Subprime ARM Mortgage Resets Ending Soon

Author: Rob K. Blake | Date: September 11, 2008 | Filed In: Mortgages

Subprime mortgage defaults, the underlying cause of the real estate, mortgage, and financial market implosion and the drag on our economy, will soon be finished. Subprime mortgages are ARMs which adjust and it’s this adjustment to a higher payment that triggers default and eventually foreclosure.

Subprime ARM Resets

There is some debate about whether payment hikes due to ARM resets is truly the cause of the subprime defaults, but I think you’d only have to ask yourself if your house payment jumped from $1200 to $2200 could you still make the payment to get a viable answer.

Subprime ARMs (Adjustable Rate Mortgages) have a lower, fixed rate period at the beginning of the loan, usually 12-24 months. It’s during this relatively affordable period most home owners can make the payment. But as time marches on they realize the reset of their subprime ARM is coming and seek to refinance. Another reality slap in face comes in the fact their home has dropped in value to the point they could not refinance if they wanted to.

Now desperation sets in…unable to refinance or sell due to deflating home values…all that’s left is to default since the payment jump makes the mortgage unaffordable.

ARM resets combined with dropping home values cause defaults…period!

Subprime ARM Resets Over Soon

The graph below shows not only the subprime ARM resets going forward, but all the other ARMs as well. The horizontal shows the number of months out moving forward from Jan 2007. The vertical shows mortgage volume in billions that recast that month. I added an arrow to show where we are today, September 2008.

You can clearly see subprime resets will drop to a nominal level next month and stay down from October on….hurray!

Ding, Dong the Witch Is Dead…the Wicked Witch Is Dead…

Now we all know there is a lag between the subprime ARM resets, mortgage default, and subsequent foreclosure. But at least this graph foretells the end is near for the subprime mortgage writedowns for the banks, investment firms, and Fannie Mae / Freddie Mac have to worry about.

Now the banks and investors around the world can see for themselves, the worst is over. The pipeline of doom is no longer getting refilled with Billions of dollars worth of subprime resets every month with no end in sight.

I’ll take any excuse to write something positive about the mortgage market and sometimes I’m reaching…I’ll admit it.

But this time, I’ve found some seriously sobering and authentic “good news”.

Finally!

Good Luck!

PS: Here’s a video of a Wall Street analyst who found the same good news on subprime mortgage resets…enjoy!