Thousands brace for mortgage rate jump

More than 9 percent of all homeowners in Massachusetts with adjustable-rate home loans, about 10,000 borrowers, are facing larger housing payments when their mortgages reset to higher interest rates over the next three months, suggesting the state will continue to face high levels of foreclosures and loan delinquencies.

The total value of all those loans, according to data prepared for the Globe by First American LoanPerformance, a California business research firm, is $2.45 billion.

The number of mortgage rate resets will decline in 2008, but the amount is still sizable: 24,650 adjustable-rate mortgages, with a total loan value of $5.2 billion, according to the analysis.

These rate increases will add hundreds of dollars to homeowners’ monthly mortgage payments, and some housing specialists predict hundreds, and perhaps, thousands of borrowers will be unable to afford the higher costs. Mortgage rate resets are already fueling the record number of foreclosure proceedings filed this year in Massachusetts Land Court against delinquent homeowners.

"This is an unprecedented wave of resets," said Wellesley College economics professor Karl Case. "It’s going to lead to a credit crunch for people who will find it hard to find loans," he said, "and people are getting hurt badly when their houses are taken away from them."

The mortgage industry is already struggling with a squeeze caused by skyrocketing foreclosures. Wall Street investors have been reluctant to underwrite higher risk loans, which has caused many lenders to curtail some types of mortgages and charge higher rates on others.

The borrowers facing these higher mortgage payments either bought their homes or refinanced previous mortgages two to five years ago, when interest rates were very low and the housing market was booming, creating a frenzy in both home buying and borrowing. Moreover, the lending industry created many new types of mortgages with adjustable rates during that period that made it easier for more people to borrow money, such as loans that did not require income verification and other documentation.

Adjustable mortgages typically have a below-market interest rate for the first few years, then reset at the prevailing market rate -- or higher for adjustable subprime loans, which carry higher interest rates and are used by borrowers with poor credit histories. Rates are roughly more than a percentage point higher than they were two years ago. In 2005, nearly one-third of all mortgages nationally were adjustable-rate loans, according to the Mortgage Bankers Association.

"I don’t know how I’m going to survive," said Sana Masoud, a single mother facing a $600 a month increase in one of two mortgages she obtained to buy a two-family house in Brighton for $712,000 in 2004.

That mortgage will reset on Dec. 1 to 7 percent, from 6.125 percent, pushing up Masoud’s total monthly housing costs to $4,350. She rents the second unit for $2,400 and earns $63,000 a year as a computer programmer. But her income will not be enough to cover the mortgage and other expenses, such as property taxes, college tuition for her eldest daughter, and ongoing medical bills for her youngest daughter.

"I don’t want a foreclosure," said Masoud, who is asking her lender to renegotiate her mortgage.

Nareida Fleming, housing coordinator for the Mattapan Family Service Center, said the community organization is counseling about 40 struggling homeowners, half of whom are facing higher payments from resetting mortgages.

For most of them, the subprime mortgages appeared affordable at first, Fleming said. But once the rate shot up -- and usually the homeowners’ incomes did not -- they missed their monthly payments. In one extreme case, she said, a homeowner’s payment more than doubled to $5,000, from $2,000, after the reset. The influx of people "is nonstop," Fleming said. "I don’t see it slowing down at all."

And unlike in previous years when the state’s housing market was strong, many homeowners with resetting mortgages will not be able to refinance into more affordable loans. The current real estate slump has driven down home values across Massachusetts, leaving many recent borrowers with homes that are worth less than their outstanding mortgages, making refinancing virtually impossible.

With delinquencies soaring, many lenders have become more willing to renegotiate or modify loan terms to prevent having to seize billions of dollars in property and to minimize the hit to their profits from delinquent loans. Massachusetts banking commissioner Steven Antonakes said reprieves by lenders may mitigate the impact of the wave of resets.

"We’re seeing dramatic changes over the past few months" as lenders try to "make sure consumers can stay in their homes," he said.

One such lender is Countrywide Home Loan, the nation's largest mortgage company. Countrywide said about one-third of the 150,000 subprime mortgages in its portfolio will reset to higher payments this year and next.

To stem delinquencies, Steve Bailey, the company’s senior managing director of loan administration, said Countrywide modified terms on about 17,000 mortgages this year in an effort to keep customers in their homes; of those, 1,200 had reductions in rates "to an amount the borrower can pay."

A large number of adjustable mortgages are subprime loans; in 2005, one in four people who purchased a home in Massachusetts used a subprime, adjustable mortgage. A typical subprime mortgage in 2005 had an initial rate of about 6 percent, which would reset this year to 9 percent, boosting monthly payments by 30 percent to 40 percent, depending on the size of the mortgage.

Many of the loans being foreclosed on here and elsewhere are subprime. James Campen, a former economics professor who follows the mortgage industry, said the wave of resetting mortgages will significantly add to the foreclosure crisis. "This is going to play out for a long time," he said.

In Massachusetts, lenders filed a record 19,487 initial notices of foreclosure in 2006, and are on track to exceed that in 2007.

Moreover, the mortgage resets will have a "very significant" impact on real estate markets in low-income neighborhoods where high-cost adjustable mortgages are concentrated, said economist Frederick Breimyer of the New England Economic Project; more foreclosures will add distressed properties to those markets, which could depress prices in those neighborhoods.

Kimberly Blanton can be reached at blanton@globe.com.