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Calculated Risk points us to a new Fannie Mae report on the 2/28 ARM performance with rate adjustments between 2006 and 2007. Below is the chart (from Fannie Mae):
Let’s take a look at what this report is telling us.
- The blue are loans that are paid off - most likely through a refinance in to another loan. Note how 76% of loans that were set to reset in 2006 have been paid off.
- The loans set to reset in 2007 only 37% have been paid off, and we’re more than half-way through the year. Does this mean that people don’t have equity to refinance out of them? Do the majority reset later in the year? Why aren’t people refinancing out of them?
- The amount of loans delinquent between loans set for reset in ‘07 is almost double that in ‘06. Perhaps some of the ‘06 loans were saved by refinance options that are no longer available to the ‘07 class?
- The default rate seems well on its way to surpassing the ‘06 class as well.
- The folks that refied in ‘06 - what type of loans did they get in to? Was it another 2/28? Will there be room to refinance in 2008/09 with decreasing property values?
Fannie Mae points to these factors (emphasis mine):
The first is that as of March 2007, many loans with 2007 IRRs have not yet hit their lock-expiration date, and many hybrid ARM borrowers prepay around (or shortly after) their reset date.
The second reason is tied to changing market conditions. The market is now less hospitable to refinance borrowers than it was in 2006. By March 2007, the average spread between the then-current 2/28 refinance rate and the teaser rate on existing early-2005 2/28s had risen to 165 basis points (an additional 30 basis points above the 135 basis point spread seen in 2006), making it more expensive to refinance. Moreover, the spread above the initial teaser for the four weeks ending June 1, 2007 rose still more — up to 205 basis points. At June 2007 rate levels, going forward, each additional 25 basis points rise of the 2/28 subprime refinance rate relative to the 2005 initial teaser rates costs borrowers an addition $30 per month in principal and interest payments on a $170,000 mortgage (the average subprime size). Also lenders have tightened their lending requirements.
It’s no secret that there is less home equity available due to massive cashing out over the last few years, coupled with decreasing home values. It will be important to watch these 2/28 vintages as they come due again (in 08/09) when there could be even less room for refinance opportunities.
If you are in a 2/28 and are in the 45% that haven’t refinanced before your payment is set to escalate be sure to talk to a trusted mortgage adviser to come up with a solid game plan for either refinancing or otherwise mitigating your payment shock.
