Cutting off your ARM to save your house

Aerial view of housing development.

TEXT OF STORY

Kai Ryssdal: If trying to figure out auction rate securities took you back to the halcyon days before anybody had ever heard of CDOs, here's another blast from the past: America's biggest mortgage lender, Countrywide, said today foreclosures and late payments are still hitting new records.

A good many of those foreclosures are homeowners trying to pay down adjustable rate mortgages -- ARMs, they're called, the loans that almost everybody's worried about. because a wave of ARM interest rate resets is looming in the next 18 months or so that could drag the housing market down even deeper.

From WCPN in Cleveland, Mhari Saito has the story of a family on the leading edge of that wave.


Mhari Saito: John and Vicki Glicken spent years working to improve their credit so they could get a loan for a house.

John is a building maintenance man. Vicki is a administrative assistant. They managed to pay off their debts and fix their credit report.

In 2005, they paid $183,000 for their first home. It's a ranch house in Lyndhurst, Ohio, a quiet, middle-class suburb of Cleveland.

John Glicken: And we have a fence in the backyard. Y'know, the American dream, with the two dogs...

Vicki Glicken: It's not a picket fence, but it's a fence and it's ours for now.

The couple got a zero-down, interest-only adjustable rate mortgage from First Franklin, a subprime unit then owned by National City Bank. They planned to refinance a year later, but then John lost his job. Vicki took a second job. John couldn't find work for nine months, but they kept up their mortgage payments.

John Glicken: I cashed in a 401k. We've exhausted our savings. The record's there of lump sum payments.

At the same time, the interest rate on their mortgage went from 7.25 percent to 10.25 percent. No one wanted to refinance their loan. Home prices were tumbling and they couldn't sell their home for what they borrowed. They filed for bankruptcy protection last October.

Now, John and Vicki sit at their kitchen table with a new letter from their lender saying their interest rate is going up again on March 1. Their mortgage will be $1,694 a month and that doesn't include taxes or insurance.

Vicki Glicken: We were naive in a lot of areas.

John Glicken: Sure.

Vicki Glicken: And we take responsibility for that. We went to a counseling session as part of your Chapter 13 and it requires you to come up with a budget. We're trying to follow the steps and this just keeps going up and up and up.

The Glicken's lawyer, Richard Nemeth, says bills now in Congress might help his clients. The legislation would let bankruptcy judges recast the terms of mortgages.

Richard Nemeth: What this would help folks do is get out from these products that they are unable to pay because they have adjustable rate provisions that require them to pay in higher and higher installments.

But lenders say that bankruptcy reform won't help the country out of the subprime crisis. The Mortgage Bankers Association's Steve O'Connor says the legislation will only cause more problems later.

Steve O'Connor: What you're allowing a judge to do under the proposed legislation is to unilaterally and retroactively alter mortgage contracts. So going forward, investors will take that into account and they will price in a risk premium to account for that and that will ultimately increase costs for all borrowers.

The Glickens have asked their loan servicer, now owned by Merrill Lynch, to put them in a fixed rate mortgage. It cost them $425 to file the request. They also have more legal fees ahead. Deutsche Bank manages the Wall Street trust now holding their loan. It's asking a federal court to stop bankruptcy proceedings so the bank can foreclose on their house.

The Glickens realized how tight money was when their 14-year-old son recently asked for $150 to go to summer school.

Vicki Glicken: We're not making choices about, 'Should we go up to the casinos for the weekend?' We're making a choice about whether or not our son can go to summer school so he can take an extra elective class. How do you say no to him? We don't want to be in the position where everything is going just to the house.

John Glicken: Which is how it's been the last year and a half.

Vicki Glicken: And it hasn't been enough.

So while the Glickens hope for help from their lender, Vicki is looking for rental properties that will take them, even with their newly tarnished credit, just in case they go into foreclosure.

In Cleveland, I'm Mhari Saito for Marketplace.

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