Mortgage Payment Reset: The Rumor and the Reality

In the United States, there are 7.7 million currently active adjustable-rate first mortgages that originated in 2004 and 2005, representing $1.888 trillion in debt. It has been suggested that mortgage payment "reset" - the point at which adjustable-rate mortgages (ARMs) convert from low teaser rates to higher rates - will create a new financial burden for which American homeowners are unprepared.

Dr. Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, has conducted a comprehensive study using extensive data and analytical resources to measure the losses mortgage payment reset may incur on the American economy.

The study finds that the most vulnerable segment of the population will be those who do not have substantial equity in their homes, but hold "risky" mortgages, such as ARMs with low initial rates, often with interest-only and negative-amortization features.

While individual families and firms that are involved with the riskiest loans may suffer, on a national basis the impact of mortgage payment reset will result in approximately $110 billion in losses over five years. This is a number that is equal to approximately one percent of annual mortgage lending and will not significantly impact the economy.

The states most susceptible to reset sensitivity are those with the highest percentage of risky loans where equity is currently high but vulnerable to cyclic downturn. These include:

• New York
• Hawaii
• Massachusetts
• Connecticut
• New Jersey

The states least susceptible to reset sensitivity are those with few risky loans where equity is relatively low, but prices are likely to be stable. These include:

• Tennessee
• Colorado
• Michigan
• Alabama
• Arkansas

About the Author
Dr. Christopher Cagan, director of research and analytics for First American Real Estate Solutions, has more than a decade of experience in the areas of market research and competitive strategy for the real estate and financial services sector. Since joining RES in 2002, he has developed several patent-pending mathematical and algorithmic inventions, built multiple analytical products, and written numerous technical papers, presentations and studies. Dr. Cagan earned his bachelor's, master's and doctorate degrees in mathematics from the University of California at Los Angeles.