ARMS - Driving up foreclosures!

This is a pretty good article which comes the AP via Yahoo. The article is surprisingly good and highlights what loose credit standards combined with ARMS leads to. All the examples cited in the article are on the margins, ie lower value homes, sub prime loans and in markets not nearly as hot as California. Overall according to the Mortgage Bankers Association, foreclosures fell in all categories except sub prime loans. My gut tells me that the numbers will be way up for sub prime loans as these are people who cannot get credit elsewhere and very often cannot re-finance into a fixed loan because of poor credit.

""ARMs are a ticking time bomb," said Brad Geisen, president and chief executive of property tracker Foreclosure.com. "Through 2006 and 2007, I'm pretty sure we'll see a high volume of foreclosures."

Last year, foreclosures hit a historical low nationwide at about 50,000. But that number has more than doubled since then, according to Foreclosure.com.

Let's keep in mind something. The number has doubled it's only JUNE! That means we are on pace to having four times the number of foreclosures in 2006 than we did in 2005. That's a huge spike and pretty frightening.

This won't have as much of an effect on California just yet,

"Gaines pointed out that although California's default notices are rising by the thousands, actual foreclosure sales remain in the hundreds. Because of California's still-active housing market, homeowners there can sell their properties before going into foreclosure.

On the flip side, in less active markets like Texas and Georgia, homeowners can't find a buyer in time and are forced into foreclosure."

A bit of statistics manipulation and things don't seem as bad as things really are in the Golden State

California, where the median home price reached $468,000 in April, leads the nation in the percentage of homes purchased with adjustable rate mortgages. Nationwide, ARMs account for 24 percent of all home loans.

"In our zeal to make mortgage lending more available to a greater number of people, it's normal to expect the foreclosure rate to go up," Gaines said.

The problem with this number is that it takes all mortgages and lumps together. So my father in law who purchased his home in 1977 for $77,000 (now worth well over $750,00 0) is lumped in. This hides and understates the real problems that ARMs are going to be in California. As I covered in a recent post 61% of new mortgages in 2005 are interest only! So people buying at the very top of the market with financial instruments set to reset in 2007 and 2008. 2008 is going to be a very tough year for anyone who bought with an ARM.