In the early years of the financial crisis, many feared there was a disaster looming in the mortgage market's then-near future when the adjustable-rate mortgages (ARMs) originated during the pre-crisis years started to reset. Many feared that when the low introductory rates expired and the loans reset to higher rates, the market would face a new flood of delinquencies and foreclosures.
Fortunately, that's turned out to not be the case. According to Lender Processing Services' (LPS) September Mortgage Monitor report, the majority (63%) of outstanding hybrid ARMs have already reset from their initial interest rates. Of those that are yet to reset, approximately 75% were originated in post-crisis years, when over 60% of loans had credit scores of 760 and above, the firm reports.
Herb Blecher, senior vice president for LPS, says this bodes well for the future performance of ARMs, as interest rates are expected to continue to rise.
"Only 36 percent of outstanding hybrid ARMs are in a pre-reset status, and the vast majority of those are coming from newer vintages where loan quality has been pristine," Blecher says in a statement.
Blecher says LPS analyzed the remaining pre-reset loans originated during the bubble years, when ‘underwriting criteria was not nearly as strict as post-crisis criteria,’ and concluded that the resetting of these loans was ‘little cause for concern.’
‘With interest rate indices near historically low levels, we found that they would need to rise on the order of 300 basis points for most of these pre-crisis hybrid rates to increase,’ Blecher says. ‘Most of these borrowers are more likely to be looking forward to a reduction in payments, rather than an increase (though periodic rate floors may limit these decreases).’
However, rising rates have had a significant impact on prepayment speeds, which are now at their lowest levels since May 2011, Blecher notes.
‘LPS saw prepayments decline across all investor categories, with [Fannie Mae and Freddie Mac] segments seeing the steepest drops – both down over 50 percent since rates began their climb back in May,’ Blecher says. ‘HARP-eligible loans – GSE loans with loan-to-value ratios of 100 percent or greater – have dropped sharply as well, declining over 40 percent. Finally, since interest rates drive refinances – and refinances have been driving prepayments and originations – overall origination activity has declined as well, down more than 9 percent from last month and nearly 18 percent year-to-date.’
Meanwhile, the report finds that year-to-date home sales remain at their highest levels since 2007.
Distressed sales (both real estate-owned and short sales) continue to make up a smaller percentage of overall transactions. Of these, short-sale volumes accounted for 46% of distressed transactions in August – a declining share, but still historically high.
Delinquencies, however, increased 4.23% in September, compared to August, to reach a total U.S. loan delinquency rate of 6.46%
The total U.S. foreclosure presale inventory rate stood at 2.63% – a month-over-month decline of 1.29%.
States with the highest rate of delinquency in September included Florida, Mississippi, New Jersey, New York and Maine. States with the lowest rate of delinquency included Wyoming, Montana, Arkansas, South Dakota and North Dakota.
To access the full report, click here.