Home loan changes could ease nationwide ARM pain

Loan modifications could cushion the shock of roughly $347 billion in subprime adjustable-rate mortgages (ARMs) scheduled to reset in the next six months, according to New York-based Fitch Ratings.

Fitch’s relative optimism could be considered good news for a Fort Smith region not completely immune to national economic cycles — layoffs at Whirlpool, Rheem and slowdown in related sectors.

By way of explainer, subprime ARMs allowed people to get into homes with the possibility of increasing monthly mortgage payments if interest rates increased. The London Interbank Offering Rates (LIBOR) was the rate to which many ARMs were connected in the United States. LIBOR has seen a dramatic increase in recent weeks.

Here’s the bottom line, according to Fitch, on what might happen in the next few months:

• Of the outstanding $418 billion of subprime ARM loans, a total of 1.8 million loans, or $347 billion in outstanding principal balance, are on average approximately half a year away from either their initial or next rate reset date.

• At the recent LIBOR peak, these borrowers would have seen increases from their rate reset of 8.27 percent to 10.27 percent, which would cause their monthly payments to increase by an average of $331, or 19.3 percent.

• However, Fitch notes that these statistics reflect original loan terms, and that loan modifications have reduced the amount of mortgages at risk. “The pace and number of work-out plans have picked up noticeably in 2008,” according to an Oct. 29 report from Fitch.

• The majority of work-out plans have consisted of repayment plans and rate modifications. Few loans have had principal forgiven.

• If the loan workout level continues at the pace evidenced in 2008, then more than 1 million of the 1.8 million subprime borrowers should find some relief in the next six months.