A decade ago, the housing market was heading into the busiest years of the bubble. Ten years later, hundreds of thousands of homeowners are about to get a nasty surprise. As their loans turn 10 years old, they will see their monthly loan payments reset higher—in some cases more than double.
The trouble is coming for loans that had such features as adjustable rates and interest-only periods that let homeowners borrow more than they would have been able to afford via a typical fixed-rate loan. Subprime loans have typically been resetting after three years or five years; the more borrowers’ monthly payments went up, the more likely they were to fall behind on their loans.
A report from Fitch Ratings says this problem impends for more than 700,000 borrowers who took out prime jumbo loans—mortgages larger than what Fannie Mae (FNMA) and Freddie Mac (FMCC) allowed—and Alt-A loans, which went to borrowers whose credit scores placed them between prime and subprime. More subprime loans have already reset than the total number of affected prime jumbo and Alt-A loans, but payments for the newest batch will increase far more than they did for the subprime loans.