S&P: Low Rates Don't Raise ARM Pool Risk

Loan pools backed by adjustable-rate mortgages originated in recent years have no additional risk related to the low interest rates at which they were originated, according to Standard & Poor's Ratings Services.According to an S&P commentary titled "Low Interest Rates Pose No Eminent Risk in U.S. Adjustable-Rate Mortgages," residential mortgage origination volume topped $2.4 trillion in 2002, of which ARMs represented about 17%. Rising interest rates can cause defaults if payment increases are greater than borrowers' income growth. But S&P said when forecast income changes are used in the analysis of debt-to-income ratios under rising interest rates, the risk appears to be "negligible" under the various forecasts. "Even under unlikely scenarios, borrowers' debt-to-income ratios remain within standard underwriting guidelines," said Francis Parisi, a director in S&P's Structured Finance group and the author of the report. ".... Given the forecasts, the correlation between change in income and change in rates, and the seven-year average life of a typical mortgage, today's ARMs should not result in higher-than-average default rates should interest rates rise in the future."