Magazine article Mortgage Banking

ARM Resets Cause Short-Term Pain but Little Long-Term Harm

Magazine article Mortgage Banking

ARM Resets Cause Short-Term Pain but Little Long-Term Harm

Article excerpt

Although the impending reset of existing ARM loans to higher interest rates will hurt borrowers in the subprime mortgage sector in the short run, it won't have significant impact on the overall mortgage market or the economy at large, according to a study released by First American CoreLogic, Santa Ana, California.

In the study, Mortgage Payment Reset: The Issue and the Impact, First American's director of research and analytics, Christopher Cagan, examined 26 million mortgages and focused on 8.37 million ARMs originated between 2004 and 2006 with outstanding loan balances of $2.2 trillion.

"The subprime mortgage market is correcting. It's tightening up and we're moving toward a normal market," said Cagan. "I think the lending industry is going through a classic time of market tightening. This is the kind of market cycle that happens every 10 or 12 years or so."

A key finding of the study is that the impact of reset-based foreclosure will focus on subprime mortgages and teaser-rate loans with low initial interest rates, interest-only or negative-amortization features originated within the past three years, explained Cagan.

The total debt outstanding from these mortgages is $326 billion, said Cagan. After foreclosure and resale, it is projected that approximately $112 billion will be lost to remaining equity, lenders and investors over several years. …

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