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Late house payments aren't widespread -- yet

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What are these things that tend to drive delinquencies up? Unemployment is the biggie, but the unemployment rate has been falling. It was 4.6 percent in May, down from 5.1 percent in May 2005.

"If you can work, then you can pay your mortgage," says Bob Moulton, president of Americana Mortgage in New York. "When those jobs numbers start to weaken, then I think you're going to have issues pertaining to delinquencies and foreclosures."

He doesn't expect that to happen anytime soon.

For new loans, adjustment day coming
Another source of late payments is a rise in rates on adjustable-rate mortgages. We've certainly seen increased rates, but it's too early for them to affect the delinquency rate, because so many of the adjustables are of recent vintage.

As inflation ticked up this year, the average rate on 30-year, fixed-rate mortgage has gone up about half a percentage point. The same has happened with the 5/1 adjustable-rate mortgage, which keeps its low initial rate for the first five years, then is adjusted annually. The 5/1 ARM is the most popular of the many types of adjustable-rate mortgages, becoming fashionable during the refinancing boom of 2003 and 2004.

Rising interest rates haven't affected the mortgages of people with 5/1 ARMs, because most of them are locked into their introductory rate until 2008 at the earliest. When the rate-adjustment day arrives, their monthly payments will jump, and delinquencies and foreclosures are likely to rise.

Moulton says some borrowers refinance their 5/1 ARMs into fixed-rate mortgages "as an insurance measure" -- paying a higher rate now in exchange for not having to pay stratospheric rates later, when the rate-adjustment period begins. People who don't refinance their ARMs will find "their rates are going from 5 percent up to 7 and then to 9," he says. "They are putting themselves at risk."

About one-third of borrowers are getting ARMs, and 37 percent of those took out interest-only mortgages in 2005, according to Harvard's Joint Center for Housing Studies. Interest-only loans were about 20 percent of the dollar volume of mortgages last year, and about half of those were pay-option ARMs that allow monthly payments that don't even cover the interest accrued that month -- meaning that the borrower can end up owing more on the loan, even after making a payment. People making minimum payments on pay-option ARMs are deemed to be especially at risk of foreclosure when their rates eventually rise.

Next: "People who don't refinance their ARMs will find ..."
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