There are plenty of reasons for loans to go bad, but the ARM reset/recast is not really as big a factor on the second wave as originally thought.
Resets (at least right now) are not really a major driver. Negative equity and job/income are the real drivers.
There are some loan categories in that chart that are/were disasatrous. Option ARM loans (those that allow negative amortization) are the worst and are toast. Most of these have recast and many are likely to burn up.
The rest of the loans, many of which were 5/1 I/O ARMS and similar are not nearly as bad.
I know this because I had one on my rental property. I refinanced into a 30-year fixed under 5%, but if I still had that loan today, the rate would be 3.25%.
Here are the numbers for a 5/1 I/O loan, originating in 2005 and recasting in 2010.
I am using actual rates that my loan would have had, but using round numbers for loan amounts:
Original loan: 5/1 I/O ARM
Balance: 400K
5.625% interest only fixed for 5 years
Index : 12-month LIBOR
Margin: 2.25%
interest-only payment : $1875 per month
monthly payment (inlcuding taxes and insurance) ~ 2375
2010 reset/recast
(assuming no optional principal payments made)
Balance: 400K
ARM rate resets to LIBOR (less than 1%) + 2.25%
Rate: 3.25%
Remaining Term: 25 years
Current payment (principal plus interest) :
1949 per month.
total monthly nut (including taxes and insurance) ~ 2450
A whopping $75 increase in payment 5 years later. This amounts to about a 3% increase in payment
If the property tax value dropped by at least 15% on appeal or reassessment, their total monthly outlay would be less than their original payment.
