Adjustable Rate Resets no Longer a Looming Threat

One of the big worries in thernearly days of the housing crises were the large numbers of adjustable raternmortgages originated during the boom years that were scheduled to reset inrnstages over the upcoming years.  Whatrnwould happen to home prices, delinquencies, and foreclosures once these loans,rnmany of which also carried extra-low teaser rates or negative amortization,rnwhen those resets happened?</p

New data from Lender ProcessingrnServices (LPS) appear to show that those worries are largely in the past.  LPS’s September Mortgage Monitor reports that 63 percent of outstanding hybridrnadjustable-rate mortgages (ARMs) have already reset from their initial interestrnrates and of those that have not reset, three-quarters were originatedrnpost-crisis when most loans had credit scores of 760 and above. </p

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AsrnLPS Senior Vice President Herb Blecher explained, these numbers bode well forrnthe performance of ARMs if mortgage interest rates rise as expected. “Onlyrn36 percent of outstanding hybrid ARMs are in a pre-reset status, and the vastrnmajority of those are coming from newer vintages where loan quality has beenrnpristine.”  </p

Thernremaining pre-reset loans originated during the bubble years where underwritingrncriteria was not nearly as strict as post-crisis criteria.  It is these borrowers who could be mostrnnegatively impacted by upward resets in their monthly mortgage payments but LPSrnsees little cause for concern.  Therncompany found that interest rate indices would need to rise on the order of 300rnbasis points for most of these pre-crisis hybrid rates to increase. Most ofrnthese borrowers may be looking forward to their payments going down rather thanrnup, although contractual rate floors may limit the decreases</p

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Resets were one of four areasrnLPS focused on in the latest Monitor.  A second area was prepayment rates andrntheir response to rising rates.  LPSrnfound prepayments are at their lowest level since May 2001 as rates continue tornrise.  </p

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The decline was evident across allrninvestor categories, with GNMA and GSE segments seeing the steepest drops -rnboth down over 50 percent since rates began their climb back in May. </p

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Prepayment of loans withrnloan-to-value ratios (LTVs) in excess of 100 percent – so call HARP-eligiblernloans –  have dropped sharply as well,rndeclining over 40 percent. </p

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Blecher said that since interestrnrates drive refinances and refinances have been driving prepayments andrnoriginations, overall origination activity has declined as well, down more thanrn9 percent from last month and nearly 18 percent year-to-date.</p

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The third area on which LPS focused was trends in delinquency andrnforeclosure rates which were previously covered in its First Look report lastrnmonth.  Delinquencies increased 4.3rnpercent from August to 6.4 percent, in-line with seasonal patterns, but are stillrndown 9.9 percent for year-to-date 2013 and 12.6 percent compared to Septemberrn2012.</p

The foreclosure rate declined 1.3 percent to 2.63 percent and is down 23.6rnpercent year-to-date and nearly a third from a year earlier.  Foreclosure inventories continue to improvernand new problem loans remain close to pre-crisis levels. </p

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Both delinquency rates (non-current rates) and foreclosures remain exceedingly local phenomena.</p

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Finally, looking at home prices and sales, LPS found that prices are uprnabout 9 percent from September 2012 but increases are starting to slow as theyrnalways do in the fall.  Home sales remain high but the share of distressed sales continues torndecline, falling from about a third of all sales in 2011 to 19 percent inrnSeptember.</p

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