ARMs

As long as interest rates remain as low as they are, a number of fears that get expressed frequently are not really major concerns. The first of these is the concern related to resets on Adjustable Rate Mortgages. Yes, these often came with teaser rates that were significantly below market at the time and many of them are going to reset in the near future. However, if the current reset rate is as low as the teaser rate was, what exactly is the impact?

Now, if the ARM had negative equity provisions or other exotic factors, yes there might be an impact. However, one would like to think that financial institutions, who have mortgages that are current, would be smart enough not to force them into delinquency at no benefit to anyone.

Extending current terms or agreeing to modify these mortgages would be easy enough and clearly more profitable in both the short term and the long term then imposing terms that simply create additional foreclosures, unless, the market goes up significantly.

One of the things we are going to see in the next few years is a tremendous explosion in asset valuations held by banks. It doesn't require that real estate recover to the levels it had at the peak, merely that it increase from the lows. Many of these assets were written off as toxic with effectively no residual value to the banks. However, as the real estate market stabilizes and these assets increase in value, we will see banks start to look healthier.