High-Risk Reset Trends

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A couple of readers responded to my prior article about the study on local mortgage resets to ask how the projected 2008 resets stacked up against those of 2007. The study's primary author, Joseph Galascione, consulted the archives for me and pulled out some stats on the number of high-risk resets expected each month as compared to the same month in 2007: January and February of 2008 looked pretty much unchanged from a year prior, March increased by 2 percent, April by 5 percent, May by 3 percent, and June by 5.5 percent.

All in all, first-half 2008 high-risk resets will run higher than a year earlier, but only very mildly, with the increase skewed towards the later months. According to the foreclosure study's proposed timeline, then, we can expect reset-driven foreclosures to be slightly higher in late 2008 than they were in late 2007.

I emphasize the use of the word "reset-driven" in the prior paragraph. These numbers only concern potential foreclosures that could result from the resets of high-risk loans, as defined in the prior article. Not all seemingly high-risk loans will result in foreclosures, of course, but by the same token not all foreclosures will be the result of resetting high-risk loans. So there is not a precise mapping between the number of high-risk resets discussed here and the total number of foreclosures we will see down the road. Still, the study's projections at least give us an idea of the directional trend that may be in store.

Galascione also offered up some thoughts on what the future might hold in terms of high-risk loans that are subject to reset, saying, "By the end of 2006, banks had stopped writing these loans. So the two-year resets will show up in the second half of 2008 and the rest will be five-year resets from 2004 and 2005." He believes that the first-half 2008 numbers "may identify the top or a shelf before the top," but he is withholding that judgement at least until he can determine the reset figures for late 2008.

Fascinating stuff, and I will keep readers posted on Mr. Galascione's future exploits.

In the meantime, for more on the topic of potential foreclosures, I highly recommend Kelly Bennett's latest piece on the changing nature of the decision to enter foreclosure. Two years ago on these very pages I suggested that the combination of low-down-payment loans and declining home prices would cause many people to walk away from their mortgages if times got even slightly tough. Kelly's article offers in interesting look at how this eventuality has played out and how it continues to evolve.

-- RICH TOSCANO