Berson: Subprime 2/28 Reset Problems Growing

Nearly 20% of subprime borrowers with adjustable-rate 2/28 mortgages that reset this year are already facing problems in making their payments, and it is going to get worse, according to Fannie Mae economists.Data from First American LoanPerformance show that 18% of those borrowers are in trouble: 11% are delinquent, 4% are in default, and 3% are in foreclosure as of March 31. Fannie chief economist David Berson estimates that less than 25% of those borrowers have experienced a reset to the fully indexed rate and that the vast majority still benefit from the "teaser" rate. In comparison, the percentage of troubled subprime ARM loans that reset in 2006 is only 12% as of March 31. However, 76% of those borrowers who got into a 2/28 ARM in 2004 have already financed or sold their house. Mr. Berson said it will be harder for 2/28 borrowers to refinance this year because of tighter underwriting standards and higher interest rates. It will likely lead to higher delinquencies and defaults. "It is a disturbing trend," Mr. Berson said.