More than $47 billion in prime and Alt-A mortgages where borrowers are currently making interest-only payments are set to recast to fully-amortizing payments over the next year, according to Fitch Ratings.
“This recast exposes borrowers to an average payment increase of 15% and possibly higher if interest rates increase,” the company said in a release. “Over the next two years, a total of $80 billion of prime and Alt-A loans, and a total of $50 billion Subprime loans are due to recast.”
The news is worrisome considering the fact that 60-day delinquency rates have risen more than 250% in the 12 months following previous recasts for prime and Alt-A loans.
“While only 3.3% of prime loans are 60 or more days delinquent prior to recast, delinquencies the year after recast increased to 9.3%. Similar effects have been seen in Alt-A and subprime, with delinquencies increasing from 12% to 29% for Alt-A, and from 20% to 58% for subprime.”
Fitch said the current loan-to-value (LTV) ratios for prime and Alt-A loans are 118 percent, with 64 percent of borrowers underwater.
“Of those IO loans recasting in the next two years, 99% of prime, 94% of Alt-A, and 90% of subprime are ARM loans.”
Oh, and most of these borrowers qualified for the loans based on their ability to make the initial interest-only payments rather than the fully amortized principal and interest payments, often while simply stating income.