their fixed-rate counterparts. Instead, these rates fluctuate as market rates fluctuate.
With the steady rise in interest rates, homeowners’ mortgage payments have also kept pace with the increases. These loans make it difficult to plan a budget because monthly payments fluctuate. The initial attractiveness of these mortgages had been that variable rates, now above fixed-interest rates, could have fallen below fixed rates, and saved borrowers money.
Whether or not an adjustable-rate mortgage is a good investment really depends upon luck and how much of a risk-taker you are.
If you know that you will not be able to afford payments if your interest rate rises, then you should not get an adjustable-rate mortgage. However, taking a chance on an adjustable rate does work out for some people, and you always can refinance your variable-rate mortgage if you wish.
The Bush proposals would help an estimated 80,000 homeowners refinance their mortgages. Both Republicans and Democrats agree that millions of homeowners could be overwhelmed in the next 18 months as low teaser rates expire on more than 2 million adjustable-rate mortgages, causing monthly payments to increase sharply.
Other black clouds looming over homeowners’ heads are falling real estate prices and a pullback among mortgage lenders. These are expected to make it more difficult for overstretched homebuyers to either refinance their way out of trouble or simply sell their houses.
“This is really just the beginning,” said Karen Weaver, global director for securitization research at Deutsche Bank. “There’s a big wave of defaults coming over the next 12 to 18 months.”
Under the Bush plan, the Federal Housing Administration's mortgage insurance program will be changed to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages.
People who have missed mortgage payments are now ineligible for FHA insurance. The president's plan would allow them to be eligible for FHA insurance if the amount they are required to pay each month increases, as has happened on many adjustable loans with so-called "teaser" introductory rates.
However, Bush is rejecting a wholesale bailout of borrowers and lenders alike, saying it's not Washington's role to provide such a backstop. "The government's got a role to play," he said, "but it is limited."
A bailout of lenders, Bush said, would only encourage similar situations in the future. "It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford."
But the president said that many homeowners could be helped if their lenders are flexible with mortgage terms and if the government offers them modest help.
"This is not going to reverse things," David Ader, bond strategist for RBS Greenwich Capital, said in a written statement. "This proposal is something that may help a small slice of the market, but we don't see it as a broad solution."
Many other ideas have been floated in recent weeks to help homeowners who face staggeringly high payments on adjustable-rate mortgages taken out in the past two and a half years. These include giving Fannie Mae and Freddie Mac a bigger role, or even creating a new federal bureaucracy to bail out homeowners.
One of the first steps you can take to get yourself back afloat is learn your options.
These include:
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