Checking the Status of ARM’s

One lingering question in the discussion about when the housing bubble will fully deflate is the status of numerous adjustable-rate mortgages or ARM’s as they are commonly referred to yet to reset.

The magnitude of defaults in this subset of loans is expected to weigh heavily on the timing of the market bottom, which may be years away.

How many of these loans will default is anyone guess, but one property that seems like an apt case study of the problem, looks like this – a house in the LA area is now on the market for $875,000. The current owner bought it around the market home price peak in June 2006 for $898,000. The selling agent said the owners had yet to miss a mortgage payment, but were soon facing a rate reset that they could not afford. The house has been on the market seven months.

If no one steps forward to buy the house at a price high enough to bail out the owners, default and foreclosure are the next steps. Since they haven’t missed payments yet, the foreclosure process won’t conclude until sometime next year. If there are many more cases like this one, we’ll see more foreclosures piling up in the inventory next year.

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