Big Wave of Mortgage Resets May Not Be As Bad As Feared

Delinquencies of more than 60 days for payment option ARMs originated in 2006 have risen from 23.26 percent in 2008-2009 to 42.44 percent, according to a report from Deutsche Bank. For 2007 ARMs, the delinquency rate has climbed from 10.1 percent to 35.25 percent, according to the same study.

And foreclosure rates for some ARM loans have reached levels of up to 84 percent in some areas, like Clevleand, Ohio.

AP

Some $750 billion worth of ARMs were originated between 2004 and 2008—with most targeted to home buyers who wanted lower payments while hoping to re-finance on a rise in housing prices—and to those who planned to sell the house before the new terms set in.

But housing prices have fallen over the last two years and continue to seek a bottom in many parts of the county. As a result, thousands of homes have lost their equity and homeowners are "underwater" or owe more than the home is worth.

Falling prices—along with tougher underwriting regulations—has made re-financing more difficult for ARM borrowers and also made it tougher to sell the home at any kind of profit.

For those holding ARM loans, the answers to the term changes aren't necessarily simple. Some anlsysts say it might be best just sit tight when the readjustment comes.

"I think the ARM payments will pretty much be the same with the lower interest rates when they reset or recast," says Schawber. "There's no rush to do anything as I see it."

Other analysts say re-financing is the answer, if borrowers can qualifty and can get through the maze of paperwork.

"People should be looking into longer term rates if they plan to stay in the home more than two years," says Alan Rosenbaum, president and ceo of Guardhill Financial, a mortgage lending firm. "Even if their ARM is three percent, they can get a better deal with a long term mortgatge right now with rates so low."

"Refinancing is difficult as they now ask you 40 quesitons instead of just 10 like they used to and home prices are a problem," says Eric Silverman, co-founder of Silverman, a real estate develoment firm in Jersey City, New Jersey. "But it can be done, if you have enough equity in your home."

As for new homebuyers, many seem to be avoiding ARMs altogether.

"By far, the loan of choice is still the fixed rate," says Freddie Mac's Nothaft. "Around 80 percent of all new loans are longer term, fixed rate. There are ARMs for sure and with the lower interest rates, the so called ARM teaser rates or introductory rates are very low. But there are not as many of these done as in the past. People are more conservative these days."

As for getting into this ARMs mess in the first place, there's plenty of blame, according to RealtyTrac's Sharga.

"It's not easy to be sympathetic to the banks who pushed these loans, and of course, homebuyers did over reach," Sharga says. "A lot of people were told their home values would go up. That hasn't happened."