There are several hurdles to clear to refinance out of an adjusting loan. Most of the resets start next year, and people are not going to refinance now because 1) they don’t know their loan will reset and/or 2) they hope interest rates are lower when their reset happens. The majority of loan resets will be in 2009 – 2010, if I understand correctly that Option ARMs have 5 year intro periods. So the biggest decline in housing prices would come in 2010, in my opinion, due to the high number of foreclosures from Option ARM borrowers who will default.
The problem for refinancing today could be several. With each passing year, the severity of each of these points that I make, gets bigger.
First, most people who qualified for the adjustable loans will no longer do so under the new lending guidelines which will come out this fall. Those guidelines are going to apply to all lenders, even the private ones. They will use Regulation X and Z to cover them all.
Second, to refinance, your home must appraise for the loan amount. If you are upside down, as many people who bought in 2004 or later could be, then you wouldn’t qualify for a refinance.
Third, if you were making a minimum payment on an Option ARM, your new loan balance could be 10-15% higher, and you may not qualify for a refinance based on the appraisal coming in too low and the payment too high for your income.
Fourth, to get back to the original low teaser payment, the Fed funds rate would need to be exactly what it was when you took out the loan back in 2001 – 2002. I think the Option ARM has a 5 year intro period, and didn’t become popular until 2003, so those borrowers won’t have a reset anyway until 2008. You’d need a Fed funds rate of 3% or so (?)
Fifth, I know of several people whose payment jumped, but they don’t want to refinance because they have a 6 month interest prepay penalty. That is a penalty of 6 months of their mortgage payment (if they are paying only the interest).
