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Sep 13, 2007

Interest rate resets spell trouble for home owners

NEW YORK - MANY less-creditworthy borrowers in the United States may lose their homes when interest rates on a flood of sub-prime adjustable-rate mortgages (ARMs) reset next month.

Even a recent sharp fall in mortgage interest rates, which could make the potential transition from an adjustable-rate to a fixed-rate mortgage less painful, will do little for those with the weakest credit because lenders have all but closed their books to the riskiest borrowers.

'The ARM resets will hit the sub-prime borrowers hard and, therefore, we have a huge amount of trouble ahead of us,' said Deutsche Bank senior economist Torsten Slok.

About US$75 billion (S$114 billion) in ARMs are going to reset in the fourth quarter, most of which will emerge next month. Of the loans resetting, around 75 per cent are sub-prime mortgages, Mr Slok said.

Sub-prime ARMs are going into foreclosure at an annual rate of 13 per cent, up sharply from 6 per cent two years ago. This rate will climb even higher over the coming two years as a result of the ARM resets ahead, he said.

'Most of these borrowers are going to have a really hard time trying to refinance and, with an expected payment shock of about 30 per cent higher on average, many will not be able to afford their homes,' he said.

Many of the ARMs resetting in the coming months were originated during the housing market's heyday in 2004 and 2005, when easy credit ran rampant.

The primary mortgage market, where loans originated, has changed significantly over the past few months.

A sharp rise in defaults in the sub-prime mortgage market, which caters to borrowers with poor credit histories, has caused lenders to tighten requirements, making it more difficult for those with weak credit to get a home loan.

Some market observers say that even borrowers with an unblemished credit history are having a more difficult time getting a loan.

Separately, the National Association of Realtors reduced its home sales forecast for the ninth time this year and said the housing slump will extend into next year.

Existing home sales will fall 8.6 per cent this year, exceeding the 6.8 per cent drop estimated a month ago.

New-home sales probably will decline 24 per cent on top of an 18 per cent fall last year, the trade group for 1.3 million real estate brokers said on Tuesday.

New home sales will not reach a bottom until the first quarter of next year, the organisation said. A month ago, it had said the low point would be at the end of this year.

REUTERS, BLOOMBERG NEWS