Hello Out There...Is Anyone Paying Attention

Here are some statistics from the August 21, 2006 issue of Barron's. I think we'll see single-family, residential foreclosure rates continute to rise throughout the remainder of 2006 and well into 2007.

• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000.
• 43% of first-time home buyers in 2005 put no money down
  15.2% of 2005 buyers owe at least 10% more than their home is worth.
• 10% of all owners with mortgages have no equity in their homes
  $2.7 trillion dollars in loans will adjust to higher rates in 2006 to 2007.

These number sound preposterous, but the reasoning behind them is worse. Lenders have encouraged people to use the appreciation in value of their houses as collateral for additional loans.

Now the house is the bank's collateral for the questionable loan. But what happens if the value of the house starts to drop? The answer, at least from banks, is already clear: Float the Loans.

The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option adjustable rate mortages were in the negative amortization (payments were not covering interest charges, so the shortfall was added to the principle). At the end of 2004, the percentage jumped to 21%. At the end of 2005. the percentage jumped to 47%. By value of the loans, the percentage was 55%. Every month, these borrower's mortgage balance increases and some or most of them may not know it. There is no strict disclosure requirement for negative amortization.

My advice: if you have an adjustable rate mortgage and you're within the "conversion window" to a fixed loan, run the numbers to see if converting make sense. Simply divide the cost to convert (say $1,500 for arguments sake) by the increased mortage payment (say $150 per month) and your breakeven point is 10 months. If you plan on living in your home for more than 10 months, this may be a good financial decision.

But you have to do the calculations yourself.