Loan reset threat looms till 2012

Homeowners nationwide with good credit but artificially low mortgage payments could be forced to pay more to the bank sometime within the next three years, according to Credit Suisse.

If low interest rates remain, some of these borrowers will be spared payment shock. But those with extremely low payments via deferral of interest/principal owed, will not.

While preparing a story about high-priced foreclosure resales selling slowly in Orange County, I asked Credit Suisse for the latest version of its chart on loan resets nationwide. (The chart has popped up on several Web sites in past months.)

To the right is the version updated last month (click on it for larger image). It shows resets increasing from here with peaks in 2010 and 2011/2012 in the range of $30 to $45 billion monthly. The chart also shows subprime resets are still going on, but decreasing in frequency over the rest of 2009. However, prime resets and resets on loans to people with decent credit scores but special circumstances (stated income) are heading straight up through early 2012.

Note that the chart uses both resets, when interest rates change, and recasts, when payments change. Resets and recasts often happen at once, but not always. Credit Suisse, an analyst told me, used resets in the chart for all loans except option adjustable-rate mortgages, when borrowers can choose a minimum payment that may be less than interest owed (option ARMs are in yellow on the chart… see how they are rising!). For option ARMs it used recasts, which can happen either when the loan amount expands to a maximum allowed — often 115% or 125% of original principal — or a set period, such as five years. (Read more on resets/recasts at Calculated Risk.)

Now here is a copy of the chart published in a February report. This chart goes back further in time. The older chart shows a big peak in 2010 — about $40 to $45 billion a month in loans around September/October 2010. The newer chart pushes that peak about one year into the future into late 2011/beginning 2012.

Some borrowers will hold on a little longer. Maybe the housing market will recover by 2012 and they can sell to avoid foreclosure.

But if any of these borrowers are deferring principal and interest owed, reaching say a maximum of 125% on a loan amount on 2005 to 2007 prices, then it is much less likely home prices will have rebounded enough to save them by 2011 or 2012.