A Look Ahead To the Great Resetting
Saturday, October 3, 2009
Take a look around the corner.
Millions of adjustable-rate mortgages are going to reset in the coming years, possibly to higher interest rates, creating the prospect of a new round of foreclosures.
About 10 percent of all mortgages in this country are scheduled to adjust in the next few years, with the numbers peaking in mid- to late 2011, according to First American CoreLogic. Those loans are worth about $1 trillion, and nearly 20 percent of the borrowers who have them are already seriously behind on their monthly payments.
Many of these loans will lapse into foreclosure and disappear before they adjust, said Sam Khater, senior economist at First American CoreLogic. Others will terminate for less dramatic reasons as people sell their homes, refinance or have their mortgages modified.
"I suspect that at least a third of these [adjustable loans] won't be around by the time they are scheduled to reset," Khater said.
Traditional adjustable loans made to prime borrowers generally carry lower rates than similar 30-year, fixed-rate mortgages written at the same time. They became popular in the 1980s, when interest rates soared and few could afford to commit to fixed-rate mortgages. They had another burst of popularity in recent years when lenders aggressively marketed them with artificially low teaser rates as housing costs climbed and home buyers stretched for any savings they could find.
During the recent boom, these loans attracted millions of subprime borrowers, typically people with poor credit. But the subprime market unraveled when home prices started to soften and loans started to adjust. Some subprime borrowers saw their interest rates surge and their monthly payments more than double. They could not refinance or sell because, with prices down, they suddenly owed more than their homes were worth.
Foreclosures have just about wiped the subprime loans out of the market. But now, other types of loans are about to adjust.
Some of them won't necessarily adjust upward. Rates on adjustable loans can also go down. And they probably will over the next year for borrowers with traditional prime loans because rates are at historic lows, said Guy Cecala, publisher of Inside Mortgage Finance.
"We have a long way to go before prime borrowers see a big jump in payments," Cecala said. "It's not something people are predicting for 2010. We're looking at 2011 and 2012. None of us know what's going to happen then, but we're assuming rates will rise."
When they do, some borrowers could be caught off guard, said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site.
"We've seen this movie before," McBride said. "We know that interest rates are going to go up, and go up a lot, at some point in the next several years. You don't want to be holding an adjustable-rate mortgage when that happens."