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ARM Resets Not Expected to Have Major Economic Impact
With trillions of dollars of adjustable-rate mortgages having their payments beginning to reset this year and in 2008, a new study by Christopher Cagan, director of research and analytics for First American CoreLogic, anticipates 1.1 million foreclosures over the next six to seven years, representing 13% of the ARMs originated from 2004 to 2006 and $326 billion of debt.
After the foreclosed homes are resold, Cagan projects, about $112 billion will be lost to remaining equity, lenders and investors over several years.
However, these losses represent less than 1% of the total mortgage lending projected for that period. “Thus, mortgage payment reset will not break the national economy or the mortgage lending industry,” he said.
The impact of these reset-based foreclosures will not be spread evenly, but will focus especially on teaser-rate and sub-prime mortgages originated in the past three years, his study says. These loans will begin the reset process earlier than market-rate adjustable loans and they are more likely to default.
The study projects that:
- Thirty-two percent of teaser loans will default as a result of being reset at higher monthly payments.
- Seven percent of market-rate adjustable loans will succumb to being reset at a higher interest rate.
- Twelve percent of sub-prime loans will default.
What happens to prices can make a crucial difference to borrowers, Cagan points out. “A small rise in prices will lift many properties out of equity difficulty and enable an escape from reset-based default through refinance or sale,” he said. On the other hand, “a small drop in prices will push many properties into equity difficulty and resulting reset-based default.
The First American study developed two alternate scenarios involving rising and falling prices and found that:
- With each 1% rise in national prices, 70,000 fewer loans will be lost to reset-driven foreclosure.
- With each 1% drop in prices, an additional 70,000 loans enter reset-driven foreclosure.
Cagan noted that the marketplace is already taking action to limit the extent of the reset problem.
“Many loans are being refinanced from adjustable-rate to fixed-rate terms, avoiding payment reset,” he said. “Many lenders are working with their clients to modify or refinance existing loans to avoid default. In our market economy, it is the marketplace of lenders and investors that must face the issue of mortgage payment reset; the marketplace is already doing just that.”
 Is the Housing Correction Over? Attend Construction Forecast Conference on April 26
Will housing demand outweigh affordability hurdles, inventory overhangs and the retreat of investors? Where are home prices headed?
Get the answers to these and other questions at the Construction Forecast Conference — Spring 2007 on April 26 in Washington, D.C.
Panels of nationally recognized experts will discuss economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys at the day-long conference.
For more information and to register, click here.
Can't Attend in Person? Webcast of Conference Also Available
The conference is also available via Webcast. For Webcast information, visit www.nahb.org/cfcwebcast.
 Want to Know Your State’s Starts Forecast for 2008?
Find out in HousingEconomic.com’s State Starts Forecast (sample). The starts forecast includes downloadable Excel tables of total, single-family and multifamily starts by region and state.
To learn more, visit www.housingeconomics.com.
 NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into the middle of the year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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