Government Mortgage Assistance for California Homeowners

Taxpayers from all over the country are chipping in to help unemployed California homeowners with their mortgage payments. More or less. The Unemployment Mortgage Assistance Program (UMA) will use federal funds to give mortgage-payment assistance to unemployed homeowners in California. This will undoubtedly be a popular topic among Californians in 2011, so we have put together a fact sheet with the pertinent details.

Mortgage Assistance for the Unemployed

The Unemployment Mortgage Assistance Program went into effect this month, January 2011. The program is managed by the California Housing Finance Agency (CalHFA). This program uses federal funds to provide temporary mortgage assistance for California homeowners who have lost their jobs. Homeowners must meet other eligibility criteria, in addition to being unemployed. A partial list of criteria can be found below.

The purpose of the program is to provide financial assistance to California homeowners who have lost income due to unemployment. The funding allows the homeowners to make their mortgage payments for a period of time, while they seek additional employment. So it’s an unemployment and foreclosure-avoidance program rolled into one.

California homeowners who are unemployed and meet other eligibility criteria could receive $3,000 per month or 100 percent of their mortgage payment, whichever is less, for up to six months. Again, the goal here is to provide enough mortgage assistance to help homeowners avoid foreclosure, until they are able to find new employment.

Eligibility Criteria for California Homeowners

In order to be eligible for the mortgage assistance program, California homeowners must meet the following criteria (at a minimum):

  1. Income limitations: The unemployed homeowner must meet the program’s definition of “low- to moderate-income” household. This means the borrower’s income cannot be more than 120 percent of the HCD Area Median Income for a family of four, in the county where the homeowner currently lives. Learn more (PDF)
  2. Hardship: The unemployed homeowner must complete a form that documents the reasons for their financial hardship (e.g., reduced income resulting from a job loss). This form is called the Hardship Affidavit / 3rd-Party Authorization. This is the start of the paperwork process for the California mortgage assistance program. Borrowers will be asked to provide a variety of other financial documents as well. The loan servicer or housing counselor will provide a list of these documents.
  3. Unemployment: The homeowner must be eligible to receive unemployment benefits in the state of California.
  4. Default: The unemployed homeowner’s mortgage loan must be delinquent (behind on payments), or at risk of “imminent default.” This must relate to the loss of employment, and it must be clearly outlined in the hardship letter described in item #2 above.
  5. Origination: The homeowner’s first mortgage must have been originated on or before January 1, 2009.
  6. Balance: The current mortgage balance (unpaid principal) cannot be more than $729,750. This number might look familiar. It’s the conforming loan limit for high-cost areas such as California, set forth by Fannie Mae and Freddie Mac.
  7. Participation: Your mortgage lender or loan servicer must be actively participating in this program. Participation is option for lenders. At present, only a handful are involved. But the CalHFA expects more loan servicers to join in soon.

Homeowners who meet all of the criteria listed above may be eligible for the California mortgage assistance program. Final eligibility will be determined by counselors with the California Housing Finance Agency, or the loan servicer who is currently servicing the mortgage loan.

Where to Learn More

If you would like to learn more about the mortgage assistance program for California homeowners, please contact the California Housing Finance Agency. You can also visit the website they’ve set up for this program: At the time this article was published, they were instructing homeowners to call: 888-954-KEEP. But you should check the aforementioned website for current instructions and guidelines.

30-Year Mortgage Rates Going Into 2011 – 4.86 Percent

Happy (almost) New Year! The benchmark 30-year mortgage rate rose to 4.86 percent this week, according to the latest data reported by Freddie Mac. Rates in other mortgage categories are up as well, with the exception of the 1-year ARM loan. Going into 2011, we can probably expect more of the same.

This is the highest the average 30-year rate has been since May 2010. It also aligns with many of the mortgage predictions compiled in our housing market predict-o-meter. The consensus of those predictions is that rates will gradually trend upward throughout 2011, perhaps reaching or exceeding 5 percent by year’s end.

