Interest Rate Cuts Fail To Check Foreclosures
June 16th, 2008
Interest rates have been lowered on adjustable rate mortgages but it has failed to check the surging tide of new foreclosures. It is scaling new heights having touched 1 million.
The reason is because hitherto the prime focus had been on sub-prime borrowers but the virus has spread to a slowing down of the general economy. This has led to credit worthy borrowers now stumbling with mortgage payments. The tumble down in house prices has made refinancing and resale difficult – if not impossible.
During the first quarter of 2008, 2.47% of the house mortgages were in some stage of foreclosure houses. This is an increase of 1.28% from the previous year. Today it has reached a record point since 1979, according to Mortgage Bankers Association. A fresh bunch of 6.35 mortgages have become delinquent but had not yet been foreclosed upon. This is a rise of 4.84% from 2007. Together it reads that nearly 9% of the house mortgage loans are in trouble across the country – this despite sharp federal rate cuts to halt the monthly payment figure of borrowers.
Over 60% of the loans entering foreclosure belong to the sub-prime ARM category. The problem now does not seem to be ‘rate shocks’. This was what had been forecast nearly a year back. Many of the loans at that time were because of the resetting of interest to higher niches but that phase is over. It has been faulty to focus only on that one point, opines mortgage expert Guy Cecala of Inside Mortgage Finance. The borrower of a typical ARM loan would expect the monthly payment to increase by $70 today compared to $450 if it had happened in December 2007 according to American Securitization Forum. Thus rate shocks can no longer be held responsible for defaults and foreclosures, says Christopher Mayer of Columbia Business School.
Together with Sub-prime borrowers, today the prime borrowers are being dragged into the foreclosure net. It has become an increasing part of the compounded problem. During the first quarter the number of prime loans going into foreclosure was higher than the sub-prime ones, as per findings of Mortgage Bankers Association. Today a safe group of borrowers are failing.
However the Federal decrease in rates have helped some borrowers but many are still at risk. Even the modest rate of increase is proving to be a shock that borrowers with limited income in the inflationary market cannot manage.
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