Beware of Exploding Mortgages - NYT 6-10-07

Beware of Exploding Mortgages

By Gretchen Morgenson Published: June 10, 2007

A tsunami of interest rate increases on adjustable-rate mortgages is coming, meaning that the worst of the subprime lending fiasco is far from over.

During the next 5 years more than $1 Trillion in ARM's will reset. From June to October of 2007 10% of that amount or $1oo Billion will reset and all of it is in the sub prime category! Many resets are based upon LIBOR + 6 Points resulting in a new rate of 11% more than 4% higher than current conventional home loan rates. Five years ago Fannie Mae estimated that 50% of sub prime borrowers could have qualified for a prime rate loan.

Last year, there were 1.2 million foreclosures in the U.S. (realtytrac)

Morgan Stanley reported that the delinquency rate for the ABX-HE index [markit] of 20 loan pools originated in the second half of 2005 and 2006 had climbed from 4% to 8% of the loans outstanding with payments 60 days or more past due, respectively. The highest credit risk tranche, ABX-HE-BBB-07-1, has lost about one third of its value. Many hedge funds have shorted either the BBB or BBB- tranche and made profits of more than 90% given leverage. The index is currently at 65.45.

Interest Rate Chart