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Mortgages & Refinancing

Mild Mortgage Migraine

Time for refinancing is running out. But higher rates won\'t cause housing prices to plunge.

As interest rates rise, worries are mounting that a massive reset of rates on adjustable-rate mortgages will cause an explosion in foreclosures and distress sales, putting pressure on housing prices. But the concern is overblown.

It's true that many homeowners who scored great rates on hybrid ARMs during the last refinancing boom soon face a bump. Hybrid loans begin at a low fixed rate but, often after three or five years, are adjusted annually. Analysts at Deutsche Bank say $436 billion in hybrid-ARM debt will adjust in 2006 and $585 billion more in 2007. If you took out a $200,000 hybrid ARM in 2003, figure your monthly payment to rise by a couple of hundred dollars.

This isn't happy news, but it's unlikely to cause a housing crash. About one-third of all mortgages are adjustable, and about two-thirds of those are of prime credit quality, meaning the borrowers are well qualified. And the rate of delinquent payments, although edging up, remains low, so lenders won't repossess scads more properties. Rick Sharga, of RealtyTrac, in Irvine, Cal., says his organization, which follows foreclosure and pre-foreclosure trends, expects the rate of foreclosures to return to a normal level -- 1% of all loans annually. Skyrocketing home prices previously let troubled borrowers sell and escape with at least some cash. But the foreclosure rate won't go high enough now to flood the market with foreclosed homes offered at deep discounts. After all, lenders are highly motivated to avoid letting the process get that far.

-- Pat Mertz Esswein