Mortgage Rate Reset Timeline: Another Wave Coming

One of the things I like to read when I get the itch for some stock market opinion (which isn’t very often) is John Hussman’s weekly market commentary. Not that he’s always right, and I don’t own any of his mutual funds, but I like to hear his reasoning. In this week’s 6/8 post, he references a chart that shows us in a temporary lull of mortgage resets. The infamous subprime “wave” is past, but there is another big wave of option ARM and Alt-A resets ahead:

As I’ve noted before, recent months have represented a lull in the reset schedule, which was accompanied until recently by a moratorium on new foreclosures. Those foreclosures are now ramping up quickly, and a fresh surge in resets will add to the difficulties beginning later this year.

The chart originates from an IMF report entitled Assessing Risks to Global Financial Stability.

These upcoming resets may not be as bad as they are supposedly borrowers with slightly better credit profiles, assuming that enough people can refinance their mortgages to something they can afford. But it’s kind of hard to refinance when you’re upside on your house. Even I’m basically upside-down on my mortgage, and I had a 20% downpayment. Thank goodness I have a 30-year fixed, a steady job, and no desire to move!

I’m not changing my asset allocation by selling stocks or anything right now, but I’m also not getting too attached to these recent market gains. Plenty of uncertainty ahead!

Comments

  1. The whole real estate bubble is just absolutely amazing. Even in “affordable” semi-rural Pennsylvania, I can’t believe how much houses cost when the majority of people are just barely middle class. That being said, California leads with everything and spreads east, so our worst may be yet to come.

    We’d love to move, but just can’t justify a $250,000 house on a 100K salary when six years ago they were $150,000K houses on the same salary. At least with the stock market you can by at prices circa 1998!

    If only I could live “in” the market.

  2. Jonathon,

    What forecasters saying about July 2009? I am needing to look into my fixed 30yr rate within the next 90 days.

    Thanks!

  3. A lot of the ARM adjustments won’t be that horrible. Interest rates are pretty low right now so if your ARM adjusts it may end up at something like T-bill rate + 2% or 6-7% range. Some could even adjust DOWN. WellsFargo offers an ARM at 1 year LIBOR + 2.25% which right now is about 3.85%. But on the other hand worst case rates on that same WF loan could hit as high as 9-10%, assuming interest creeps up again in the future. Course how bad it is depends on the exact nature of the ARM and what its indexed to, how much people owe and what their finances are like.

    Point is that given the low interest rates right now the adjustment of ARMs is not necessarily a looming disaster. And some people may even end up with lower payments after they adjust.

    Jim

  4. Here in Australia, it’s impossible to find a 30-year fixed-rate mortgage. (People look at me like I’m crazy when I mention ‘fixed-rate’!) ARMs are the standard, although it IS possible to fix the rate for the first 1-5 years. That of course drives up the rate – currently about 5% for variable-rate and 7% for fixed-rate (meaning 1-5 year fixed, variable after that).

    My husband and I are thinking of buying, but I really don’t like the idea that we are forced into what I see as an irresponsible option: the rates here are at an historical low, so they are sure to rise!

    Any words of wisdom?

    Annie

  5. enonymous says:

    recast vs reset – this is an important distinction and is constantly goofed in the press

    I’d post a link but whenever I try my commnet gets cut out

  6. innocent bystander says:

    That’s a scary looking chart but, here is what I think I totally agree with Jim.

    The majority of these loans should be LIBOR indexed, and the standard mortgage margin was 2.25% on these loans back in 2004-2006. (There are some MTA and COFI loans out there as well)

    If a loan was at 6% before the adjustment, then today’s 12 Month LIBOR rates are around 1.6% to 1.8% percent. So if you’re ARM is do and adjusts this month, wouldn’t the loan adjust to LIBOR Plus 2.25%?

    From my calculations the rate would now be 4.05%, if you were at 1.8% 12 Month LIBOR plus 2.25%. Am I right?

    If that is the case, many of the mortgages will move down in rate when they adjust if they are adjusting soon.

