Many consumers who signed up for adjustable rate mortgages in 2004 and 2005 will see their mortgage payments jump this October, according to CNNMoney. With foreclosure rates already as high as one foreclosure filing for every 656 households in the US, this can’t be good news.

From CNNMoney:

“In October alone more than $50 billion in ARMs will reset,” according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.

So, what exactly will happen to the more than two million homeowners whose ARM’s will reset in October?

A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1,331, a 39 percent increase.

The chief economist for the Mortgage Banker’s Association estimates that about 600,000 of these homeowners will get into trouble, and about 300,000 of them will lose their homes. How did this happen?

“There were increasingly poor quality loans made starting in the spring of 2005,” he said, “with the poorest of all made during the fall of 2006.”

Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets (“liar loans”) and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched

For an insider’s look at the shady techniques subprime lenders used to foist ARM loans on unsuspecting people who did not know they couldn’t afford them, check out this story from NPR about mortgage lender Ameriquest.

Scary, scary stuff.

Mortgage resets: Record bill coming due [CNNMoney]
(Photo: mbostock)
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