Mortgage bailout is the object of my ire

Ok, I know it's been a while--more than three months since my last post. In that time, I've welcomed a new daughter into the world, passed another test on my way to a Chartered Financial Consultant designation, and scrambled to find and buy a replacement car for my Sentra, which unexpectedly died on the Pa. Turnpike. So I've been busy.

What prompted me to write today? Outrage. The culprit? The Bush mortgage bailout plan. It's even made me do something that I've never done before: write to my congressman and senators. (That would be Jim Saxton, Frank Lautenberg, and Bob Menendez--and you didn't even think I knew who they were, did you, Dad?)

Wish I had the government in step in to freeze the rate on the ARM I took out on my first house back in 1999, when I didn't know any better. Would have been nice to pay the low initial rate I got for an extra five years.

Better yet, wish M and I had used an ARM to buy that oh-so-nice $464,000 house we looked at a few years ago. We knew we could never afford it with a fixed-rate mortgage on our five-figure income. What were we thinking? We could still be living there, sitting pretty with an affordable rate until 2012. And who knows, by then I could have turned this blog into a money-making machine, become CEO of my company, or hit the lottery, so we could afford the payments when the rate resets then.

One anonymous poster on Real Time Economics sums up my feelings about the Bush plan pretty well, plus gave me a chuckle:

"I would like the government to help me out with my gambling debt in Vegas. The casino didn’t explain the rules very well. And I didn’t realize that the house had the advantage. I would like my life savings back. If you could just give me a little more time, I think I could win it all back. Please help me!"

Shhhh, anonymous...Don't give Washington any more bright ideas.

Red storm rising for many homeowners

The predictions are coming true. And faster than many financial experts expected.

People are losing their homes. In droves.

"Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace," The Wall Street Journal recently reported. "The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors world-wide in the $10 trillion U.S. mortgage market.

The article notes that most of the defaults stem from people that had a questionable ability to pay from the start. However, it appears that the trend is spreading to other parts of the mortgage market as well.

A report on ABC's Good Morning America said that more than a million families have lost their homes to foreclosure in the first 11 months of this year. That's up a whopping 43% from the same period a year ago. In the state of Georgia alone, foreclosures have increased 100%.

An early increase
The apparent culprits of much of the foreclosure activity: non-traditional loans, such as interest-only and adjustable rate mortgages. As housing prices soared through 2005, millions of homebuyers took out these mortgages--which have low monthly payments in the beginning, but that can jump substantially after a few years--to keep their home purchase "affordable."

I remember watching a news report about a year ago that cautioned about the risks of all these homebuyers taking out non-traditional loans. The reporter brought up the possibility that, when homeowners' payments increased in three, or four, or five years, we could see many people losing their homes because of an inability to pay.

Well, the increase has come early. For instance, $1.2 trillion in adjustable rate mortgages will adjust upward in the coming months, the Good Morning America report said. The impact on already stretched homeowners is proving to be pretty big.

Evaluate other options
If you've been able to make your monthly payments on an adjustable rate or interest-only mortgage, now's the time to evaluate other options. Consider refinancing to a 30-year fixed-rate mortgage, which currently runs at about a 6% interest rate per year--historically, still a very good deal. You'll surely face some upfront refinancing costs--and make sure there isn't a pricey prepayment penalty in your mortgage contract--but those costs can be worth it over the long run.

However, you may find that going to a fixed-rate loan--even a 30-year one--means you can no longer afford your house. Generally, housing costs (mortgage, interest, taxes, and insurance) should be 25%-35% of your household's monthly net income. If refinancing causes your mortgage payment to eat up 40% or 50% of your net income, you've bitten off more than you can chew.

In that case, it may be time to call your realtor. Which is better than dodging calls from creditors and eventually seeing your family's home auctioned off in a sheriff's sale.