$50 Billion Worth of Mortgage Resets on October 1?!

David Bach, The Automatic Millionaire over at finance.yahoo.com wrote an article entitled “Making Mortgage Relief Work for You” on Monday, September 10, 2007. He begins his article in this way:

“On Aug. 31, while many of us were getting ready for a long holiday weekend, President Bush addressed the nation about the mounting concerns in the housing market. His speech took place exactly one month before we’ll see a record-breaking $50 billion in mortgages reset to a new rate.

“That’s right, in the month of October alone, many homeowners will be forced to pay higher monthly mortgage payments than they can reasonably afford. And while this number is staggering, it’s not exactly new information — it’s been known for two years that the crisis was coming.

So once again I’m left befuddled. In approximately two weeks, homeowners of all stripes with adjustable rate mortgages (interest only mortgages, subprime borrowers and those homeowners with weak credit and no cash reserves) will be forced to pony up more cash to keep a roof over their collective heads. We are talking about mortgages that are barely affordable to these borrowers at the margin and the specific mortgage amounts will be going up based on what the Federal Reserve sets the rate at in one week, on September 18, 2007 A.D.

So, if the Fed adjusts the prime rate significantly lower (.50 to .75 basis points), then these households that are struggling with budgetary concerns will have just a hint of fiscal breathing room. If the Fed does nothing to the prime rate, then the stock market will go in the tank which will cause more individuals lose their jobs while their adjustable rate mortgages will reset beyond their budgetary abilities to make the monthly payments. I don’t even have to tell you what will happen if the Fed raises the prime rate (which is unlikely but still one of three options)!

$50 billion in mortgages resetting in approximate two weeks is no small number! If you are a homeowner who wants to get out of your home as quickly as possible because your mortgage loan was financed with an adjustable rate mortgage, perhaps you should consider putting a nice-looking sign in the front yard that says “Owner Will Finance”. It’s far better to sell your home quickly and save what is left of your credit rating than it is to be one of thousands in your community with homes will be foreclosed upon as unaffordable to the previous owner. Cut your losses now, owner finance!

InvestorInsight has an interesting chart of the amount of adjustable rate mortgage resets that will be happening over the next year or so. While we think that there have been an incredible amount of mortgage resets in the past few months the real bubble will be occurring starting in January of 2008. For the period of January to April expectations are that 370 million in adjustable rate loans will reset.

Now in reality, most of these loans will be refinanced or kept up to date, but if the credit situation does not get figured out, there are going to many households that are going to be stressed.

Adjustable Rate Loan Resets For 2007–2008

Month           Millions
January-07      22
February-07     25
March-07        35
April-07        37
May-07          36
June-07         42
July-07         43
August-07       52
September-07    58
October-07      55
November-07     52
December-07     58
January-08      80
February-08     88
March-08        110
April-08        92
May-08          76
June-08         75
July-08         50
August-08       35
September-08    26
October-08      20
November-08     15
December-08     17

Mortgage resets: Record bill coming due

Billions in subprime ARMs will be subject to higher payments.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) — More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.

Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low “teaser” rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.

Consumer groups and politicians worry that hundreds of thousands of subprime ARM borrowers will be unable to keep up with their mortgage payments and will lose their homes.

“In October alone more than $50 billion in ARMs will reset,” according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.

Foreclosures: Hardest hit zip codes

A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, the bill would now be set to spike to $1,331, a 39 percent increase.

Until recently, rising home prices bailed out many ARM borrowers in trouble. They could raise cash with cash-out refinancings or home equity lines of credit. If worse came to worse, they could sell the house and get some money back.

But prices have stabilized or slipped in many markets. (Latest home prices.)

As a result, Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), is expecting as many as 600,000 home owners will get into trouble with perhaps half of them actually losing their homes.

One of the reasons for the worsening situation, according to Zandi, is that just as the number of subprime ARMs being underwritten was reaching a high, the quality of loans was hitting new lows.

“There were increasingly poor quality loans made starting in the spring of 2005,” he said, “with the poorest of all made during the fall of 2006.”

Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets (”liar loans”) and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched. Regulators are urging tighter standards.

“Lenders wanted to keep the pipeline flowing,” said Zandi, “and were hopeful that prices would grow again.”

The hardest hit areas will fall into two categories, according to Duncan. The regions battered by basic economic storms - think Detroit, Cleveland, St. Louis and other old industrial centers - and high-growth areas where home markets went crazy earlier in the 2000s and where home prices are now falling

Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets.

“Prices there are falling quickly, particularly in Florida and Las Vegas,” he said. (Florida foreclosures are set to spike.)

There will be more downward pressure on prices as delinquencies, foreclosures and short sales add inventory to markets.

Another factor is that regulators and lenders are attempting to tighten loan underwriting standards, meaning fewer credit-damaged applicants will get approved, lowering demand for homes.

The tightening mortgage-loan standards could also result in short-term foreclosure spikes. Home owners with resetting ARMs, for example, may not qualify for refinancing under the stricter oversight. That could lock borrowers into unaffordable loans and they could lose their homes.

Another increase in supply, according to Josh Rosner, managing director at financial research firm Graham Fisher & Co, will be from investment properties coming back on the market. There was a precipitous burst of buying homes for investment purposes earlier in the decade. In 2005, about 40 percent of all purchases were of second homes and the majority of these were for investment purposes.

As returns on these investment properties decline, owners will bail out, increasing the listing backlog and depressing prices further. The effect of a foreclosure rise and home price slide on the nation’s economy may be hard to predict but it will have an impact.