WASHINGTON — Millions of adjustable-rate mortgages are going to reset in the coming years, possibly to higher interest rates, creating the prospect of a new round of foreclosures.
About 10 percent of all mortgages in this country are scheduled to adjust in the next few years, with the numbers peaking in mid- to late 2011, according to First American Core Logic. Those loans are worth about $1 trillion, and nearly 20 percent of the borrowers who have them are already seriously behind on their monthly payments.
Many of these loans will lapse into foreclosure and disappear before they adjust, said Sam Khater, senior economist at First American Core Logic. Others will terminate for less dramatic reasons as people sell their homes, refinance or have their mortgages modified.
“I suspect that at least a third of these (adjustable loans) won’t be around by the time they are scheduled to reset,” Khater said.
Foreclosures have just about wiped the subprime loans out of the market. But now, other types of loans are about to adjust.
Some of them won’t necessarily adjust upward. Rates on adjustable loans can also go down. And they probably will over the next year for borrowers with traditional prime loans because rates are at historic lows, said Guy Cecala, publisher of Inside Mortgage Finance.
“We have a long way to go before prime borrowers see a big jump in payments,” Cecala said. “It’s not something people are predicting for 2010. We’re looking at 2011 and 2012. None of us know what’s going to happen then, but we’re assuming rates will rise.”
When they do, some borrowers could be caught off guard, said Greg McBride, senior financial analyst at , a finance website.
“We’ve seen this movie before,” McBride said. “We know that interest rates are going to go up, and go up a lot, at some point in the next several years. You don’t want to be holding an adjustable-rate mortgage when that happens.”
The most vulnerable borrowers will be those with “option” ARMs, which tend to be concentrated in places where home prices soared, then plunged precipitously.
Option ARMs, also called pick-a-pay mortgages, allow borrowers to choose how much to pay each month. Nearly all borrowers who took out these loans from 2004 to 2007 chose to pay less than the interest due, and the unpaid interest was tacked on to the balance.
For them, loan balances are rising as home values are falling, said Keith Gumbinger, a vice president at the mortgage research firm HSH Associates. “They’ve got bigger problems than just the interest rates.”
