Concerns of a new wave of problem loans caused by unsustainable rate resets on adjustable-rate mortgages (ARMs) are largely unfounded, according to Lender Processing Services (LPS).
LPS conducted an in-depth analysis of the outstanding hybrid ARM population and found that the majority—63 percent—have already reset from their initial rates.
Of the remaining 37 percent that have yet to reset, three-fourths were originated in post-crisis years when lending criteria was tighter and most new loans went to borrowers with credit scores of 760 or above—an attribute that LPSsays suggests they are less likely to default in any type of scenario.
And even among those ARM loans with looming rate resets that originated during the bubble years—when underwriting criteria weren’t nearly as strict—interest rates would need to rise a full 3 percent, or 300 basis points, for hybrid rates to increase, according to LPS.
In fact, the company reveals in its latest Mortgage Monitorreport that most of these borrowers will likely see their rates and their monthly mortgage payments decrease, not increase, when their loans reset.
LPS’ Mortgage Monitor also looked at residential real estate transactions through August. Home prices were up 9 percent year-over-year, by LPS’ assessment. However, at just 0.4 percent month-over-month growth, home price appreciation is beginning to show signs of seasonal slowing, the company says. Still, the pace of home price appreciation in 2013 is greater than it was in 2012.
LPS reports year-to-date through August, home sales remain at their highest levels since 2007. Distressed sales—including REO and short sales—continue to make up a smaller percentage of overall transactions. Annually through August, distressed sales comprise 19 percent of total home sales. That’s down from 20 percent for all of 2012 and 33 percent in 2011.
Among distressed sales, short-sale volumes accounted for 46 percent of distressed transactions in August—a declining share, but still historically high, LPS says. Short sales as a percentage of distressed sales hit a high point of about 58 percent in late 2012, according to LPS’ report.
New problem loans—those that were seriously delinquent as of September but current just six months prior—are close to pre-crisis levels at 0.85 percent, LPS says. New problem loan rates remain higher in judicial states (1.0 percent) than in non-judicial states (0.8 percent).
At the same time, first-time foreclosure starts are at their lowest level in at least five and a half years. LPS’ data show the nation’s total foreclosure inventory stood at 2.63 percent as of September, or 1,327,608 loans.