Sunday, October 2, 2011

Adjustable Rate Mortagage Reset Schedule Graph.

The above graph is the graph from Credit Suisse that has many people nervous (especially in the financial sector) and squirming in their chairs.  It displays the 2nd wave of adjustable rate mortgage (ARM) resets coming straight at us this year and next year.  California is particularly vunerable since almost 60 % of this type of loan were sold for new purchase and refinance.

The reason behind the popularity was that people did not need the fixed 30 year mortgage since people moved or refinanced every 3 to 5 years so many homeowners traded the secure mortgages for low teaser rate yet dangerous offers  "to cash out their equity".

Not only ARM was popular but the option ARM was also widely embraced by homeowners because it allowed the  borrowers to pay less than the interest payment thus accruing negative equity.  These are the loans that are almost impossible to modify or become impractical since payment can't be reduced. From the graph, one can easily tell the higher proportion of option ARM loan that is about to be rest.  Only after the end of 2012 the reset declines.

The first wave of ARMs adjusted in 2007. This year 2011 is the year that large amounts of loan known 5/1 will be reset.Close to $ 500 Billion in Option ARMs is scheduled for reset.  The exact date might not be accurate as banks try to modify some of the loans by postponing thru forebearance and beacuse home do not foreclose overnight. On average ,a foreclosure takes more than 12 months.

According to latest survey, there are more than 11.1 Million homeonwers (some source says is close to 15 M) with a mortgage that is negative in equity (underwater), meaning their house is worth less than the loan balance. They cannot sell, they cannot refinance, and there seem to be no solution.

The significance of this impending reset is that the additional homes with ARMs scheduled for foreclosure and the additional shadow inventories(estimated at 2 Million units) will further depress home values.  It is estaimated that for every 5 % decline in home values, an extra 300,000 homeowners will be negative in quity or upside down.

If the homeowners can't cure the default by paying the balance the bank will eventually foreclose on their properties. It is important for homeowners to work with properly trained agents to assist them with the short sale.

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