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Chart courtesy of At These Levels.
Above is a chart that Credit Suisse Analysts put out when looking at the housing industry in their report Mortgage Liquidity Du Jour: Underestimated No More (pdf). It is an excellent report, and published back in the first quarter it was one of the early pieces from Wall Street analysts that raised a lot of alarms publicly in the main stream media.
This chart shows the different ARM types and their reset period. As you can see we’re coming in to the thick of subprime ARM resets, which is one of the factors in the recent surge in foreclosures. While the prime market has not run in to the same problems as subprime; you can see why it may not make sense to get too comfortable thinking that all is contained and subprime is just a small disturbance.
The reason for the unease is the looming reset of billions of dollars in pay-option (negative amortization) ARMs and Alt-A ARMs which are usually given to people with good credit. When these ARMs reset many borrowers in the prime category will be facing the same challenges subprime borrowers are currently:
- higher mortgage payments
- little to no equity to refinance in to a better loan
- tighter underwriting guidelines make getting a loan harder
- higher interest rates offer less relief if a borrower can refinance
It will be interesting to see how prime holds up as we move through this chart. As I’ve said before FICO scores can’t make your mortgage payment. If you have 780 scores and your pay-option loan recasts to 3 times your current payment, the equity in your house is severely reduced from the negative amortization, and you have a hard time getting a loan due to loan-to-value restrictions you could be in serious trouble. You would also not be alone.
My advice is if you are in a pay-option loan or any type of adjustable that is set to adjust over the next 12 months is to start talking to a mortgage professional now about your options. Feel free to email me with any questions about your loan too; I am more than happy to help answer questions and provide possible solutions where I can. While making a change now may be painful; having a game plan for stabilizing your financial future is essential.
