There's a ticking time bomb in the mortgage market. One-quarter of all outstanding home mortgages are adjustable - and about half of those are about to feel the pain of rising interest rates, warns Douglas Duncan, chief economist of the Mortgage Bankers Association.
The other half, judges Duncan, are outside of the 3- to 5-year danger zone when most defaults happen.
Adjustable-rate mortgages are tied to shorter-term rates, which have moved up more than long-term rates in recent months. They also have a period of fixed payments that vary depending on the mortgage. For example, the most common adjustable mortgages are "5/1" ARMs, which are fixed for five years and adjust every year after that.
Increasing numbers of homeowners chose ARMs because their lower initial rate allowed the borrower to afford more house for the money as home prices skyrocketed in the past few years. Now however, as interest rates rise, borrowers are getting stuck trying to pay for houses that are more expensive than they can really afford.
Warns Duncan, "As long as the economy continues to grow, we expect the vast majority will be able to meet their higher payment. But if the economy takes a nosedive, there will be job loss. Or if an economic shock led to a dramatic rise in interest rates, certainly that could change the trend."
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Mortgage delinquencies are already on the rise. The MBA reported Thursday that the number of borrowers delinquent on their mortgages increased in the fourth quarter of 2005 to 4.7% from 4.38% a year ago. Nearly 1% of home loans are in the foreclosure process, according to the MBA.
"We have been expecting an up-tick in delinquencies due to a number of factors: the seasoning of the loan portfolio, the increased shares of the portfolio that are ARMs and subprime mortgages, as well as the elevated level of energy prices and rising interest rates," said Duncan.
Editor's note:
Sir John Templeton warns of market, housing crash – Read More Here
Alan Greenspan Warns of Housing Bust, Worse....
Warren Buffett just sold his house . . . find out why - Click Here
