Letter Re: Adjustable Rate Mortgage Rate Resets

Dear JWR:
Back in 2009, and even as early as 2007, many dire predictions were made about the massive wave of Alt-A and Option ARMs that were to reset in 2010 and 2011. See this widely-cited chart. (First mentioned in SurvivalBlog in January of 2009, in a link to iTulip.) Like many of you, I braced for impact, and then, nothing.

What happened? This happened. Alt-As and ARMs have been resetting, but at very low rates, keeping the level of defaults lower than they would otherwise be.

I don’t believe this is a coincidence. The Federal Reserve has been keeping [downward] pressure on interest rates, possibly to get us over the hump into mid-2012, when the number of resets drop down to about 1/5th of today’s numbers.

The trouble is, they may not be able to extend and pretend much longer. The Federal Reserve may have to raise rates very soon in order to attract buyers. If they don’t hold out as long as possible, then all hell could break loose.

Looks like The Motley Fool concurs, in an article dated June 6th 2011: “As it turned out, interest rates have stayed low throughout the initial period of option-ARM resets, saving many borrowers from the possibility of much higher payments. But eventually, interest rates will go up. And while fixed-rate mortgage borrowers will enjoy their current fairly low rate as long as they own their homes, ARM borrowers may well find themselves in the uncomfortable position of trying to figure out whether to eat much higher interest charges, or refinance into a fixed-rate mortgage at a higher rate than the ones now available.”

The Fed is going to have to thread the needle. The next 12 months should prove interesting.

Thank You, – C.D.V.