The biggest bubble of adjustable rate mortgages comes due for adjustment in 2011. As I talk to people they often breathe a sigh of relief knowing that the end is near.
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I wish I could share their relief but I don’t believe that 2011 will be the end of it.
In order for the bubble to dissipate all the adjustable rate mortgages need to be paid-in-full, modified, refinanced, short sold, or foreclosed. While we will see a number of foreclosures and short sales, the vast majority of these borrowers cannot sell or refinance their adjustable rate mortgages.
Why? There are two major reasons.
First, their property values have declined to the point where they cannot refinance. Even if they can qualify for a new mortgage, the lack of equity and lower appraised values will prevent them from being able to refinance.
Second, because of the tightened lending standards many borrowers who are making their mortgage payment on-time cannot refinance. Many of these current mortgages were given to self-employed individuals and were done as stated-income loans. So while, they’re paying on-time, they cannot refinance.
This will cause the bubble to go into 2012 and later years. Granted, it will get smaller with each passing year, but the bubble will take years to dissipate completely.
If lenders want to work on reducing the size of the bubble quickly, they need to consider allowing borrowers with stated income loans and who are paying on-time to refinance into fixed rate loans. It could easily be set up like a VA interest Rate Reduction Loan (IRRL). People with multiple mortgages could combine them into one new loan and opt to pay private mortgage insurance given the higher Loan to Value (LTV). LTVs over 80 percent would be required to set up an escrow account for their taxes and insurance as well.
Where we go from here is in the hands of the lenders.
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