While these rates are attractive, they don’t erase the concerns people have about falling home prices. Indeed, prices are still falling in many cities across the country. Many would-be home buyers are rightfully concerned that depreciation in home values would wipe out the benefits of getting a low mortgage rate. It’s a valid concern, and it will keep a lot of buyers on the fence for now.

The average rate for a 15-year FRM rose slightly from 4.17 to 4.2 percent. The 5/1 ARM rose from 3.75 to 3.77 percent. Again, this is according to Freddie Mac’s weekly survey of the primary mortgage market. It is considered one of the most accurate “snapshots” of current mortgage rates in the U.S.

Putting the Rates in Perspective

This kind of news may come as a shock to potential home buyers. After all, 30-year fixed mortgage rates have risen steadily for the last seven months. But let’s keep it in perspective. At this time last year (December 31, 2009), the average rate for a 30-year fixed-rate mortgage was 5.14 percent — compared to the current average rate of 4.86 percent, as we head into 2011. For a while there, we were spoiled by record-low rates near 4 percent. But you can’t expect that kind of thing to last forever.

In a nutshell: The cost of borrowing will remain relatively low for most of 2011, though we’ve probably seen the last of the record-low rates. Housing costs are equally affordable. In fact, some economists are predicting a double-dip in home prices throughout much of the country. For a qualified home buyer, the 2011 housing market could be a kid-in-the-candy-store scenario.

The Decline of Adjustable-Rate Mortgages in 2010

The popularity of adjustable-rate mortgage (ARM) loans has declined sharply since the housing boom. This is partly because home buyers today are more aware of the risks associated with ARM loans.

Money HouseAt the height of the housing boom, adjustable-rate mortgages were about one-third of the mortgage market. They also accounted for roughly 80 percent of subprime loans. By 2008, ARM loans only accounted for about 15 percent of mortgage activity.

Today, as we move into 2011, adjustable-rate mortgages are only 5 – 6 percent of the market. That’s a huge decline, and it’s evidence of the growing stigma of the ARM loan.

How Does an Adjustable-Rate Mortgage Work?

Most adjustable-rate mortgages in use today are actually “hybrid” loans. This means they start with a fixed interest rate for a certain period of time, usually one to five years. After this initial period, the interest rate on the loan will begin to adjust or “reset” at some predetermined interval.

For example, the 5/1 ARM loan carries a fixed interest rate for the first five years, after which the rate will adjust every year. That’s what the “5/1” numbers signify. Adjustable-rate mortgages usually have caps that limit how much the rate can increase from one adjustment to the next, and also over the life of the loan.

Learn more about ARM loans.

A Brief History of ARM Loans

In 1982, during the Reagan administration, the U.S. Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA). This legislation allowed non-federally chartered mortgage lenders to offer adjustable-rate mortgages. Before the passage of this act, banks were mostly limited to making conventional fixed-rate mortgages.

This legislation also paved the way for balloon loans, option ARM loans, negative amortization loans, and other so-called “exotic” mortgages. In more recent years, this act has been criticized for allowing lenders to obscure the total cost of a loan (and here the term “fuzzy math” comes to mind).

Adjustable-rate mortgages gained popularity through the latter half of the 1980s. In the mid 90s, when the housing boom was heating up, ARM loans exploded in popularity. At the height of the boom, one in three mortgage loans came with an adjustable rate. Through 2011, however, these loans will probably only account for about 5 percent of total mortgage applications.

Unpredictable in the Long Term

The risk associated with adjustable-rate mortgages comes during the first adjustment period, and every adjustment thereafter. Even if the rate is fixed for the first five years, it’s going to start changing eventually. In most cases, the rate will adjust upward to follow some kind of index. If the initial interest rate is heavily discounted, then the rate may rise significantly down the road. Save now … pay later. This kind of unpredictability makes the ARM loan a bad choice for a long-term stay.

