Fannie-Freddie Fear ARM Resets (NYSE:FNM),(NYSE:FRE)
Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) appear to have extended their Home Affordable Refinance Program (HARP) because of upcoming option ARMs that will either reset or recast between 2010 and 2012. The latest outlook is for $1 trillion to be reset/recast in the next few years.
Stacy-Marie Ishmael of Financial Times reports with the latest chart showing the monthly mortgage rate resets between 2010 and 2013 (below). It seems that while several industry observers worry about negative equity and unemployment driving foreclosures, a couple of experts point out that interest rates on mortgages remain a cause for concern.
Ishmael provides, via SNL Financial, the most leading-edge version of what is possibly the world’s most popular finance-related graphic:
(Ishmael) – “Here’s more from SNL, who spoke to Credit Suisse about their most recent conclusions (including, as the chart shows, that more than $1,100bn of US ARM loans – adjustable rate mortgages – will either reset or recast between 2010 and 2012).
Though option ARMs have grabbed some headlines recently, they are not the primary concern for analysts such as [Chandrajit] Bhattacharya [head of non-agency RMBS and ABS strategy at Credit Suisse] and Greg McBride, senior financial analyst at Bankrate.com. McBride told SNL he is more concerned about ARMs that do not even show up on Credit Suisse’s chart.
Borrowers who already have seen their ARMs reset might be sitting on their hands and not refinancing into fixed-rate products, McBride said. Because mortgage rates have been so low recently, resets can actually lower, not raise, monthly payments. When that happens, borrowers might feel little urge to refinance into a fixed-rate product that would cost more per month. Alternatively, ARM borrowers might simply struggle to qualify for a refinance because of low or negative equity.
Bhattacharya said the ARM reset chart does not portend the all-out doom some housing bears infer. For one, option ARMs are concentrated in just a few states. A Fitch Ratings study from Sept. 8, 2009, reported that three-quarters of all option ARMs were in California, Florida, Nevada and Arizona.
McBride is worried about the prime ARMs posted in the Credit Suisse chart. The chart shows $10 billion to $15 billion resetting each month. If a substantial number of those borrowers do not refinance and interest rates shoot up, McBride said he could see $50 billion worth of prime ARMs facing payment shocks each month by 2011.”