San Diego Housing Market News and Analysis
Reset Timebomb Not Such a Big Deal?
Submitted by Rich Toscano on August 22, 2009 - 8:35am
I have long suspected that the whole "reset explosion in 2010 (or thereabouts)" factor was a lot more complex than people often make it out to be. Especially for San Diego... we are at the forefront of the bubble on the way up and then the way down; it makes sense that our reset peak might happen earlier as well.
But there are bigger reasons than that to doubt the reset explosion thesis. One is that resets don't matter -- all those loans were written at a time of substantially higher short-term rates, so a simple reset to the prevailing market rate should actually lower the mortgage payment. Recasts, not resets, are the danger. Recasts occur when the borrower starts paying down principal on an interest-only loan (in which they've paid only interest, as the name suggests) or a negative amortization loan (in which they haven't even paid all the interest, resulting in a principal that's been growing since they took the loan out). Option ARMs would fall in the latter category, assuming that the borrowers had chosen to take the "option" to pay less than the full payment amount.
Now, there are certainly a lot of loans like this set to recast, but they account for only a portion of the loans seen in those famous reset charts.
My other doubt had to do with the fact that people often don't wait for a reset to bail on their mortgage. If you paid peak pricing, unless you got a hardcore neg-am loan your monthly payment is higher than it would cost to rent the same place -- so why wait around for the reset before pulling the ripcord? Some neg-am loans might have payments so (temporarily) low that it would make sense to stay until the 11th hour. But in the case of many mortgages, it would make sense to default before the reset date.
Unfortunately all of the above are just suspicions without any data to back them up. So I was real interested today when I stumbled across an article on this topic on the blog Accrued Interest. The author provided data from option ARM-heavy mortgage pools he's (or she's?) been tracking, and the conclusion is that a lot have defaulted already and a lot have paid off already. Meaning that while there are still some potentially troublesome mortgages left, they aren't as big as the reset explosion thesis would suggest.
Thoughts from the Piggs?
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