When to Consider Using an Adjustable Mortgage

There is only one scenario when I recommend using an adjustable-rate mortgage. That’s when you know for sure that you’ll only be in the home for a few years. If you plan to sell the house and move after a few years, you could avoid the uncertainty of the first adjustment period. So, if you can get a lower initial rate with an ARM loan than a fixed mortgage, it might be in your interest to use one.

The key is to understand how these loans work, and what risks they carry. What happens if you’re unable to sell the home for some reason? Can you afford the new payments after the loan adjusts? You need to answer these questions before making a decision.

Freddie Mac Offers a Glimpse of the Mortgage Market in 2011

Editor’s note: This article contains outdated information pertaining to mortgage rates. For the most recent information available, be sure to visit our forecast page.

Ask 20 different economists to predict mortgage trends in 2011, and you’ll get 20 different predictions. (And don’t forget to take your No-Doz pills first.) But there are a handful of economists who are in a position to give fairly accurate predictions. One of them works for Freddie Mac, the newly-government-owned purchaser of home mortgage loans. Here’s a 2011 mortgage outlook from Frank Nothaft, the chief economist at Freddie Mac.

Frank NothaftParaphrasing: Mortgage rates will remain relatively low during 2011. Some rate increases can be expected between now and then. The average rate for a 30-year fixed mortgage will probably stay below 5 percent throughout the year, while the 5/1 hybrid ARM will probably stay below 4 percent.

Translation: 2011 will probably be a lot like 2010, as far as mortgage rates go. Mr. Nothaft’s forecast for 2011 closely matches the consensus we have posted on our housing market predict-o-meter.

What We Might See in 2011

What else will change in 2011? Disclosing the fact that we have no crystal ball in our office, here’s our view:

The job market will slowly improve through 2011, though the national unemployment rate will likely remain over 9 percent. This will increase the demand for housing in many cities across America. But a full recovery of the housing market probably won’t take place until 2012. Home prices will continue to decline in many areas, at least for the first half of the year.

Housing inventory will be the primary cause for these declines — foreclosure inventory in particular. More people will be buying homes, when compared to 2010. Refinance loans will drop considerably. Oh, and we haven’t heard the last of the robo-signing drama.

What It Means to Home Buyers

Are you planning to buy a home in 2011? Here’s how all of this may affect you. If you have steady income and a good credit score, 2011 might be a great time to buy a home. You’ll have plenty of buying power, in terms of home prices and mortgage rates. Sellers who have been on the market for a while should welcome an offer from a qualified buyer, even if it’s below their asking price. This puts the negotiation process in your favor, so long as you make a reasonable offer based on recent sales.

Just keep an eye on your local housing market. Start keeping tabs on what home prices are doing in your area, and what they are expected to do over the next few years. You don’t want to purchase a home in a steadily declining market. If you do that, you’ll likely end up with negative equity inside of a year. But if your real estate market is bouncing along the bottom, so to speak, you might want to jump in while the rates are still low. The key is to make an informed decision, based on plenty of localized research.

Disclaimer: The mortgage rate forecasts in this article should not be taken as gospel. They are an educated guess, based on current conditions in the economy.

Benchmark Rate to Average 4.4 Percent, Says MBA

Editor’s note: This is an outdated article. For the most recent mortgage forecasts available, please see this page.

On Tuesday, the Mortgage Bankers Association (MBA) released its forecast for 2011 home-loan rates and other housing trends. They feel the benchmark 30-year fixed mortgage rate will average 4.4 percent for the remainder of 2010. For 2011, the MBA predicts that the benchmark rate will slowly but steadily increase to around 5.1 percent.

Various factors are driving our rate forecast,” said Jay Brinkmann, MBA’s Chief Economist and SVP for Research and Economics. “Absent some blockbuster post-election announcement from the [Federal Reserve] on November 3rd, we do not expect to see a further decline in rates.”

The MBA also expects to see a modest rise in home sales in 2011, along with a corresponding rise in home purchase loans.

