Most ARM borrowers will see a reduction in their mortgage payments in spite of rising interest rates, new data has suggested.
The September Mortgage Monitor report from Lender Processing Services has found that 63% of outstanding hybrid ARMs have already reset from their initial interest rates. Of those that have not yet reset, around 75% were from post-crisis years, when the majority of loans had credit scores of 760 and above. Pre-crisis borrowers, who LPS Senior Vice President Herb Blecher said would be most vulnerable to upward resets in monthly mortgage payments, were likely to see their repayments fall.
"With interest rate indices near historically low levels, we found that they would need to rise on the order of 300 basis points for most of these pre-crisis hybrid rates to increase. Most of these borrowers are more likely to be looking forward to a reduction in payments, rather than an increase (though periodic rate floors may limit these decreases)," Blecher said.
But Blecher said rising rates had negatively impacted prepayment speeds, which have fallen to their lowest levels since May 2011.
"LPS saw prepayments decline across all investor categories, with GNMA and GSE segments seeing the steepest drops – both down over 50% since rates began their climb back in May. HARP-eligible loans – GSE loans with loan-to-value ratios of 100% or greater – have dropped sharply as well, declining over 40%," Blecher said.
Overall origination also fell in September, down 9% from the previous month and nearly 18% year-to-date.