Unanticipated relief for anxious homeowners

Nearly 17,000 borrowers in Massachusetts are among those across the country whose adjustable mortgages reset this year. But falling rates mean many who were worried about a crunch will now enjoy unanticipated savings. And others will see the specter of foreclosure ease, because their loans may not rise to unaffordable levels.

All this is good news for borrowers and for the economy.

"Being able to free up cash flow for folks will have a substantial positive effect on the economy," said Christopher Foote, a senior economist at the Federal Reserve Bank of Boston.

Bill and Susan Bell of Cohasset are expecting the 4.75 percent rate on their adjustable loan to drop to as low as 3.5 percent this spring. That would lower their monthly payments by at least $200.

"This goes against the traditional concerns that [at] the end of the period you are going to have an increased rate," said Bill Bell, a senior consultant at Public Consulting Group in Boston. "The bottom line is the [adjustable loan] has been highly successful for us."

Adjustable mortgage rates have a fixed rate for a set period, anywhere from one to seven years in most cases. After that they reset, based on common financial benchmarks, such as the one-year Treasury note or the London Interbank Offered Rate, a prominent bank lending index. Both are now at remarkably low levels. The one-year Treasury, for example, was at 0.37 percent last week, an all-time low, while the six-month LIBOR was at 1.772 percent, its lowest since 2004, according to HSH Associates, a New Jersey-based mortgage loan tracker.

When recalculating interest rates, lenders typically add 2 to 3 percentage points to the index number being used to come up with the new rate.

Just two years ago, the one-year Treasury rate was almost 5 percent, and LIBOR was 5.4 percent. So adjustable loans that reset in February 2007, for example, would have come in as high as 8 percent.

These loans reset on a regular basis, however, with terms as short as month to month and as long as every three years. One year is the most common reset term. So those with an 8 percent rate in 2007 would have seen substantially lower rates in 2008, and now even lower.

Cambridge homeowner Katherine Selfridge has a seven-year adjustable loan that hit its first reset in spring 2008, dropping to 5 percent from 5.375 percent. Now, with another reset due in March, she is looking at a rate in the 3 percent range.

"I was worrying. I was wondering if I would refinance," said the 77-year-old retiree. "I still don't understand why the adjustable rates have dropped, but I'm happy to accept it."

The sharp ratcheting up of adjustable rates on subprime mortgages was one of the main culprits in the country's foreclosure crisis. These loans often carried low "teaser" rates for two years, and then vaulted up - as much as 6 percentage points or more in one step. The additional hundreds of dollars in monthly payments were too much for many borrowers, often lower-income workers who could not qualify for ordinary loans.

But the vast majority of subprime borrowers who are still hanging on can now expect to see their mortgage rates stay the same or go down. About 40 percent of the 16,900 adjustable-rate loans resetting in Massachusetts this year are subprime mortgages, according to data tracker First American CoreLogic Inc.

For these subprime holders, the rate reset is no longer the biggest threat to keeping their homes. "What gets people into trouble is if they've lost their jobs and they can't sell their house or refinance it," said Foote, the Boston Fed economist.

The falling rates are particularly good news for those who had been anxious to refinance into fixed-rate loans but couldn't because falling housing prices left them without enough equity in their homes to qualify. About 100,000 homeowners, or 10 percent of mortgage holders in Massachusetts, are considered to be "underwater" - they owe more on their homes than their properties are currently worth, according to the Boston Fed.

Mark Zandi, chief economist of Moody's Economy.com, said homeowners unable to refinance have time. He predicted mortgage rates won't begin to increase appreciably until the second half of 2010.

But homeowners with sufficient equity to refinance, Zandi said, might be wise to take advantage of historically low rates and lock in a fixed-rate mortgage, with 30-year loans now averaging about 5 percent.

Ed Coppinger's adjustable-rate loan for a vacation house on Cape Cod, already at a low 4.375 percent, is expected to go down more when it resets in May. That's a huge relief because Coppinger worried he would not be able to refinance.

"I honestly don't know if I could refinance," said Coppinger, 36, a broker for Fairway New England Mortgage in Needham. "I'm almost afraid to make the phone call."

Jenifer B. McKim can be reached jmckim@globe.com.