Help! I Can’t Make the Payments On My ARM!

In recent years, many people have refinanced their homes with various types of non fixed-rate mortgages. These include interest only loans, “exploding ARMs,” and other types of loans that have a significant downside: after a relatively short period (usually two years) of low interest rates and payments, the rate skyrockets, and so does your payment.

I have seen clients’ monthly payments jump from $1,500 to over $2,000 overnight…and it just keeps going higher. Every six months, the interest rate is recomputed, and it never seems to go lower. A leading cause of foreclosure (and Chapter 13 filings) is the problem that this situation causes.

Is there anything you can do?

There are several options. First, you can refinance. Refinancing, preferably to a fixed-rate mortgage, will usually significantly lower your payments, and, except for annual escrow increases due to higher property taxes and insurance rates, will remain the same. Even if you can’t qualify for a low fixed rate mortgage now, you may be able to obtain a new adjustable rate mortgage that has a lower fixed rate for two years, giving you time to improve your credit and refinance again before the rate jumps.

Even if you are in a Chapter 13, you still may be able to refinance. Many of my clients have refinanced their way out of bankruptcy, and we work with several mortgage brokers who are experienced at dealing with clients in a Chapter 13.

Refinancing, especially right now with the collapse of the sub-prime mortgage market (read my blog Why is the Subprime Mortgage Market Collapsing), may be difficult, however. There still may be hope.

Many of the interest only and exploding ARM mortgages issued in the last several years have technical defects that may allow them to be restructured. These defects often arose from the “sweatbox” sales techniques used to sell them to unsuspecting consumers. See the Washington Post Article, Pressure at Mortgage Firm Led To Mass Approval of Bad Loans, for one example. Further, the losses currently being absorbed by the mortgage industry right now are staggering. According to the Center for Responsible Lending, a non-profit policy and advocacy organization for home owners, about 2.4 million holders of subprime mortgage loans made between 1998 and 2006 will lose their properties to foreclosure. This will result in a net home ownership loss of one million households.

These losses, coupled with the technical defects and outright fraud that may subject lenders to liability, make it more likely that your mortgage loan may be able to be restructured. The process can be difficult, however, and there are no guarantees. Often, it is necessary to file a Chapter 13 and an adversary proceeding against the lender to gain the time and leverage to fix things.