| NEW YORK
NEW YORK Many U.S. less creditworthy borrowers
may lose their homes when interest rates on a flood of
adjustable-rate subprime mortgages reset next month.
Even a recent sharp fall in mortgage interest rates, which
could make the potential transition from an adjustable-rate to
a fixed-rate mortgage less painful, will do little for those
with the weakest credit because lenders have all but closed
their books to the riskiest borrowers.
"The ARM resets will hit hard the subprime borrowers and
therefore we have a huge amount of trouble ahead of us," said
Torsten Slok, senior economist at Deutsche Bank in New York.
About $75 billion in adjustable-rate U.S. mortgages are
going to reset in the fourth quarter, most of which will emerge
next month. Of the loans resetting, around 75 percent are
subprime mortgages, Slok said.
Subprime ARMs are going into foreclosure at an annual rate
currently of 13 percent, up sharply from 6 percent two years
ago. This rate will climb even higher over the coming two years
as a result of the ARM resets ahead, he said.
"Most of these borrowers are going to have a really hard
time trying to refinance and with an expected payment shock of
about 30 percent higher on average, many will not be able to
afford their homes," he said.
Many of the ARMs resetting in the coming months were
originated during the housing market's heyday in 2004 and 2005
when easy credit ran rampant.
The primary mortgage market, where loans get originated,
has changed significantly over the past few months. A sharp
rise in defaults in the subprime mortgage market, which caters
to borrowers with poor credit histories, has caused lenders to
tighten requirements, making it more difficult for those with
weak credit to get a home loan.
Some market observers say even borrowers with an
unblemished credit history are having a more difficult time
getting a loan.
"The adjustable-rate mortgage does not offer a whole lot of
value right now," said Greg McBride, senior financial analyst
at Bankrate Inc., in North Palm Beach, Florida.
The conforming 30-year fixed-rate mortgage stood at 6.50
percent last Wednesday, down from 6.71 percent on August 1. But
during this same time period, the rate on a five-year ARM rose
to 6.45 percent from 6.36 percent, McBride said.
McBride expects rates on conforming 30-year fixed-rate
mortgages, which are loans guaranteed by housing finance
giants, Fannie Mae FNM.N and Freddie Mac FRE.N, to fall
around another 0.15 to 0.20 percentage point in its next
interest rate survey, which will emerge Wednesday.
Interest rates on fixed-rate mortgages are often pegged to
U.S. Treasury yields. Treasury yields have dropped sharply in
recent weeks on raised expectations of a rate cut from the
Federal Reserve. The next Fed policy-making meeting is
scheduled for September 18.
"The ARM is a product with higher instances of delinquency
and default and therefore the rates are incorporating a higher
risk premium," he said. "Federal Reserve Chairman Ben Bernanke
has said the subprime mortgage market will probably deteriorate
further and I have to think that he was looking at the month of
October when he said that."
The majority of subprime ARMs are going to reset at rates
2.5 percent to 3 percent higher than their original loan,
Deutsche's Slok said.
"That is not peanuts and exactly why people should be
worried about subprime," he said. "We are really in for a
horrible situation for the housing market over the next six to
Jim Baird, chief investment strategist at Plante Moran
Financial Advisors in Kalamazoo, Michigan, said the increasing
difficulty in getting a home loan will exacerbate the impending
ARM reset situation.
"Tighter lending restrictions will make it difficult for
subprime borrowers to refinance and, with higher monthly
payments, many will face a default or foreclosure with very few
options," he said.
The Mortgage Bankers Association last week said the rate of
U.S. home loans in the foreclosure process rose to a record
high in the second quarter of 2007.
"If all rates were falling that would be great news for the
housing market, but that is not the case," said Bob
Walters, chief economist at Quicken Loans, an online mortgage
lender in Livonia, Michigan.
More homes going into foreclosure will add to an already
unwieldy supply of homes for sale.
"Supply is just one if the things working against housing
right now and reduced mortgage cash is another one," Walters
The National Association of Realtors last month said the
supply of existing single-family home sales was at 9.2 months'
in July, the highest level since October of 1991 when it was
(Additional Reporting by Patrick Rucker and Joanne