How Many ARM's Set To Reset in 2008...?
A: You wonder quietly to yourself? Thanks to the RealEstateJournal.com we have an idea of what's to come in the ARM reset category of the housing equation for the next 3 years.
In 2007 (from July 1 - December), there are just over $200B worth of home mortgages that are expected to reset into higher interest rates; that is, adjustable rate mortgages or ARM's. Of that $200B, abut $150B was subprime loans, $30B or so of Alt-A (in between subprime and prime, or near prime loans) loans, and about $30B of loans backed by Fannie Mae or Freddie Mac.
So, whats expected for the next year? Let me break it down for you in comparative purposes to 2007; or just look at the chart.
EXPECTED VALUE OF ARM's RESETTING IN 2008
Subprime - Aprox. $260B of loans set to reset into higher rates
Alt-A - Apox. $30B of loans set to reset into higher rates
Prime - Aprox $15B of loans set to reset into higher rates
Fannie/Freddie Backed - Aprox $50B of loans set to reset into higher rates
TOTAL VALUE OF HOME LOANS SET TO RESET TO HIGHER RATES ---> Aprox $355B
Luckily, according to this study by Deutsch Bank Securities, the dollar amount of home loans expected to reset into higher interest rates for 2009 & 2010 drop significantly. It's 2008 that we have to worry about and how that may or may not further change the lending environment and ultimately housing.
Since banks and lenders have smartened up in the past 6-10 months or so with tighter lending and underwriting standards, less of these adjustable rate loan products were being committed to which explains the drop off expected in 2009 and 2010. Most adjustable rate mortgages are for three or five years; so we are really talking about those who purchase homes between 2004-2006 that we still have to worry about.
There should be some great buying opportunities in the coming year or two as the smoke clears from the mistakes made that led us into this credit/liquidity squeeze. Contrarian investors unite, especially outside Manhattan. As with every recovery, you won't know we are in one until it already happened!
Comments (15)
Interesting insights, Noah. I enjoy reading urbandigs.com but I think there's been too much macroeconomic analysis recently. You've built your readership on being Manhattan real estate focused - the bricks and mortar stuff. Not ignoring the very important macroeconomic developments of course, but would love to see a "return to basics" for urbandigs.
Posted by Sydney | August 19, 2007 11:44 AM
Thx for suggestion Sydney! Last 2 weeks has been mostly macro updates given the enormous change in fundamental macro economic conditions. very important to discuss the quickchange in credit markets and how that affects investors.
I'll certainly go back to local market updates and tips in coming weeks!!
Posted by Noah | August 19, 2007 12:36 PM
I disagree with Sydney. I believe the macro analysis to be as useful if not more useful than the Manhattan real estate information. Reason is that macro ends up affecting everything from your job, mortgage rates, to your property in the end. It is somewhat limiting to just focus on one aspect, while totally ignoring what is happening on the world outside you. I appreciate Noah's insights on the macro since they are much more easy to understand and comprehend than many other bloggers who write about macro.
Posted by Jonny Red | August 19, 2007 7:59 PM
Thx Johnny! My true passion is the macro, and now that I think I got readers up to date with what is happening, Ill start to slowly add in more local real estate updates as I see changes occur.
But macro will definately be more heavily weighted as the world continues to change so that investors can properly understand what is happening and how to adapt to it for future decisions.
Appreciate the positive feedback!
Posted by Noah | August 19, 2007 8:21 PM
Micro, Macro... I just like hearing your take on markets.
Thanks for all the insight.
Posted by Dan Green | August 20, 2007 10:54 AM
I like the macro - it's useful info and I haven't seen another RE blog that provides this explanation of the markets as it relates to Manhattan RE. Maybe it's too academic for some readers but you can't be all things to all people.
Posted by newbie | August 20, 2007 12:57 PM
Yeah, macro analysis is key to nyc real estate, perhaps now more than ever. This is a scary time to contemplating one's first home purchase.
Posted by Justin | August 20, 2007 1:02 PM
good to hear guys! I like that readers of this site share the same interests!
Posted by Noah | August 20, 2007 2:05 PM
How can all of these adjustable rate mortgages be adjusting UP?
Aren't they tied to the one year treasury? Isn't the one year at 1.4%?
I thought the standard loan was 2.75 over the index with an annual cap of no more than 2% per year and a life of the loan cap at 8 or 10%.
