Rising Interest Rates Pose Problem for Some Mortgage Holders

The sharp rise in home prices is starting to level off in some parts of the country. Financial advisors say it could start to squeeze homeowners, especially those with adjustable-rate mortgages.

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RENEE MONTAGNE, host:

Our business news begins with an increase in foreclosures.

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The U.S. economy continues to show strength, despite the huge federal budget and trade deficits. Inflation hasn't gotten out of control, despite a sharp run-up in energy prices. But in some areas, houses are taking a little longer to sell. And in some cities, foreclosure rates are up.

NPR's Jack Speer reports.

JACK SPEER reporting:

Overall, the foreclosure rate is not going up. Nationally, the percentage of Americans who lose their homes after defaulting on a loan is going down, as you might expect, when the economy is doing well.

But what's true of most places is not true of all places. In Greeley, Colorado, the number of foreclosures has been heading higher, from around 1,100 in 2004 to 1,500 last year. Sara Allen is with Consumer Credit Counseling Service, and has an office in Greeley.

Ms. SARA ALLEN (Executive Director, Consumer Credit Counseling Service, Colorado): We had some fairly significant price appreciation on homes in the early 2000 time range, and we found that people really had to really stretch themselves to get into a home and be able to afford it. And some of that may be showing up now, as far as foreclosures.

SPEER: One way many homeowners in Greeley stretched was by using an adjustable rate mortgage that includes interest-only loans to buy a home. Over a third of all mortgages originated in Colorado in the first six months of last year were interest-only, meaning homebuyers don't immediately pay on the principal.

Early on, when rates are low, that's not necessarily a problem. But those rates have been adjusting higher. Rick Sharga is with RealtyTrac.

Mr. RICK SHARGA (Vice President of Marketing, RealtyTrac): If you were a homeowner and you got into financial trouble, you could tap into that equity to refinance, to recalibrate your payments, to sell the property below market value and still walk away with money in your pocket. As those dynamics have shifted, it's made it much more difficult for homeowners who get themselves in financial trouble to get themselves out of financial trouble.

SPEER: That is what has happened in Greeley. Many people who bought at or near the peak of the recent run-up in real estate were also at the absolute limit of what they could afford. And as their mortgage payments have moved higher, they are now being squeezed.

And homeowners in Greeley are facing what potentially could be an even bigger problem. They may not be able to count on price appreciation to bail them out. While house prices nationally rose 13 percent last year, in Greeley, the average house price was up less than 2 percent.

And Colorado isn't the only part of the country where price appreciation is slowing.

Mr. HOWARD DEVORKIN (President, Consolidated Credit Counseling Services): I always use our phones as a general barometer. When our phone traffic is heavy, that means trouble is not far behind.

SPEER: Howard Devorkin is president of Consolidated Credit Counseling Services. He's been hearing from an increasing number of homeowners who are now deeply in debt, and have fallen behind on their mortgage payments.

Further complicating things is the fact that two trillion dollars worth of adjustable rate mortgage loans come up for interest rate renewal over the next two years. Analysts expect many people facing a costly increase in their monthly mortgages will be able to refinance into another adjustable rate loan, though some worry about a situation similar to what's happened in Greeley--slow or no house price appreciation, or even worse, a pull-back in home prices. They say that could leave some people owing more money on their homes than the properties are worth.

Jack Speer, NPR News.

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