A major concern in the onset of the housing crises how the payment adjustments of the large number of adjustable-rate-mortgages over the coming years would impact the values of home. It was seen that this category of homeowner would be most vulnerable to resetting mortgage payments in the coming years. These are the loans that carried below market “teaser rates” and/or negative amortization. Not only would these payments jump at the first adjustment but the indices they tied to were bound to rise and that could create a compounded crisis in the housing market. Many foresaw a steady stream of delinquencies, foreclosures, vacancies resulting in falling home values. At least, that was the conventional wisdom.
Well, rest at ease. Recent data appear to show that this window has largely passed. Lender Processing Services’ (LPS) September Mortgage Monitor reports that 63% of outstanding hybrid adjustable-rate mortgages (ARMs) have already passed their initial rate reset.
Of those that have not reset, about three-quarters were originated post-crisis when underwriting was tighter and most loans carried credit scores of 760 and above. LPS Senior Vice President Herb Blecher explained, these scores portend good performance of ARMs should mortgage interest rates rise as anticipated. “Only 36% of outstanding hybrid ARMs are in a pre-reset status, and the vast majority of those are coming from newer vintages where loan quality has been pristine.”
The remaining pre-reset loans originated during the boom-boom years where underwriting criteria was much more relaxed then as post-crisis criteria, some may say it was even loose. These borrowers could be most negatively impacted by upward resets in their monthly mortgage payments but LPS sees little cause for concern. The report found that interest rate indices would need to rise nearly 300 basis points for most of these pre-crisis hybrid rates to increase appreciably. In fact, many of these borrowers are finding their payments dropping.
The study also looked at prepayment rates and their relation to the rate of prepayments and rising rates. LPS found prepayments are at their lowest level since May 2001 as rates continue to rise. The decline crosses all investor categories including GNMA and GSE sectors which both fell over 50% since rates began to climb last May.
Prepayment of loans with LTV ratios above 100% (HARP eligible) have declined over 40% in the same period.
Interest rates drive refinances which in turn drives prepayments and originations. Overall origination activity is down more than 9% m/m and near 18% y/y.
Last month LPS reported that delinquencies increased 4.3% from August to 6.4%, in-line with seasonal patterns, but are still down 9.9% y/y 2013 and 12.6% compared to September 2012.
The foreclosure rate declined 1.3% to 2.63% and is down 23.6% year-to-date and nearly 33% y/y. Foreclosure inventories continue to improve and new problem loans remain close to pre-crisis levels.
Home prices are up about 9% y/y but started their seasonal dip. Home sales remain robust with the share of distressed sales falling from 33% of all sales in 2011 to 19% last month.