Posted by Paul | March 31, 2008 4:57 PM
It's interesting how most analysts seem to ignore what may be the biggest category of resets of all. After the pay option arms, which allow for negative amortization (which from what I've been told is a bigger portfolio than subprime was) comes FNMA/FHLMC 30 year fixed interest only. Although these loans have a fixed rate, after the first ten years they convert from an interest only payment to a 20 year fully amortized loan, which will raise the monthly payments 30-40%. As a lender for the past 15 years, I can tell you that I (and everyone) did a ton of these and we can no longer refinance people out of them because they're upside down. Big!!!!!
Posted by Alec | May 9, 2008 9:39 AM
What about the option-ARMS? Those are going to be worse than subprime and ALT-A, since they have negative amortization built into them.
Posted by Billy | May 9, 2008 1:06 PM
Exactly - Option-ARMS are bigger then almost everything put together - this article completely ingores those - and those don't taper off until 2012'
Posted by Paul | May 9, 2008 4:26 PM
Option ARMs are going to blow up in 2010-2011! Click my name for the chart. I'm not buying a house until at least 2012.
Posted by Out at the Peak | May 10, 2008 3:06 PM
A few things missing...
1) Negative Equity Effect across all borrower types. Resets are not all they are cracked up to be especially loans resetting in the past several months when the underlying index values on the T, MTA and LIBOR are historically low. These loans should not be defaulting in such great degree if it were due to resets because many are resetting the same or lower. Granted, when many intermediate-term arms reset they go from interest only to fully amortized, but still nearly 65% of all defaults are coming PRIOR to resets and have for quite some time.
2) The ALT-A universe and larger than the subprime universe in some of the bubble states, CA being one. However, the loan make up looks almost exactly the same as subprime when you compare the two universes side-by-side. http://mrmortgage.ml-implode.com/2008/04/16/mr-mortgage-alt-a-exposedmuch-worse-yet-to-come/
3) Stated Income, No Ratio and No Doc loans. Deutsche put out a report last year saying 90% of those with a light-doc loan lied on their income, 50% by more than 50% and 50% by more than 5%. This is not an ARM exclusive problem, but will also cause defaults across the fixed space for conforming and jumbo loans. Defaults will even be greater on those that could not afford it in the first place couple with negative equity.
4) Shadow inventory driving down prices http://mrmortgage.ml-implode.com/2008/05/09/82/
5) Home equity lines of credit and loans that from 2004-2007 were offered to 100% CLTV by the nations largest banks that have forced most takers into a negative equity position, weakening the risk profile for the first mortgage forcing defaults. http://mrmortgage.ml-implode.com/2008/04/21/home-equity-loan-delinquencies-surgesp-bofa-and-fitch-concur/
6) Pay Option ARMs that reset hard after 2010 through 2012 that cuts across all socio-economic boundaries and are a total loss for the borrower and bank in most cases. http://mrmortgage.ml-implode.com/2008/04/30/the-pay-option-arm-implosionsubprimes-big-brother/
http://bp2.blogger.com/_nSTO-vZpSgc/R_HlCECrufI/AAAAAAAACZE/E1WPLRuaWmY/s1600-h/Mortgage-Rate-Resets-1.png
7) Most affordable jumbo loan programs suddenly gone making real estate in the states that drove the real estate boom from 2002-2006 significantly over valued still. To regain the affordibility lost when exotics went away, 30-year fixed rate mortgage must drop below 2%. http://mrmortgage.ml-implode.com/2008/04/29/how-much-house-can-you-afford-are-you-sure/
Perhaps in Nebraska and Wyoming the housing crisis is coming to an end but not in the half dozen, or so, states that were the housing bubble. These states just so happen to hold 70% of the US population and are responsible for most of the US GDP as well. Dennis Kneale love to talk about how this is NOT a national problem because it only effects so few states. Take CA, NV, AZ, CO, OH, FL etc out of the United States and everything would look much different Dennis.
Best, Mr Mortgage
Posted by Mr Mortgage | May 10, 2008 4:29 PM
According to this study by Deutsch Bank Securities, the dollar amount of home loans expected to reset into higher interest rates for 2009 & 2010 drop significantly.
Posted by IT Certifications | April 7, 2009 3:47 AM