Brace for mortgage rate jump, state says

Higher payments will start this year on many adjustable-rate loans

The State's Division of Financial Institutions yesterday issued a consumer advisory to homeowners with adjustable-rate and nontraditional mortgages, urging them to plan for interest rate spikes and higher monthly payments.

Nationwide, an estimated 1 million mortgage loans are scheduled to have their rates reset this year.

While the state cannot determine exactly how many Hawaii consumers will be impacted by the changes, it is warning consumers who don't have fixed-rate mortgages that they could incur considerable increases in their monthly loan payments.

The state has also asked lenders reach out to these consumers to alert them to the potential effects of the recast to avoid payment shocks or defaults.

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The State's Division of Financial Institutions (DFI) yesterday issued a consumer advisory urging homeowners with adjustable-rate mortgages -- especially those with nontraditional mortgages -- to plan now for the scheduled "recasts" or "resets" of interest rates in the year ahead.

There is no way for the state of Hawaii to accurately gauge how many borrowers here have adjustable-rate mortgages because of the wide pool of lenders operating in the state. But based on national projections, many mortgage loans that were financed during the height of the market are due to be recast this year, said Nick Griffin, Commissioner of the State's Division of Financial Institutions.

With an estimated 1 million mortgage loans scheduled to recast nationally this year, it is imperative that lenders reach out to these consumers to alert them to the potential effects of the recast, Griffin said. Consumers with mortgage loans that will be recast this year could have considerable increases in their monthly loan payments, resulting in payment shock or possible default, he said.

"Servicers should provide information on when the recast will occur and how much the monthly payment will adjust," said Griffin. "Should the loans go into default, servicers should consider workout arrangements to prevent foreclosures."

While Hawaii's DFI office has not received many complaints from consumers in regard to loan recasting, concern about creative financing has been on the national radar for some time. Earlier this year, many economic reporting agencies forewarned of upcoming interest rate hikes and published surveys of rising mortgage default rates.

"Historically Hawaii consumers tend to be more conservative and have preferred fixed rate loans, but many of these loans were very tempting and we have no idea how many people in Hawaii may be facing an upcoming recast," Griffin said.

From 2003 onward, creative financing became very popular in real estate circles, he said. Consumers were offered everything from adjustable-rate mortgages and teaser interest rates to interest-only loans and even loans that allowed you to choose your monthly payment, Griffin said.

Since most of the deals were good for a two- to five-year period, many consumers who took advantage of these offers could soon face recasting, he said.

""Some consumers could see their mortgages rise from $1,100 to $3,500 virtually overnight," Griffin said.

"The different products were intended to lower the monthly payment but in most cases it was just deferring the pain."

The state DFI office is issuing this advisory to consumers in conjunction with a similar statement that was recently issued by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR).