The United States could be facing another mortgage crisis, as a number of option-Adjustable Rate Mortgages (ARMs) approach the 10-year mark.
Josh Chisari, the portfolio manager of UBS’s American equities team, said that these could cause major problems to the banking sector, as home borrowers prepare to default.
“Option ARM mortgages are coming to the end of the five- to ten-year term from when the paper was written,” said Mr. Chisari. “These loans are a small percentage of the mortgage market, but it is a very big market so there is a significant dollar value.”
The option ARMs allow home borrowers to refinance and invest the interest of their mortgages into the capital, making an affordable payment in the short-term loan but much higher in the longer term. Without large deposit requirements, many borrowers follow this trend during the property boom.
Other US bank managers agree that there is a problem, but said it is factored into market valuations.
Sebastian Radcliffe, manager of the Jupiter North American Income fund, said that “the amount of outstanding mortgage debt is huge, but no-one is under any doubt that these loans are heavily impaired. A lot of these expected losses have been written off over the past two years.”
Jonathan Armitage, head of US equities at Schroders, said that the problems have been overblown. “Mortgage rates are very low so the adjustment to a fixed rate from a teaser rate may not be as bad as feared,” he added.