According to Lombard Odier another crash is around the corner as Adjustable Rate Mortgages – cheap fixed loans that revert to huge variable rates – become too much for many US households.
The Swiss private bank says almost £462bn ($750bn) of resets – where the rate reverts to its high default – are likely over the next two years, concentrated this time in the ‘Option ARM’ sector. Option ARMs are adjustable loans that required little or no documentation, where borrowers had the option of making monthly payments with the interest rate negatively amortising on the mortgage.
Lombard Odier chief investment officer Paul Marson says the lull in ARM resets has hit its low point and the surge of second wave resets are set for 2010 as many of the loans sold after 2005 finally revert to the higher rate. This could lead to a second spike in repossessions as homeowners struggle to keep up with the inflated rate.
Marson says: ”At the peak in 2006, a record 50 per cent of total mortgage applications were for ARMs, which usually had a very low teaser rates would generally reset five years forward.
“There are almost £120bn ($200bn) of Option ARMs to reset in the years ahead and, given that delinquency rates are already running near 40 per cent, the scale of this reset time-bomb is equal in magnitude to that of sub-prime in 2007 and 2008. Whoever said the credit crisis was over is severely misguided.”