ARM Adjustments Put Focus on Portfolio Retention

Keeping adjustable-rate mortgage clients is a big concern as resets will cause their payments to balloon and possibly result in increased foreclosures. The smart application of technology can help ease borrower fallout.

Many borrowers of adjustable-rate mortgages are not financially prepared as their interest adjusts upward from a low introductory rate, according to the consumer advocacy group ACORN, which said in an interview with The Miami Herald that borrowers could face foreclosure as a result. ACORN pointed out that the problem is increasingly significant in low-income and minority communities, where a large number of minorities have turned to adjustable-rate financing in order to afford homeownership.

Nationwide, foreclosures triggered by "rate shock" are most likely in markets enduring economic troubles, such as the Rust Belt and the Deep South as well as in Florida, California and other areas where the residential market has been overheated. ACORN is pushing for regulation compelling lenders to ensure that borrowers can afford financing even after rate adjustments.

In fact, Credit Suisse reported a 141% jump in delinquent adjustable-rate mortgages over the past year vs. a 27% increase in fixed-rate mortgage delinquencies. Low-income or poor-credit borrowers traditionally encounter difficulties making their monthly payments, but the problem now also is affecting middle- and upper-middle-income borrowers who obtained interest-only, adjustable-rate, option ARM and piggyback loans to purchase homes they could not otherwise afford.

UBS AG reported that $137.5 billion in mortgages this year and another $524 billion over the next four years will see higher monthly payments due to interest-rate adjustments. Some borrowers can refinance into fixed-rate products, but others could be forced to sell their homes or fall into foreclosure.

Companies like XSell, here, are trying to ease this burden with technology. Given the increase in the number of ARMs and other exotic loans, the lending institution should be prepared to service these borrowers and get them into better products before their payments balloon, which will either result in a foreclosure or the borrower refinancing with another lender. "During the refinance boom there was so much business that trying to worry about your own borrower retention wasn't as big a deal," said the company's CEO Rob Lee. "Today lenders are shutting branches down, laying off people, closing servicing systems, etc., so it's more top of mind.

"In a few years from now every lender will have an automated system in place. If the number of loans isn't growing, but there are ARM resets causing people to move around, retaining your clients is essential and will help you gain ground on your competitor," he added.

XSell offers a Web-based system that lenders pay for on a transaction basis as a possible solution to the problem. "We want to address the pain so the borrower can refinance or get a HELOC with their mortgage company that's servicing the loan," noted Mr. Lee. "In total, $505 billion in ARMs will reset this year. If you got an ARM 18 months ago and your rate is going to adjust, you know your payment is going to go up. In this case you should be able to easily refi with the lender you deal with all the time."

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