Borrowers Defaulting on Subprime ARMs Before Much-Feared Resets Even Occur
- Feb 21, 2008
Arlington, Va.–Although analysts feared high subprime loan resets would bring payments to unrealistic levels and increase foreclosures, many borrowers are defaulting before their rates reset, CNNMoney.com reports.Defaults for subprime loans given in 2007, which are still due for a reset, rose to 11.2 percent n November–twice the rate of 2006 subprime loan defaults 10 months after issuance, according to Michael Youngblood, an analyst at Arlington, Va.-based financial firm Friedman, Billings Ramsey.The relaxed lending rules of recent years could be to blame. Borrowers were given adjustable-rate mortgages they could barely afford even with the low initial rates. After a few years, those rates rise three percentage points or more–and keep rising every six months to a year.In the past two years, more than 40 percent of subprime borrowers were given loans without having to provide much proof of their ability to pay them back, such as income or assets; many also got into homes using low- or no-money-down payment programs, which gave them no home equity.To make matters worse, many homeowners who did have equity drew money from their home during the housing boom as equity rose to pay bills, including their mortgage, which helped reduce defaults. But, when prices began to fall in 2006, they had less equity–and less money to use to avoid a default.Nevertheless, lenders like Countrywide and Wells Fargo made money off of subprime mortgages because they were able to quickly securitize and sell the loans, which promised high yields. And, as lender finances dried up due to lower mortgage rates and increased borrowing costs, lenders favored subprime loans because they provided a short-term monetary infusion. Subprime ARM pre-reset defaults are likely to increase as the rates for ARMS issued in 2006 and 2007 reset this year, according to CNNMoney.com. The Center for Responsible Lending forecast in 2006 that 2.2 million subprime ARM-financed homes would be foreclosed upon in the next two years due to resets.