If their rate predictions come true, it means that mortgage financing will be more affordable this year than next. But how much more affordable? Let’s look at some pricing scenarios to see how the percentages play out when applied to an actual loan amount.

Mortgage Pricing Scenarios

At the time of publication, the average rate for a 30-year fixed mortgage was 4.23 percent (up from 4.19 percent two weeks ago). The MBA is forecasting that rates will rise to 5.1 percent by the end of 2011. At first glance, these numbers don’t mean much. Sure, 4.4 percent is lower than 5.1 percent. But how does that translate into actual dollars? Here’s an example of how much money a home buyer could save by getting the lower of these two rates.

  • A 30-year fixed-rate mortgage in the amount of $250,000 at 4.4 percent interest will have a monthly payment of $1,251 (excluding insurance and taxes). Total interest paid over the full term of the loan = $200,684.
  • A 30-year mortgage for the same amount with a rate of 5.1 percent will have a monthly payment of $1,357 (excluding insurance and taxes). Total interest paid over the full term of the loan = $238,654.

In the second scenario, I would pay an additional $106 a month toward my mortgage payment. The higher interest rate would account for this increase. But look at the total amount of interest paid over the life of the loan. That’s where the true difference becomes apparent. In the second scenario, I would pay an additional $38,000 worth of interest. I could put my kid through college for that amount of money.

What does all of this mean? It means that if the MBA’s predictions are accurate, mortgage loans are going to be more expensive in 2011. It means that you could save money by buying (or refinancing) a home sooner, rather than later.

We are tracking these and other housing market predictions for your convenience.

Disclaimer:We make no assertions or guarantees about the forward-looking statements made by the MBA. We have provided this information for educational purposes only. There are many variables that could render their predictions inaccurate. No one can predict the mortgage market with 100% accuracy. Additionally, the rate you receive on a home loan will vary from the average rate, based on your credentials as a borrower (credit score, down payment, debt level, etc.).

Survey: Americans Feel the Government Hasn’t Done Enough Foreclosure Prevention

A recent survey by the Home Buying Institute revealed how Americans feel about the federal government’s efforts to reduce foreclosures. The majority of respondents felt that the government had not done enough to reduce foreclosures. Perhaps most surprising was the large number of people who said the government should never have gotten involved.

Consumer Survey

Survey Details: We conducted this survey on the Home Buying Institute website. Responses were collected over a one-month period, between September 23 and October 23, 2010. The survey was presented to a mix of home buyers and homeowners, many of whom were in the market for a mortgage loan (for either purchase or refinancing purposes).

Of those who responded:

  • 43.8 percent said the government has not done enough to reduce foreclosures.
  • 25.7 percent said the government has done enough.
  • 22.9 percent said the government never should’ve gotten involved to begin with.
  • And 7.6 percent felt that the government has done too much.

“This was a survey without an agenda,” said Brandon Cornett, publisher of the Home Buying Institute. “We did not suggest that it was the government’s role to reduce foreclosure rates. We merely posed the question and allowed people to respond.”

Most surprising was the fact that nearly a quarter of respondents thought the government shouldn’t have gotten involved at all. “That was certainly a surprise,” said Cornett. “Normally you hear people complaining that the government doesn’t help enough. I didn’t expect so many people to say they should have stayed out [of the foreclosure mess] altogether.”

About the Home Buying Institute

The Home Buying Institute has been educating home buyers and homeowners since 2006. In 2010, the company began conducting online surveys to learn more about its audience. You can view the most recent surveys here.

Image Use: You are free to use the bar-graph image above on your own website or blog. A link back to this story would be appreciated. If you have questions about this survey, please email us.

How Will a Foreclosure Freeze Affect the Housing Market?

I previously wrote that the current foreclosure freeze was being blown out of proportion. But could there be more to the story? After delving deeper into the morass, I’ve revised my position.

Here’s what I think. The foreclosure freeze itself will mostly have a short-term effect on our housing market. It will initially reduce the inventory of foreclosure homes. But when the banks start rolling at full speed again, it will increase the inventory and therefore depress home values. It’s what lies beneath that has people more concerned, and it could have a broader impact on the housing market.