    Keep in mind this is one time per year on the adjustment.

    As global interest rates start to rise, so will the mortgage index rates. This is a key component of global economic recovery, and I believe by the time the rates reach levels where the ARMs would be at their caps (if they ever reach their caps 9-10%), then the homeowners should theoretically have more money to pay their mortgages.

    In the end, I think that the graph doesn’t truly portray any real danger, but shows more of an aftershock from a systemic earthquake caused by an insatiable appetite for large returns from risk.

  7. How many crap loans were issued, will this ever end? Thanks California for being the testing gound for crappy loans for 15 years before the Southern California Subprime Companies took their show on the road and infected the rest of the country. I wish I could have taken out fake home equity just like you did and went to Europe or paid for my kids college.

  8. @Jim,

    The problem is that you probably can’t afford to refinance if you are upside down. Otherwise, you are right.

  9. Froderick says:

    Annie, try to get a fixed rate loan from a large international bank like HSBC.

  10. That is a scary looking chart & I have noticed the 30 yr bonds have been rising so mortgage rates will be rising as well. Again, I think the real thing to keep an eye on is unemployment numbers, if you don’t have a job you cannot qualify for a mortgage and cannot make the payments to say the least. I also think that the fact that the majority of buyers over extended themselves in the first place, the fact many mortgages may be underwater & even if you didn’t loose your job there is a good chance you have seen a salary cut this past year will make it very difficult for a success in the outcome of these resets. I know the stock market has been improving but I am sitting here wondering what is propping this whole thing up besides hot air and green shoot talk. I also think we have such a glut of home inventory and from the chart there could be more on the market, it will be a while before this housing market is on stable ground. I feel sorry for the people that were duped into buying a house they could not afford in the first place.

  11. Ditech Refinance says:

    Most Alt-a and option arm loans have high margins that can cause the rates to spike when reset. To avoid some refinance issues or defaults, the servicing lenders could offer a simple modification at a reasonable cost to lower the margin before the loans reset.

  12. I can’t believe how fast interest rates just jumped this past week. Around me, things went from a little under 5% to 5.75. That’s huge if you were buying a new home or refinancing. I bet it slows down the number of applications. Or it could put another damper on home sales.

  13. The vast majority of mortgages in the country are fixed. ONly 10-20% of mortgages are adjustable. Most people are not underwater on their home equity and about 25% of people are underwater. So we’re looking at around 2-5% of the population that is underwater and facing an ARM reset. A portion of those will have favorable terms on their ARM and won’t be facing an immediate hike in their rates.

    Another way to look at it, theres 14.6 Trillion in mortgage debt in the country. The chart shows 30-40B in resets monthly. So over the next 2 years under 6% of the total mortgage debt will reset. A lot of those people can refinance and a lot won’t have their rates go up.

    Jim

  14. Jim, there is quite a bit of risk in the market you aren’t recognizing. Over 9% of mortgages on 1-to-4-Family homes were delinquent or in foreclosure as of 1st quarter 2009. 25% of JUST PRIME mortgages (not all mortgages, as you indicate) are underwater. There are $2.4 Trillion (with a ‘T’) of Alt-A mortgages, and their resets are mostly ahead of us. For references and more details, link to the PowerPoint presentation I posted above.

  15. I locked in on May 13th with a 30-yr fixed at 4.875 with .125 points. Today, with the same company, the rates are 5.875 with .125 points. Glad I locked in when I did. I can’t imagine this dramatic increase in rates wouldn’t deter some new homebuyers. At least there’s the $8K new homebuyers tax credit attracing some buyers into the market.

  16. ChrisMR says:

    I always wondered why everyone else could afford more house and a “bigger” lifestyle than me, despite being a DINK. Now I realize the truth – they couldn’t.
    I should have seen this coming.

  17. Banditfist says:

    Bingo Justin! The horror of the chart is that the majority of these mortgages CANNOT be refinanced to a 30-year fixed. They do not have the equity or are underwater. So while the adjustable rates may be low, they will remain fluctuating to the market….and there is really only one place for rates to go.

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