Mortage Payment Reset: The issue and impact Main Idaho Real Estate Insights

Under the main scenario, the study anticipates 1.1 million foreclosures spread out over a total period of six to seven years which represents thirteen percent of the adjustable-rate mortgages originated through purchase or refinance from 2004 to 2006 constituting $326 billion of debt. After foreclosure and resale, it is projected that about $112 billion will be lost to remaining equity, lenders and investors over several years. These losses represent less than one percent of the total mortgage lending projected for that period. Thus, mortgage payment reset will not break the national economy or the mortgage lending industry.

From First American CoreLogic Report
March 19, 2007

Trillions of dollars of adjustable-rate mortgages will have their payments begin to reset in 2007 and 2008, or have begun to reset already. What will be the impact of mortgage payment reset?

For the past few years, interest rates have been low and remain low. For the past few years, loan products have been designed to allow initial periods of very low payments followed by adjustment. In that rising market, the use of adjustable loans, even teaser loans with a very low introductory interest rate, often obtained with little or no money down, was a reasonable financial decision for todays more sophisticated borrowers. Residences could be purchased and mortgages kept up with small down payments and low monthly payments, freeing up money for investments and other venues. In markets with low affordability, these products were effective in allowing many segments to gain entry into the real estate market. This study explores what will happen to adjustable-rate loans as their introductory payment periods expire and payments reset to their long-term levels.

How much will reset cause mortgage payments to change on a national basis? This study looks at a large national set of adjustable loans, projecting the difference between initial monthly payments and the payments when the loans are fully reset, estimating the national impact upon payments as $42 billion per year. This amount represents only 0.36 percent of our $12-trillionper- year economy. Thus, reset will not break the national economy; but it will affect the subset of loans that are exposed to adjustment.

What will be the impact of reset as related to default and foreclosure? This study made a careful investigation of the current levels of equity and connected the results with information about payment reset to project how many loans are likely to face the double-pressure of a large reset while at the same time their properties do not possess sufficient equity to enable a sale or refinance. The analysis anticipates a total of 1.1 million foreclosures with losses of about $112 billion, spread over six years or more. Our mortgage lending industry extends about $2 trillion of loans yearly, so these losses represent less than one percent of total lending. This will clearly not break the mortgage industry, although it will affect the subset of lenders and investors who are exposed to reset.

When will the impact of reset be felt? The study finds that the results of reset will not come as a punctual event at a single time or in a single year, but will be drawn out over the next six years or longer, extending into the early part of the next decade.

What if the real estate market changes? If market values rise, equity builds and refinance and sale become easier. If market values fall, equity declines and it becomes harder to refinance and sell. This study builds a laddered model of default probabilities to estimate the impact of changes in market prices upon the number of reset-based losses, and projects the numbers and dollars of foreclosure losses in the event of a fall and in the event of a rise in prices.

Read entire report by First American CoreLogic

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Posted by tlangford at 3/19/2007 8:43:00 PM
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