The foreclosure freeze is only a symptom. The rubber-stamped paperwork and convoluted transfer of mortgage notes is the disease. And the disease could have a serious impact on our housing market. Or, it could become water under the bridge in no time at all. It all depends on how it’s handled. And this is exactly why so many people are divided on how the foreclosure freeze (and underlying mess) will affect the housing market as a whole.

To give you a broader sense of what’s going on, I’ve created an ongoing list of foreclosure freeze analysis and predictions. I call it the Predict-o-Meter:

The Foreclosure Freeze Predict-o-Meter

Here’s how it works. I set up some Google Alerts to tell me whenever somebody online is talking about the foreclosure freeze and the housing market. Blog posts, news stories, press releases, random bits and pieces of online commentary — it all comes to my inbox courtesy of Google’s web-crawling technology. And then it winds up on this page.

Note: This is an organic story that is still unfolding. This page will be updated continuously.

  • freddie macFreddie Mac released its third-quarter financial report at the beginning of November. Among other things, CEO Charles Haldeman said the recent foreclosure freeze would push housing recovery further down the road. “[T]he housing market remains fragile and has recently come under renewed pressure from slowing economic growth, weaker employment and foreclosure uncertainties,” he said. “We believe that it will be a considerable time until the housing market has a sustained recovery.” November 3, 2010, Freddie Mac
  • Wall Street JournalOn the Wall Street Journal website, Ruth Simon mentioned that “Some experts predict that the only way out of the [foreclosure robo-signing] debacle is a huge settlement in which home-loan servicers modify the terms of billions of dollars of mortgages.” Of course, this kind of settlement would be a serious financial blow to the banks. And that would hamper their ability to make new loans to home buyers. October 23, 2010, Wall Street Journal
  • ReutersA Reuters article recently quoted an economist named Patrick Newport from IHS Global Insights. He pointed out that the fear caused by the foreclosure freeze has negative implications for both the housing market and the broader economy. To quote the article: “Fewer sales to investors means fewer sales altogether, which will further elevate supply. That, in turn, will keep a lid on home prices, making consumers feel poorer.” October 22, 2010, Reuters
  • Washington PostBrady Dennis of the Washington Post points to the “moral hazard” associated with the foreclosure freeze. He said there are no statistics to show how many homeowners are using the foreclosure moratorium to skip out on making their payments. But some “economists warn that this practice could become more common if a national [mandatory] freeze is put in place, as some lawmakers are trying to do.” –October 20, 2010, Washington Post
  • Wall Street Journal“A national foreclosure moratorium will exacerbate the housing-market crisis,” said Barbara Novick, “by increasing uncertainty and preventing supply and demand from reaching equilibrium.” Her Wall Street Journal article points out that a backlog of foreclosures will prevent the housing market from righting itself, dragging home prices even lower. October 18, 2010, Wall Street Journal
  • HUDShaun Donovan, secretary of the Department of Housing and Urban Development (HUD), mentioned the damage a foreclosure freeze could do to our housing market. He made the following comments in an article on the Huffington Post. “We’ve seen real progress in the housing market … With vacant and abandoned homes more than three times as destructive to the values of neighboring homes as occupied homes that are just beginning the foreclosure process, a blanket moratorium would only slow down that progress.” –October 17, Huffington Post

We will bring you more news about the foreclosure freeze and housing market as the situation unfolds.

Are We Overreacting To the Foreclosure Freeze?

Do a search on Google News for “Bank of America,” and you will see hundreds of news stories about their foreclosure freeze. Bank of America recently announced they are halting foreclosures nationwide, pending a review of their foreclosure procedures.

GMAC Mortgage and JPMorgan Chase have previously implemented a freeze in the 23 states where foreclosures are controlled by the courts (so-called “judicial foreclosure” states). But Bank of America is going further by freezing foreclosure in all 50 states.

