NEW YORK (TheStreet) -- Rising interest rates may be hurting mortgage production volumes but concerns that they may spark a new wave of defaults among adjustable-rate mortgage borrowers are unfounded, according to a new report from Lender Processing Services.
The interest rate for adjustable-rate mortgages (ARM) is reset periodically in relation to an index. These loans start with a lower monthly mortgage payment than a fixed-rate loan, but rates can go up as interest rates rise.
Interest rates have been steady and low through most of the crisis, but with the uptick since May, there have been concerns that borrowers with adjustable-rate mortgages may be hit by an upward reset in mortgage payments.
But LPS says there isn't much cause for concern. For one, more than 60% of outstanding hybrid ARMs have already been reset from their initial rates.Of the remaining that are yet to reset, 75% were originated post-crisis, when loan quality has generally been pristine. More than 60% of the ARMs originated after 2010 has been to borrowers with credit scores greater than 760, so the likelihood of default is low. The remainder of the ARMs yet to reset were originated during bubble years when credit was loose. Arguably, these borrowers would be negatively impacted by an upward reset of monthly mortgage payments. But with interest rate indices still low, the indices would need to rise 300 basis points for most of the pre-crisis hybrid rates to rise. In fact, "Most of these borrowers are more likely to be looking forward to a reduction in payments, rather than an increase," says Herb Blecher, senior vice president at LPS. Rising rates have however definitely taken a toll on refinancing activity, the report shows. Overall origination volumes were down more than 9% from the last month and have declined 18% year-to-date. -- Written by Shanthi Bharatwaj New York. >Contact by Email. Follow @shavenk
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV