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September 7, 2009

When ARMs adjust

One recurring question from readers is about adjustable-rate mortgages, and how many have yet to "reset" -- to adjust upward for the first time after the temporary fixed period.

I went to First American CoreLogic for the answer. This is what the real estate information provider provided:

Most subprime ARMs in the Baltimore metro area have already reset -- 80 percent of them, to be exact. Most of the rest are due to reset by the middle of next year.

But many prime and "Alt-A" ARMs -- Alt-A referring to mortgages in the gray risk area between prime and subprime -- have not yet reset.

That's true for two-thirds of the Alt-A borrowers in the metro area with ARMs, First American says. Some are due for resets soon, but the biggest group -- 35 percent -- isn't scheduled to adjust until at least the middle of 2011.

Four out of every five Baltimore-area prime ARMs, meanwhile, haven't reset. Nearly half aren't due to reset until at least the middle of 2011, First American says.

A little bit of added perspective:

Half of the metro area's subprime mortgages are adjustable-rate. Many Alt-A loans are ARMs, too -- 44 percent. But just 7 percent of the prime loans in the metro area are ARMs.

All told, First American estimates, the reset clock is ticking down on about 30,000 ARMs in the Baltimore metro area.

Posted by Jamie Smith Hopkins at 7:00 AM | | Comments (13)
Categories: Mortgages


tick tock tick tock jingle jingle jingle......thud


1. How many of those have been refinanced? If we don't know this, three year old data are of little help.

2. Why do you assume that they will adjust upward, and by how much?

I would like to see more data if I am to make have even a semi-informed opinion. If the average Alt-A loan is 200k with a libor + 2.75 with a 2% max increase in the payment--you're looking at a $200 a month payment increase several years after (and ~10% inflation through next year from '05)--if you see libor et al reflecting inflationary pressure.

While I went with the 30 year at 4.75%, historical models for some adjustable loans aren't always terrible. We need to avoid any equivocations.

But I took Darwin Rules' advice about massive impending inflation and bought some RE to hedge myself. :) Thanks Darwin for pushing me into buying lots of brick, drywall, and electrical wiring.

1. It's not old data, "Little Debbie." It's pretty recent -- as of May, if memory serves (I'm at home and the file is at work).

2. I assume they will adjust upward because boom-time ARMs generally had low "teaser" rates for their fixed period. Recent stories about how currently low rates are helping out ARM borrowers as it comes time to adjust have been of the "increase wasn't as bad as expected" variety. But there are so many varieties of loans outstanding that I wouldn't be surprised if some of them don't adjust up.

Wish I had more data, but you've seen what I've got.

Personally, I think their estimate is correct. Several of our residential real estate clients, who currently have Alt-A loans, have called over the past few months trying to identify what the best course of action is if their mortgage resets to a higher interest rate in the near future.

Most clients do not understand that they have several options available to include:
1. negotiation with their lender/ loan services
2. Refinancing to a fixed FHA product
3. Selling their home to avoid foreclosure
4. Potential short sale options for individuals who qualify for a hardship.

The best thing for people faced with this dilemma to do is seek the assistance of a qualified mortgage specialist or financial planner

30,000 ARM's left to reset.

15,000 of which are subprime, which is 20% of the original 75,000
13,000 Alt-A loans
2,000 prime loans.

1. Are these the current numbers of outstanding loans vis-a-vis those originated earlier? (That stat would tell us precisely how many have been refinanced.)

2. 60,000 subprime resets seems like it would constitute the bulk of the foreclosure activity, both in volume and overall proclitivity to foreclose.

This is what I am still confused on: do the numbers of alt a loans outstanding represent the current mix? Or is that the original mix? If it's the former, then fine, but if it's the latter, then I might ask how many of those original Alt-A loans were refinanced. And to FHA loans?

Further: how much more likely are subprime borrowers likely to foreclose than Alt-A loans? I would be interested in how you could describe the total foreclosure activity broken down strictly by loan types, and what would happen if you applied the same trajectory towards the current mix.

I'd also be interested in seeing a new trajectory using the increased percantage of prime borrowers as a touchstone (e.g. they are twice as likely to foreclose now vs. 2 years ago and you can likewise double the other percentages (or perhaps triple becuase Alt-A loans are already more vulnerable)).

More models. More data. More better.

New York times had an article on this topic yesterday.

Top five quotes:
1.“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

2. 'The borrowers might have thought these were safe loans, but it turns out they bet the house.”

3.“You’re heading straight for a big wall and you can’t put the brakes on.”

4. “Everyone out here always preached to me, ‘Buy real estate. It’s the best investment you’ll ever have”

5.“If you purchased your home with an interest-only loan between 2003 and 2006, you’re cooked.”

"Little Debbie," these are the correct figures for ARMs that haven't reset, as of May 2009 (I'm at work now and am looking at my file):

Subprime: 3,358
Alt-A: 7,558
Prime: 22,820

That adds up to somewhat more than 30,000, but I rounded down. (We're several months past August, so some of them have surely reset already.)

Remember, though just 7 percent of prime loans are ARMs, prime accounts for many of the yet-to-reset ARMs outstanding.

To the best of my knowledge, First American provided me with the ARM situation as it stood in May, which means people who had been in ARMs but already refinanced into fixed-rate loans were counted as fixed-rate.

I can't help you with the rest of your questions, "Little Debbie." I love data too, but I can't spend most of my time running around finding numbers that are only for the blog. I've got two more stories I have to write this week and another on the weekend. (Cue the tiny violins.) Hey, you only get so much when it's free.

Darwin Rules:

Interesting article. I'm more bearish on CA than the Baltimore/DC metro.

People like Mr. Muller who walks because his payment goes up 20% (after he signed loan documents saying as much!). My suspicion is that these types of people are less ubiquitious in this area.

I know debbie -- it's different here

Also not sure why the assumption is that ARMS would go up with current interest rates. Personally, my 3-yr arm just turned over in July, it was at a special "promotional" rate, but the rate it switch over to in july was lower than the "teaser" rate 3 yrs ago.
BTW, mine was a prime

That's good news, Lisa! I don't know what level many of those teaser rates were set at, so I was relying on news reports written this year about resets.

the great unknown is what interest rates will be in one and two years from now as we climb to the crest of the Alt-A and option ARM recasts.

Darwin seems to be assuming there'd be doom & gloom only & exclusively...from what I've seen so far in & around Balto, the flippers would lose their "investments" (but all investments are risky "per definitionem", aren't they?). Others would be forced to actually pay to use the houses for -can you imagine that???- dwelling.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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