Could the Charlottesville Market be Hurt by Weak ARMs?

May 4, 2007 |

The C-Ville Weekly interviewed me recently about adjustable-rate mortgages (ARMs) and the effect they may have on foreclosure rates in the Charlottesville area and the area market overall. The article ran in this week’s edition. Read the C-Ville article and let me know what you think.

As with most journalistic endeavors, they asked a lot of questions but only have the space to print some of the answers. I thought the article was good, but let me expand on my thoughts a little bit for you. . .

Foreclosure rates have been rising in many areas of the country. In some areas, the rise in foreclosures has been staggering. There is little doubt that failed ARMs are contributing to this increase. To say that failed ARMs are solely responsible isn’t quite so easy, however. The problem is not ARMs themselves, but high-risk ARMs obtained by high-risk borrowers.

The rise, and current fall, of the sub-prime mortgage industry has been well-documented as of late. Sub-prime borrowers are people who have less than average credit histories, or show some other signs of being high-risk borrowers. ARMs are by their very nature, risky loans. At the very least, they carry more risk for the borrower than the “traditional” fixed-rate loan. When you combine high-risk borrowers with high-risk loans, the potential for failure goes way up. This exact scenario is being realized all over the country. Banks are getting burned by giving high-risk loans to high-risk borrowers. The result is an increase in the foreclosure rates.

It is difficult to track exactly how many of the foreclosures are the result of failed ARMs. It is also difficult to track exactly how many of the foreclosures are on sub-prime loans. To think that the rise in sub-prime lending has nothing to do with the rise in foreclosures is  coincidental is wishful thinking, at best. My guess is that when all the dust settles a few years from now, lenders will look back on the last few years and wish they had not engaged in so many high-risk loans to high-risk borrowers. The only question that remains is what effect the foreclosures will have on real estate markets. Of course, real estate is local, so some areas will be hit harder than others.

As far as the Charlottesville area market is concerned, I don’t think that the impact is going to be tremendous.  We may see a slight trend upward in foreclosures, but I don’t think it will be drastic if it does occur.  Our area is very economically stable, so the risk of foreclosures due to job losses is minimal.  As far as I can tell from talking to area lenders, we did not experience as big an increase in sub-prime lending as other, larger markets.  It is obviously hard to predict, but I don’t think that the Charlottesville market is going to collapse due to foreclosed ARMs.

If you are one of the people who does have an ARM, read the article, and you might do well to take my advice as well.  Be prepared.  Know what you are getting into, and know how you can get out if you need to.  ARMs aren’t inherently dangerous or bad, but they do require a bit more planning and attention from borrowers.  In fact, when handled correctly, ARMs can be of tremendous benefit to borrowers.

[tags] real estate, realtor, charlottesville, virginia, foreclosure rates, ARM, adjustable rate mortgage [/tags]

Posted by Daniel | Filed Under Buying, Charlottesville, Finance, Industry Issues, News, Selling 

Comments

2 Responses to “Could the Charlottesville Market be Hurt by Weak ARMs?”

  1. Jeff Brown on May 5th, 2007 12:51 am

    Daniel - solid post. I just addressed a very similar subject on my blog. It may dovetail with yours.

    [Reply]

  2. Is the Mortgage Industry Sting Still on the Horizon in Charlottesville? | The Real Estate Zebra on August 22nd, 2007 9:35 pm

    [...] While this isn’t the best news in the world for people looking to buy a home, the people that could be hurt the most are those looking to refinance. There are plenty of people out there who, during the real estate boom, purchased their homes with loans that had adjustable rates. Many of these loans, known as ARMs, are due to have their rates adjust soon. Those borrowers who are smart and proactive know that the rate will adjust, and are preparing to refinance the loan to a fixed rate. This difficulty is that with tightening lending restrictions, it may be very difficult for some people to find fixed rate loan programs to refinance into. This leaves people faced with the prospect of having to live with the adjusted rate and subsequently higher monthly payment. Not fun. There will likely be some portion of those people who will not be able to afford the new payment and will either be forced to sell or face foreclosure. Also not fun. [...]

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