Analyst: ARM Resets Impact Lessened Going Forward

According to Aite Group senior analyst John Jay, the impact of adjustable-rate mortgages resetting at higher rates is now expected to be less severe than feared. Low interest rates, loan modification efforts and the fact that many borrowers have already defaulted, mean less rate hikes and fewer defaults, said Jay. "The fact that the number of exotic, adjustable-rate mortgages scheduled to reset to higher rates is shrinking should not be taken as a sign that this sector is 'OK.' It is only manageable from here because so much of the sector already fell into default and required loan modifications or some other type of lender remediation," he added. "If such products are to be offered ever again in the future, lenders are advised to underwrite the loans to the fully-indexed and maximum loan sizes. In addition, the creditworthiness of the borrower must be able to withstand economic scenarios. After all, the current remaining nontraditional ARMs were underwritten to what was assumed to be a real estate market that would never decline."