Without a doubt, many people are being hit with higher mortgage loan payments each month, due to rising interest rates on their adjustable rate mortgage loans.

I’ve been running a weekly tally of loans that have gone into foreclosure, over the past month.

What I was surprised to find was that many loans going into foreclosure were taken out by investors, those buying multi-family homes. Meaning that, although it was still unfortunate that these owners were facing financial difficulty, the issue seemed more to be a matter of poor business decisions than a crisis facing regular, everyday Americans.

I had been expecting to find hundreds of loans taken out by middle-aged or retired homeowners in Roxbury and Dorchester. Loans pushed on them by greedy lenders looking for big commissions on these small loans.

Well, no doubt there were plenty of greedy loan officers.

But, less than I imagined, is all I’m saying (again, based only on a one-month analysis).

Well, this week I finally found the type of loan I was looking for.

It was taken out by one person to buy a single-family home. The loan she used reset earlier this year; basically, it doubled, as did her monthly loan payments.

Which should couldn’t pay. So, the bank foreclosed on her home.

I learned a lot, based on this. I see things more clearly – the problems facing certain borrowers, and also the problems the rest of us are going to have, to clean this up.

More after the jump.

This week, Marie Auguste lost her home at 10 Shafter Street, in Dorchester.

( ** For purposes of this story, I’ve left out any extraneous information on who this woman is, why she took out these loans, how she got the loans, and what other issues may be involved. For example, it looks as though she wasn’t paying her utility bills, last year.)

The Augustes, the most recent owners bought the single-family home on December 16, 2003 for $277,500. At this time, a loan for $249,750 was taken out by Jean Auguste, “a married man”, from American Fidelity. Presumably, this was Mrs. Auguste’s husband. His was a fixed-rate mortgage loan, apparently.

Subsequently, on July 17, 2004, the original loan was paid off, and a new loan for $266,000 was taken out, this time by Marie Auguste, “individually”, from Ameriquest Mortgage Company. This was an adjustable-rate mortgage loan.

(It appears that ownership of the home was transferred at this time. The public record shows the deed being transferred for a nominal $100 from Jean Auguste to Marie Auguste.)

Her loan was what is known in the business as a “2-28” loan. This means that the interest rate charged on the loan stays fixed for the first two years, then adjusts either every six months or twelve months after that. Usually, such loans have a limit on how high the interest rate can increase, over the life of the loan.

The rate on Mrs Auguste’s loan was originally 6.9%.

Not too bad, although at the time you could have probably found an two-, three-, or five-year adjustable rate loan for under 5%. Based on the interest rate, we can assume that Mrs. Auguste took out what is known as a “subprime” loan. Perhaps she had bad credit, or no credit.

Certainly, taking out a loan for more than 80% of the purchase price would be seen as risky by a lender, so it would have charged a higher interest rate.

Most adjustable rate loans are tied to one of several indexes (or, if you’d prefer, “indices”). These include the “1 Year Constant Maturity Treasury Rate”, the “11th District Cost of Funds Index”, and the “OTS 11th District COF (also called COFI)”.

The most common index rate used these days is the “six-month LIBOR rate”. According to Bankrate.com, “LIBOR stands for London Interbank Offered Rate. It’s the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.”

An additional “margin” is added to this index rate, and the new amount becomes the interest rate on the adjustable rate mortgage loan.

Mrs Auguste’s adjustable rate mortgage loan (ARM) was a 2/28 loan, tied to the six-month LIBOR rate, according to the loan documents. Her margin was 5.901 percent, and the result would be rounded up to the next 0.125 percent.

So, the interest rate for the first two years of her loan would be fixed at 6.9%. Then, on July 17, 2006 (the two year anniversary of her loan) and every six months after that, her loan would be reset to a new interest rate, based on the six-month LIBOR rate.

Which, when she took out the loan, must have looked pretty good.

In July, 2004, the six-month LIBOR rate was 1.9857%, according to the MoneyCafe.com website.

So, when figuring out whether or not an adjustable rate mortgage loan was good for her, Mrs Auguste probably thought, well, the margin on my loan is 5.901%. The LIBOR rate is only 1.9857%. So, if my loan reset today, my new interest rate would be 7.8867, rounded up, just 8.0%.

On a loan of $266,000, the monthly loan payment in theory would have increased from $1,752 to $1,952, a difference of $200.

Not an insurmountable difference, right? Probably seemed okay to her (and, to me, to be frank).

Well, guess what happened?

Interest rates increased. Fed Funds rates increased. We all know that, because we heard about it, every day.

So did all the indexes.

The 1 Year Constant Maturity Treasury Rate was 2.1% in July, 2004. It rose to 5.22% in July, 2006 (it is now around 4.47%).

The 11th District Cost of Funds Index was 1.816% in July, 2004. It rose to 4.177% in July, 2006 (it is now around 4.277%).

And, the 6-month LIBOR rate which was 1.9857% in July, 2004, rose to 5.5473% in July, 2006 (it is now around 5.535%).

So, based on the terms of Mrs Auguste’s loan, her original loan rate of 6.9% would have increased to 11.44% on July 14, 2006, and then be adjusted, every six months after that, based on the index rate. (Actually, it would have increased to 11.5%, because her 11.44% would have been rounded up to the nearest 0.125%, per the terms of her loan.)

But, fortunately, well, relatively, there was a “stop-gap” written into the loan.

It says that, no matter what, her loan would reset to no more than 8.9% at the two-year mark, and that her rate would not increase more than one percentage point, in each subsequent six-month period.

Which presumably, based on the six-month LIBOR rate, is what happened. Her adjusted interest rate in July, 2006, was 8.9%. Her new monthly loan payment was approximately $2,121 (this is what it was if she didn’t pay it down at all during the interim two years). To repeat, it went up from her original monthly payment of $1,752 at 6.9% to $2,121 at 8.9%, a difference of $369.

Then, six months later, on December 17, 2006, her rate was scheduled to go up, again. It probably would have been north of 11.5% again, based on the index and the margin. However, the stop-gap kicked in, so her new adjusted interest rate was 9.9%. Her new monthly loan payment was approximately $2,315. To repeat, it went up from her original payment of $1,752 at 6.9% to $2,315 at 9.9%, a difference of $563.

Then, six months later, on July 17, 2007, her rate was scheduled to go up, again. However, the stop-gap kicked in, so her new adjusted interest rate was 10.9%. Her new monthly loan payment was approximately $2,513. To repeat, it went up from her original payment of $1,752 at 6.9% to $2,513 at 10.9%, a difference of $761 (a 40% increase from her original monthly loan payment).

Finally, if she had continued paying her loan, and if rates had stayed about where they are now, her new adjusted interest rate in December, 2007, would have been 11.9%, a monthly payment of $2,716, and in July, 2008, would have been 12.9%, a monthly payment of $2,922.

That’s as high as it could have possibly gone, because there was another stop-gap written into the loan. In fact, it’s common in adjustable rate loans to have an upper limit, often 6% more than the starting interest rate, at least these days.

But, she doesn’t need to worry about that.

Because, at some point, she stopped making payments on her loan.

The lender began foreclosure proceedings. The lender added some late fees, etc., until the loan amount outstanding was $286,243.00. Then, they went to court and foreclosed on the property.

Meaning, she lost her home.

So, what have I learned from this? Some people took out loans they shouldn’t have. There wasn’t any malfeasance on anyone’s part. It’s just that the loan was written with one expectation in mind, yet something else happened, instead.

One thing I didn’t realize was how indexes had changed over the past three years. I was very surprised to see they had increased as much as they did. Yes, to a certain extent, it doesn’t matter, because these loans increased less than they could have, otherwise, but still, if they hadn’t gone up, at all, we wouldn’t be in this mess.

The Fed raised interest rates 13-times over the past four years (or was it 14-times?) Which they did to clamp down on a hot US economy.

Which was necessary, right?

Or, was it?

You tell me.

 

Interesting (but meaningless?) point: the City of Boston still thinks her home is worth $275,600, according to the city assessor’s department.

Here are the assessed values of 10 Shafter Street during the past four years:

2007 Residential – One Family $275,600
2006 Residential – One Family $214,300
2005 Residential – One Family $195,200
2004 Residential – One Family $195,200

That’s right. The City of Boston thought the value of her single-family home increased from $214,300 to $275,600 within one year. That’s a difference of $61,300, or a 28% increase in value, within one year.

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Updated:  1st Q 2018

Author Profile

John Ford
John Ford
EXPERIENCE

Over the course of 20 years in the Boston downtown real estate market, John represented and sold numerous, condominiums, investment and development properties in Greater Boston and in the surrounding suburbs



In addition to representing Boston condo buyers and sellers, John is currently one of the most recognized Boston condo blog writers regarding Boston condominiums and residential real estate markets. John's insights and observations about the Boston condo market have been seen in a wide variety of the most established local & national media outlets including; Banker and Tradesman, Boston Magazine The Boston Globe, The Boston Herald and NewsWeek and Fortune magazine, among others.



HISTORY

For over 24 years, John Ford, of Ford Realty Inc., has been actively involved in the real estate industry. He started his career in commercial real estate with a national firm Spaulding & Slye and quickly realized that he had a passion for residential properties. In 1999, John entered the residential real estate market, and in 2000 John Started his own firm Ford Realty Inc. As a broker, his clients have come to love his fun, vivacious, and friendly attitude. He prides himself on bringing honesty and integrity to the entire home buying and selling process. In addition to helping buyers and sellers, he also works with rental clients. Whether you’re looking to purchase a new Boston condo or rent an apartment, you’ll quickly learn why John has a 97% closing rate.

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Contact
John Ford and his staff can be reached at 617-595-3712 or 617-720-5454. Please feel free to stop by John's Boston Beacon Hill office located at 137 Charles Street.




John Ford
Ford Realty Inc
137 Charles Street
Boston, Ma 02114

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