Adjustable mortgage rates could mean trouble

There is always discussion about whether the real estate market is going to keep booming or bust. Right now that question is more important than ever with many people waiting to see what exactly is going to happen when their adjustable rate mortgage actually “adjusts.” With adjustable rate mortgages, the low initial payment price eventually expires and a new, (usually higher) rate is then used in its place. This situation is very pertinent right now because a large portion of these adjustable rate mortgages are expected to reach their peak within the next few years. Matt Krantz, of USA Today, addresses this issue in his article, “Adjustable mortgages could spell trouble for some borrowers, and lenders,” on July 19, 2006.

In his article Krantz receives a question from a reader asking about mortgages, “Q: With many homeowners facing adjustable mortgage payments that will soar, will banks like New York Community Bancorp (NYB) be in trouble?” He goes on to answer the question saying that some lenders may be in trouble, but big banks like New York Community Bankcorp will probably be okay. He gives a solid overview of the problems with adjustable rate mortgages.

“About 25% of mortgages have adjustable interest rates, where low initial interest rates expire and are replaced by current, presumably higher rates, according to an April 3 story in USA Today. The story says the number of borrowers who will struggle to pay mortgages with the higher rates will rise in 2006 and peak in 2007 and 2008. That's when the largest number of adjustable rate mortgages reset to current rates.”

Some people who are already having trouble making their current monthly payments may not be able to meet the demands of the new interest rates they will be faced with in a short time. This is where the problem would be the worst. Some people may end up losing their home. Places that were the most popular during the real estate boom, and had the highest prices could see the most problems in terms of buyers and lenders, according to Krantz.

“Areas where real estate prices ran up most are the most dangerous. In California, for instance, about 60% of loans made in 2005 were interest-only or payment-option adjustable rate mortgages. Are all these loans about to choke homeowners and cause a massive implosion among mortgage lenders? Anything is possible. But right now, the doomsday scenario doesn't appear likely for New York Community Bancorp.”

Right now, the only thing that people can do is really speculate what is going to happen. Nobody will know what will happen to the market until the interest rate son these adjustable mortgages finally settle.

“Will things play out this rosy for everyone? Probably not. Once rates kick up for homeowners with giant mortgages, some will certainly default. But it appears New York Community Bancorp may know how to avoid a problem.”

Back to Articles