Mortgage reset may boost foreclosures: study

By Ilaina Jonas

NEW YORK (Reuters) - About 1.1 million additional home foreclosures are expected over the next six years as adjustable-rate mortgages -- which made home buying more affordable to U.S. buyers in recent years -- reset to higher payments, according to a study by research firm First American CoreLogic.

The expected $112 billion in losses won't break the mortgage industry but will inflict pain on lenders and borrowers affected by the defaults, said the study, released on Monday.

"It's less than we spend on alcohol. It's less than we spend on the lottery and gambling," said Christopher Cagan, director of research and analytics, and author of the report Mortgage Payment Reset, The Issue and the Impact.

"The price of gasoline has far more impact. We have $60 billion a month in trade deficit that dwarfs this," he added.

Some loans made over the past few years were designed to allow initial periods of low payments. Many of those were "teaser" loans, which called for very low initial interest rates. A large chunk of the initial low-interest and teaser-rate loans are scheduled to reset to higher and longer term rates. Some "negative amortization" loans will call for larger principal payments than the initial loan.

Many borrowers are likely to face the double-pressure of a large reset while at the same time, stagnant or fallen property values and little money down will leave many borrowers with no equity, or ownership in the home above the mortgage. That may hasten defaults and foreclosures.

The study forecasts that the defaults won't severely hurt the economy and will account for about 0.36 percent of U.S. Gross Domestic Product. However, recent reports of default troubles in loans made to borrowers with weak credit histories helped send the stock market into a funk.

"That's what gets the attention," Cagan said. "The traffic report reports the accidents. It doesn't report the normal traffic."