NEW YORK— Tens of thousands of homeowners who secured low-interest adjustable-rate mortgages during the pandemic could face substantial increases in their monthly payments beginning in 2027, with some borrowers confronting increases exceeding $1,000 per month, according to an analysis by 24/7 Wall St.
Theanalysiscited data from Intercontinental Exchange (ICE) showing approximately 74,000 households that obtained seven-year adjustable-rate mortgages (ARMs) in 2020 are approaching their first interest rate resets.
According to ICE’s October Mortgage Monitor, the median borrower in that group could see monthly mortgage payments increase by $1,066, or 36%, translating into nearly $12,800 in additional annual housing expenses.
The increases come as homeowners are already contending with higher property taxes, insurance premiums and other housing-related costs.
Limited Impact Across Broader Mortgage Market
While the potential payment increases are significant for affected borrowers, the overall exposure remains relatively limited, according to the analysis.
ICE estimates approximately 180,000 adjustable-rate mortgages will undergo their first reset in 2027, compared with approximately 3.1 million active ARMs nationwide.
Adjustable-rate mortgages account for just 5.6% of outstanding mortgages, and most existing ARM borrowers face considerably smaller payment adjustments.
For example, ICE estimates a 25-basis-point interest rate increase would add approximately $14 to the average monthly payment for existing ARM borrowers, the report stated.
The greatest financial pressure is concentrated among homeowners who obtained mortgages during 2020, when borrowing rates were near historic lows, according to the analysis.
Refinancing Offers Little Relief
According to 24/7 Wall St., homeowners approaching their first ARM reset have limited options for avoiding higher payments.
Refinancing into a fixed-rate mortgage could provide payment stability, but current borrowing costs are substantially higher than those available during the pandemic.
The analysis noted that the 10-year Treasury yield reached 5.22% on Oct. 8, an increase of 42 basis points over the previous month and near its one-year high of 5.31%.
In August, Rocket Companies President and CFO Brian Brown said the average 30-year fixed mortgage rate had reached 6.8%, its highest level in more than a year.
For borrowers who obtained mortgages in 2020, refinancing at current rates could effectively lock in much of the anticipated payment increase.
Another Option
Selling their homes represents another option, particularly for borrowers who have accumulated substantial equity.
The S&P CoreLogic Case-Shiller national home price index has increased 1.9% over the past year and reached the upper end of its two-year range, according to the analysis.
That appreciation could provide some homeowners with financial flexibility, although selling would also require them to find replacement housing in a higher-rate environment.
Mortgage Servicers Face Challenges, Opportunities
The approaching ARM resets could create additional refinancing and home equity lending opportunities for major mortgage companies, although the analysis suggests investors remain skeptical about the potential benefits, 247WallStreet.com reported.
Rocket Companies, which maintains a $2 trillion mortgage servicing portfolio, reported that existing servicing customers accounted for 57% of its refinance closings during the most recent quarter.
Rocket is also the nation’s largest home equity lender, positioning it to serve borrowers seeking access to accumulated home equity without refinancing their existing first mortgages, the report said.
PennyMac Financial Services, meanwhile, reported improvements in its ability to retain refinancing customers.
Its government refinance recapture rate increased to 59%, while its conventional refinance recapture rate reached 29%.
Mortgage Insurers Report Rising Delinquencies
The approaching payment increases also raise questions about potential mortgage delinquencies and losses for private mortgage insurers, 247WallStreet reported.
According to the analysis, two major mortgage insurance companies have already reported deterioration in certain credit performance measures.
At MGIC Investment Corp., the primary delinquency rate increased to 2.37%, compared with 2.21% a year earlier. MGIC CFO Nathan Colson characterized the increase as “a broad-based credit normalization.”
Essent Group reported a larger increase in defaults, with its default rate climbing to 2.53% from 2.12%.
The company also reported:
- Claim severity increased to 85% from 67%.
- Its provision for losses nearly tripled to $49 million.
- Shares have declined 2.2% year to date, compared with a 4.54% decline for MGIC.
Despite the deterioration in credit measures, both insurers have experienced substantially smaller stock price declines than major mortgage lenders.
Essent CEO Mark Casale said the equity accumulated in insured properties “should mitigate ultimate claims.”
The analysis noted that continued home price appreciation supports that assessment, although higher mortgage payments could test borrowers’ ability to remain current on their loans.
More Adjustable-Rate Mortgages Being Originated
The analysis also warned that a new generation of adjustable-rate borrowers could face similar challenges in the years ahead.
ARMs now account for more than 11% of mortgage rate locks, their highest share in nearly four years, according to the report.
Unlike borrowers who obtained adjustable-rate mortgages in 2020, however, today’s borrowers are entering those loans at substantially higher initial interest rates.
That difference could influence the size of future payment adjustments, depending on how interest rates change before those mortgages reset.
What Happens Next?
According to 24/7 Wall St., the approximately 74,000 borrowers facing seven-year ARM resets in 2027 will provide an early indication of how homeowners respond to substantial payment increases after years of historically low borrowing costs.
The analysis identified several developments worth monitoring, including whether mortgage delinquencies accelerate beyond normal seasonal patterns and whether private mortgage insurers experience additional increases in claim severity.
2 Responses
Look with our own industry. SECU and Civic have mortgage delinquency that is downright frightening – all because they doubled down originating ARMs in a low fixed rate environment. Already has and will continue to come home to roost. They put members in peril in a blatant exercise in financial malpractice.
Yes, it’s a very interesting and surprisingly untold story. We’ve seen a long-standing business model by State Employees as a portfolio lender highly concentrated in mortgages, with an ARM origination mix of 60-70+% no matter what rate environment. The rate resets on their 2019-2022 vintages have and will continue to be a very big problem for them. Interesting model – don’t originate and sell, even servicing retained, because you want control over the loan during the preventable hardship you more or less caused for the member in the first place. They’ll hand out mods like candy and work through it for the next few years, so the CU will be fine, but hard to imagine how they see the virtue in setting their members up for this kind of financial stress and trauma. You can’t lend without some kind of risk, and avoiding interest rate risk, much of which can be mitigated, comes at a high cost to members on the credit risk side.
As for Civic, similar story, in large part given the LGFCU and SECU prior relationship, but its going to be a different outcome. Their delinquency and losses are a large driver of their financial peril and the severe and rapid destruction of member capital. They’re on record saying this was planned, but the math doesn’t work and they are quickly on their way to a <5% PCA with no apparent path to recovery. Can’t think of any precedent of a large CU failing like this in a relatively good economic environment.