Yesterday, at one of the morning staff meetings, a CNBC producer told of how his son had an adjustable rate mortgage that actually, thanks to today's low interest rates, adjusted down, saving him hundreds of dollars on his monthly payment. Well all of a sudden everyone wanted to know if this would mean a shot in the arm to the economy, with all these supposedly troubled adjustable rate mortgages adjusting down instead of up. I spent a good part of my morning explaining why the answer to that question is no, and I thought I'd share it with you.
Yes, it is true that there are some borrowers who may have taken out, say a 5 or seven year ARM, tied to LIBOR, which will in fact adjust down because LIBOR is so ridiculously low right now (it could be way up same time next year). However, "the number of people inclined to see resets to lower mortgage rates may represent 5 percent of all borrowers, but that is spread throughout the year. The downward resets began in late 2008, and we sure didn't see much juice to the economy then, did we?" says Greg McBride of Bankrate.com.
So let's talk about resets for a minute and why so many, including me, think they are going to be a big negative factor in housing's recovery. First subprime: Subprime ARMs were clearly the largest culprit in the housing crash and the ensuing banking sector crash. But "even on the subprime rate resets, the fear was largely overblown because the number of people current at the time of reset who then defaulted was maybe one percent," says Jay Brinkmann, chief economist at the Mortgage Bankers Association. "People were defaulting long before they ever got to reset."
The real issue we're facing now is the reset of the "Pay Option ARM", which is a type of loan product that was very popular during the housing boom, especially in California and Florida. Many of these loan takers were prime borrowers.