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Lending

Hybrid ARMs remain intact despite rising interest rates

LPS: Rates need to rise 3% for hybrid rates to increase

home&Money

The majority of outstanding hybrid adjustable-rate mortgages are unlikely to increase, which bodes well for these products given that interest rates are expected to rise for the foreseeable future.

Of outstanding hybrid ARMs, 63% have already reset from initial interest rates. Within the loans that have no reset, 75% were originated in post-crisis years, when more than 60% of loans had credit scores of 760 and above, according Lender Processing Services monthly mortgage monitor.

"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 LPS vice president Herb Blecher.

The remainder of ARMs originated during the bubble years – when underwriting criteria weren’t nearly as strict – would need to see interest rates rise a full 3%, or 3000 basis points, for hybrid rates to increase, explained an LPS spokesperson.

“That said, while upward pressure on interest rates has eased in recent weeks, the data through September shows that the increases seen since rates began climbing in May have definitely taken their toll,” he stated.

For instance, prepayments have plummeted since May, and across all investor categories, such as government-sponsored enterprise prepayments falling 50%.

Additionally, Home Affordable Refinance Program activity has come down sharply, dropping 43% since May, while refinancing of loans with loan-to-value ratios of 120% are down 41%.

Given that refis are the engine behind both prepayments and originations, overall originations are also down, dropping more than 9% from August to September and nearly 18% year-to-date, Cohen pointed out.

Meanwhile, residential real estate transactions through August remain at the highest levels since 2007.

Distressed sales of both real estate-owned properties and short sales continue to make up a small amount of overall transactions, with short-sale volumes accounting for 46% of distressed transactions — while a declining share, it’s still historically high.

Home price appreciation is beginning to show signs of seasonal slowing, inching up only 0.4% month-over-month. However, the pace of HPA in 2013 is still grater than it was in 2012, LPS concluded.

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