$1.5 Trillion Worth of 3 & 5 Year ARMs Resetting in 2007

I've written about this before.  It is a scary scenario.  According to the Mortgage Bankers Association, about $1.5 trillion in adjustable mortgages are due to have their rates reset this year. Now that it looks like the Federal Reserve will not lower interest rates anytime soon, many already cash-strapped homeowners/borrowers will soon see the 3 & 5 year fixed intermediate ARM loans (they took out during the real estate boom years of 2002-2005) adjust upward in rate. For many, there will be few options available. 

Although increased foreclosures and defaults are already being reported in the press, so far most local markets like ours in Marin and Sonoma have been reabsorbing foreclosed homes without too much material effect. However, 2007 will be the first real year that intermediate ARM resets will be taking place and with values down and rates up, leaving many borrowers with limited options.

Although lenders are often wary of short sales (allowing a borrower to pay off a loan for less than the outstanding amount due), especially where the loan(s) are current, it may be that a forward looking game plan necessitates early concessions (e.g., permitting short sales on non-default loans where the loan payments amount to the vast majority of the take home pay of the borrower).  Often, borrowers with reset rates also fall behind on property taxes and thus cannot sell their home for a price high enough to pay off the lender, real estate broker, and property taxes. 

Moreover, listing agents need to pay attention to the listings taken (e.g., make sure that clients are going to be able to pay off all their debt on the sale of the home--after all, agents are last in line to get paid.