Wells Fargo recently said they are planning to move forward with all legitimate foreclosures, despite one of their former employees making similar claims about “robo-signing” documents.

All of this comes in the wake of whistleblower testimonies and governmental scrutiny regarding foreclosure procedures. Some former employees of Bank of America (and other lenders) have said that they signed off on dozens or hundreds of foreclosure documents a day, without much scrutiny or verification.

But it’s the Bank of America foreclosure freeze that really has the media in a tizzy. I even saw one headline that said Bank of America’s foreclosure freeze could cause another housing crisis.

Which begs the question … aren’t we overreacting a bit?

Here’s the logic behind the doom-and-gloom headlines. Halting foreclosures will prolong the high level of foreclosure homes we have right now. This in turn will delay recovery and stability in the housing market. It will also prevent home prices from normalizing.

But let’s look at this from a different angle. It’s in the best interest of these banks to perform their internal reviews as quickly as possible. After all, those foreclosure homes are non-performing assets. They lose more money the longer they hang onto them. So you can bet that whatever actions they take will be swift.

Bank of America CEO Brian Moynihan recently downplayed the events: “We haven’t found any foreclosure problems,” he said. “What we’re trying to do is clear the air and say we’ll go back and check our work one more time.”

Many people claim that a temporary foreclosure freeze will drive home prices down. “The moratoriums … can be incredibly destructive to the fragile recovery of the housing and housing finance markets,” said Anthony Sanders, a finance professor at George Mason University. “Consumers looking to get back into housing are even more fearful than before. This can lead to further house price declines.”

There are plenty of folks in the media who echo Mr. Sanders sentiments.

Declining home prices. What’s wrong with that? Home prices are still inflated in many parts of the country. They still need to come down to more realistic levels, if we’re ever going to see the market pick up.

But let’s get back to the drama at hand. Many in the media are blowing this whole thing out of proportion: Foreclosures have been halted. The market will come to a screeching halt. Home prices will plummet. We may see another housing crisis. This might trigger a double-dip recession. So on and so forth.

Here’s my prediction. A month or two from now, no one will even remember the Bank of America foreclosure freeze. It will be business as usual in the world of home foreclosures, auctions, and resales. And then we can go back to worrying about larger concerns. Like unemployment.

Fannie Mae Wants to Help With Your Closing Costs – If You Buy a Foreclosure

Last week, Fannie Mae announced some new incentives for home buyers. Qualified buyers who purchase one of their distressed homes (i.e., foreclosures) could receive up to 3.5 percent of the final sales price to put toward closing costs. Example: If I purchased a Fannie Mae foreclosure home for $250,000, I would be eligible for up to $8,750 worth of closing cost assistance.

On average, closing costs add up to 3% – 5% of the loan amount. So this new incentive could cover all or most of the home buyer’s closing costs. That’s nothing to sneeze at.

In order to qualify for this incentive, you must purchase a home that’s listed on This is Fannie Mae’s website for distressed / foreclosed properties. You must also be an “owner occupant,” which means you are buying the home to live in it. Real estate investors need not apply.

To be eligible, purchase offers must be submitted on or after September 23, 2010, and must close by December 31, 2010. Additionally, the sale must close within 60 days of the offer acceptance.

The incentive program is Fannie Mae’s latest effort to get a growing number of foreclosure homes off its books.

Additional Incentives Through

In addition to the closing costs contribution, home buyers can qualify for attractive financing terms when buying a home through Many of the foreclosed homes listed on the website are eligible for HomePath Mortgage Financing. The perks of this program include smaller down payments and easier qualification, when compared to a traditional mortgage loan.

Qualified borrowers can put as little as 3% down when buying a foreclosed home through, and they may see their mortgage insurance and appraisal fees waved, as well.

How to Buy a Fannie Mae Foreclosure Home

So how do you go about buying a foreclosed home through the Fannie Mae website? Fannie Mae works with local real estate agents to list their REO properties. So if you find a home you like on the website, you should make note of the agent’s name and contact info. You can then ask the agent to show you the property.

