Washington State Department of Financial Institutions

News Release

Tuesday, September 18, 2007

Lyn Iverson, Acting Communications Director
PH 360.902.8731 liverson@dfi.wa.gov

For interviews with DFI Director Scott Jarvis and/or Director of Consumer Services Deb Bortner regarding the adjustable rate mortgage and foreclosure issues in Washington State, contact Lyn Iverson for more information.

High Resolution Photo Of DFI Director Scott Jarvis Available
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ARM Interest Resets Aren't The End Of The World, But To Unprepared Homeowners, It May Feel Like It

When Adjustable Rate Mortgage (ARM) interest rates reset, many homeowners will see a marked hike in their monthly payment. Not all will be prepared to make the higher payments and many may face the loss of their homes in foreclosure. It’s a frightening trend that’s been on the upswing nationwide. While Washington has one of the lowest foreclosure rates, our numbers are on the rise.

The Department of Financial Institutions (DFI) wants to assist consumers in preparing for the resets. Owning a home, and keeping it, is an important part of the American way of life. We’d like to help you keep it.

How did we get here?

In the past 10 years, a burgeoning non-fixed interest rate market allowed many consumers to purchase homes they would not otherwise have been able to own. Temporary payment terms with lower interest rates, or in some cases interest only payments, allowed many to become homeowners when they were not eligible for traditional fixed interest rates.

Consumers with less than perfect credit and little or no money saved for down payments were able to realize the dream of owning a home.

Lenders aggressively pursued this growing market, giving thousands the opportunity to realize The American Dream. Wall Street investors purchased these higher-risk loans in portfolios while companies like Freddie Mac or Fannie Mae purchased the more traditional fixed interest loans.

Everyone was getting what they wanted. Consumers were becoming homeowners and lenders were making money. Within a few years, however, the lower introductory interest rates ended. Monthly payments jumped, in some cases doubling or even tripling, as interest rates reset. Additionally, the stock market stopped buying the higher-risk loans, forcing lenders to maintain the risk on their own.

As homeowners began seeking fixed rate loans to avoid future increases, they found lenders less than willing to refinance with consumers who were unable to meet their current obligations, leaving many trapped in home loans with soaring monthly payments. Thousands of Americans watched their dream of homeownership become the nightmare of foreclosure.

What’s happening today?

As the number of foreclosures rise, so do reports of mortgage fraud, predatory lending tactics and other unethical and in some instances illegal practices conducted by lenders. State and federal organizations are conducting investigations, levying fines, censuring and in some cases, closing several lending companies.

Unfortunately, even when restitution is issued, consumers often find themselves in financial ruin and no longer able to own a home.

States are responding to the situation, implementing tighter restrictions and additional regulations. Washington implemented a new requirement that all loan originators regulated under the authority of the Mortgage Broker Practices Act doing business in the state be licensed with the Department of Financial Institutions Division of Consumer Services.

More than 100 mortgage companies nationwide have either closed or been sold, according to the Wall Street Journal (http://online.wsj.com). The site indicates two companies in Washington State have closed — Mortgage Investment Lending Associates and Millennium Funding Group. The site indicates two companies in Washington have sold — Reverse Mortgage of America and All Fund Mortgage. According to the Mortgage Bankers Association’s most recent report on housing activity, Washington state ranked 47th in delinquencies and 49th in foreclosure activity.

While foreclosure rates throughout the country have steadily risen, Washington has enjoyed a more stable market than elsewhere, in large measure due to a strong economy and housing market. That is expected to change, however, as more consumers are faced with increases in their non-traditional loan payments.

What can homeowners do?

Homeowners need to make sure they understand the details of their loan, what increases may be coming their way, when and what their options are. Start communicating with your lender now. Don’t wait.

If you have an adjustable rate mortgage that will reset soon, make the required adjustments to your monthly household budget now to prepare for the increase. Start saving money today for the increase and the impact it will have on your household budget. If you are eligible, you may consider refinancing with a fixed interest rate to avoid future increases.

You’re not alone: help is available. The U.S. Department of Housing and Urban Development can help connect you with a local housing counseling agency for a more detailed assessment of your specific situation. Many of these agencies offer services free of charge.

Additional helpful information:

Points To Remember

Alternatives to Foreclosure

General Tips From DFI