When adjustable mortgages reset

Subprime: When a lender loans money for a mortgage under less than ideal circumstances.

Two years ago, in a lending frenzy, buyers with less-than-perfect credit were given subprime adjustable mortgages with extremely low teaser interest rates, typically for a period of two years. Because the housing market was going strong a few years ago (the economic bubble), buyers assumed that values would continue to rise and that at the end of the low-interest period, they would be able to refinance when the interest rate adjusted.

Now, just when those interest rates are resetting, many of those homeowners are finding that they’re unable to refinance. Perhaps their personal credit situations are no longer in good shape (or never were to begin with). Perhaps they’re out of work. Or, more often than not, home values have fallen and the house can’t be sold for what’s still owed on the note.

With the increased interest coming due, many of those formerly hopeful buyers are going to be forced to make much larger mortgage payments. Many can’t afford the extra hundreds of dollars per month. Delinquencies are already soaring, and the peak for this is likely to be in October. It’s thought that the interest rates of $50 billion in mortgages are going to reset.

This can create a vicious cycle. With so many homeowners defaulting, lenders have tightened up on how and when they loan money, leaving homeowners unable to refinance their loans. When buyers default and lose their homes to foreclosure, it leaves vacant dwellings in a neighborhood. This in turn affects the selling prices of other homes in the area, many of which have likely been on the market for a long time already.

Enter the scammers. For a big upfront fee, they promise to deal with the mortgage company for the homeowner. Unfortunately, all too often homeowners are discovering that the scammers just take the money and run. Meanwhile the mortgage company moves ahead with foreclosure plans because the homeowner doesn’t contact them.

If you’re caught in this situation and know you can’t make the increased payments when your interest rate goes up, contact your lender. Depending on your payment history, it might be able to help. A scammer certainly won’t.