More Foreclosures Ahead for ARM Borrowers

March 19, 2007 — -- A new study released today finds that 1.1 million adjustable-rate mortgages will end in foreclosure over the next six to seven years as millions of homeowners face increases in their monthly mortgages payments, some more than doubling.

These mortgages -- both prime and subprime -- represent 13 percent of the adjustable-rate mortgages, also known as ARMs, issued from 2004 to 2006.

The 1.1 million only include foreclosures due to homeowners being unable to make higher monthly payments after their ARMs reset to higher interest rates. The study does not include foreclosures that could be the result of a homeowner being unable to make monthly payments due to a loss of job or an illness.

The study was conducted by Christopher Cagan, the director of research and analytics at First American CoreLogic.

Cagan studied 26 million loans, examining 8.37 million ARMs representing $2.2 trillion. Of those ARMs, he calculated that one in eight, or 1.1 million, will end in foreclosure. These 1.1 million mortgages represent $326 billion, and Cagan estimated that in the end, lenders will lose approximately $112 billion.

But the pain will not be evenly spread out among homeowners. The risk of foreclosure will be highest for those borrowers who obtained mortgage loans with teaser rates (extremely low initial rates, often interest-only, that quickly adjusted upwards) or subprime loans.

Cagan found that of the 1.1 million foreclosures, 32 percent will be teaser loans and 12 percent wille be subprime, while only 7 percent will prime ARM loans.

Despite the figures, however, Cagan was optimistic about the state of the housing industry and the economy overall. From his analysis, he concluded that while individual homeowners will suffer in the years ahead, nationwide the total losses will equal less than 1 percent of the total U.S. mortgages lending during that period. Cagan predicts that the impact to the national economy will be minimal.