Mortgage market braces for ARM Resets

Participants and followers in the subprime mortgage market have temporarily stopped looking at the problems of the present and are today focusing on the horizon.

HSBC announced yesterday that it is bracing itself against $9 billion in adjustable-rate mortgages that are about to reset, while Barclays Capital predicts that homeowners will face an additional $26 billion of payments through the end of next year because of rising rates on their adjustable-rate mortgages.

HSBC earlier this year upped its loan-loss reserves by $1.7 billion to cover exposure to the subprime mortgage market. Analysts said that might not be enough.

Many homeowners will find themselves trapped in an adjustable-rate mortgage that they will be unable to refinance out of, given falling home prices and rising interest rates. Traditionally, most subprime borrowers refinance from one ARM into another around the reset date, when the fixed-rate portion of the loan expires and converts into an adjustable-rate loan.

The $26 billion figure cited by Barclays is tied to $820 billion of mortgages, 54% of which are in the hands of the riskiest borrowers, according to the authors of a research report released yesterday. It’s unlikely that the $26 billion will cause anything other than a blip on the overall economy, according to the report, since that amount represents 0.3% of overall consumer spending.