The HomePath website also provides a state-by-state list of mortgage lenders that participate in their financing program.

When you’re ready to make an offer on a home, you will need to include the following items (at a minimum):

  1. A standard real estate contract for the state where you are buying.
  2. A Fannie Mae real estate purchase addendum.
  3. Earnest money. This will be deposited with the title or escrow company, and applied toward the down payment and closing costs at the closing.
  4. Proof of funds (if you’re paying cash for the home), or a copy of your pre-approval letter (if you’re getting a mortgage loan).

This is a simplified version of the process. If you want to learn more about buying Fannie Mae foreclosures, refer to the website. They have a variety of resources for home buyers. You might also want to speak to a HUD-approved housing counselor, or a real estate agent who is familiar with this process.

You Are More Likely to Default on an ARM Loan – Here’s Proof

mortgage defaultWe have often warned first-time home buyers about the risks associated with adjustable-rate mortgages. Now we have some new data to back it up. A recent report released by the Federal Housing Finance Agency (FHFA) reveals that home buyers who use ARM loans to purchase a house are more likely to default than those who use fixed-rate mortgages.

A mini-glossary is in order:

  • Adjustable-rate mortgage: Known as an ARM loan for short, this type of mortgage has an interest rate that adjusts (changes) periodically. This means the size of the monthly payment changes as well.
  • Fixed-rate mortgage: This type of mortgage loan keeps the same interest rate over the entire life of the loan. Thus, the monthly payment never changes.
  • Default: When you fail to make your mortgage payments, you are defaulting on the loan. Defaults frequently (but not always) lead to foreclosure.

According to the data released by the FHFA last week, you are more likely to default with an ARM loan as compared to a fixed-rate mortgage. The report showed data pertaining to single-family mortgage loans acquired by Fannie Mae and Freddie Mac, from 2001 to 2008.

Fannie and Freddie are government-sponsored enterprises that are currently controlled by the federal government (following the mortgage and housing collapse). These organizations purchase mortgage loans from direct lenders and sell them to investors. An “enterprise-acquired mortgage” is a loan that was purchased by one of the two government-supported enterprises.

Default Data – Fixed vs. Adjustable Mortgages

Here’s how the data stacked up for enterprise-acquired mortgages between 2001 and 2008:

  • Approximately 5% of the fixed-rate mortgages acquired by Fannie Mae and Freddie Mac were over 90 days delinquent at some point before the end of 2009.
  • Approximately 10% of the adjustable-rate mortgages acquired by Fannie and Freddie were more than 90 days delinquent in the same period.

This data supports something we have been saying for years. You are more likely to fall behind on your mortgage payments if you use an adjustable-rate mortgage. “Adjustable” is the key part of that phrase. When you choose an ARM loan, you can be certain that the interest rate (and the size of your monthly payment) will change at some point. If you stay in the home beyond the first adjustment period, you will have two choices. You can try to refinance the mortgage, or you can simply deal with the rate change.

Can’t I Just Refinance Before the Adjustment Period?

Sometimes yes, sometimes no. If your home depreciates below a certain point … or if your credit score drops considerably … or if your income declines for some reason, you might not be able to refinance the loan. That’s a lot of “if” clauses. Right now, millions of homeowners are stuck in the first scenario. Their homes have depreciated to the point they cannot refinance. These are the underwater / upside down homeowners you’ve heard so much about lately.

When an ARM Loan Makes Sense

On the other hand, an ARM loan can be a smart strategy in certain scenarios. If you know for sure you’ll only be in the home for a few years, you could use an adjustable mortgage to secure a lower rate. If you sell the home before the first adjustment period, you will avoid the uncertainty.

The key is to understand how these loans work, and how they match up to your long-term plans.

Learn more: How an adjustable mortgage works

You can use the links above to learn more about the adjustable-rate mortgage loan. You can also find a wealth of advice on the Federal Reserve’s website, if you’re interested.