The September Mortgage Monitor report released by Lender Processing Services Inc. (LPS) found that the majority (63 percent) of outstanding hybrid adjustable-rate mortgages (ARMs) have already reset from their initial interest rates. Within the loans that have not reset, approximately 75 percent were originated in post-crisis years, when over 60 percent of loans had credit scores of 760 and above. As LPS senior vice president Herb Blecher explained, these numbers bode well for the performance of ARMs as mortgage interest rates are expected to rise in the future.
"Only 36 percent of outstanding hybrid ARMs are in a pre-reset status, and the vast majority of those are coming from newer vintages where loan quality has been pristine," said Blecher. "That being the case, LPS looked closely at the remaining segment of pre-reset loans originated during the bubble years where underwriting criteria was not nearly as strict as post-crisis criteria -- since it is these borrowers who could arguably be most negatively impacted by upward resets in their monthly mortgage payments -- and sees little cause for concern. 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).
"However, rising rates have had a significant impact on prepayment speeds, which are now at 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 percent since rates began their climb back in May. HARP-eligible loans - GSE loans with loan-to-value ratios of 100 percent or greater - have dropped sharply as well, declining over 40 percent. Finally, since interest rates drive refinances and refinances have been driving prepayments and originations, overall origination activity has declined as well, down more than nine percent from last month and nearly 18 percent year-to-date."
Tapping data once again from the LPS Home Price Index, this month's Mortgage Monitor looked at residential real estate transactions through August and found that year-to-date home sales remain at their highest levels since 2007. Distressed sales (both REO and short sales) continue to make up a smaller percentage of overall transactions. Of these, short-sale volumes accounted for 46 percent of distressed transactions in August -- a declining share, but still historically high. While up 9 percent year-over-year, at just 0.4 percent month-over-month growth, home price appreciation is beginning to show signs of seasonal slowing. However, the pace of home price appreciation in 2013 is still greater than it was in 2012.
As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:
►Total U.S. loan delinquency rate: 6.46 percent
►Month-over-month change in delinquency rate: 4.23 percent
►Total U.S. foreclosure presale inventory rate: 2.63 percent
►Month-over-month change in foreclosure presale inventory rate: -1.29 percent
►States with highest percentage of non-current loans: FL, MS, NJ, NY, ME
►States with the lowest percentage of non-current loans: WY, MT, AK, SD, ND