MORTGAGE refinancing in the United States is increasing as record numbers of homeowners dump their adjustable-rate mortgages for the security of a fixed loan, Bloomberg News reported.
The amount of refinanced home loans will reach US$321 billion by the end of June, the most in a year, according to estimates from Washington-based Fannie Mae, the largest buyer of mortgages. Nine out of 10 of those borrowers will choose a fixed rate, Fannie Mae said.
Property owners are abandoning adjustable-rate mortgages, or ARMs, to ward off the prospect of higher payments. About 6 million US homeowners, or 59 percent of the ARM market, have Libor-indexed loans, according to data compiled by Santa Ana, California-based First American CoreLogic Inc.
The 12-month United Kingdom benchmark Libor rate rose more than two-thirds of a percentage point in the past month, according to Bankrate Inc in North Palm Beach, Florida.
"Any ability people might have had to convince themselves that adjustable-rate mortgages don't have risk has completely evaporated," said Edward Glaeser, a professor of economics at Harvard University in Cambridge, Massachusetts, and editor of Quarterly Journal of Economics.
Almost all US subprime loans and 41 percent of prime adjustable loans are linked to Libor, or the London interbank offered rate, First American CoreLogic said.
Sleepless nights
Many Libor-indexed mortgages don't have the 2 percent cap on adjustments that are typical for Treasury-indexed loans, meaning homeowners could see their monthly payments double.
"Like a lot of people I've been awake some nights worrying about what the Libor is going to do," said Marc Sherman, 51, of Manhattan Beach, California, who has a US$440,000 adjustable loan linked to the UK benchmark rate that will reset next March. "I may be switching to a fixed-rate loan."
Homeowners are recoiling from adjustable loans after a surge in defaults led to last year's collapse in the US subprime market, Glaeser said.
Two-thirds of foreclosures were adjustable-rate mortgages in the fourth quarter, according to data compiled by the Mortgage Bankers Association in Washington. The switch to fixed rates may further constrain the housing market as owners stay in their homes, said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm in Pompton Plains, New Jersey.
"If you're stepping up to a higher interest rate and, on top of that, paying loan fees, it means you are making a commitment to stay put long enough to make those costs worth it," Gumbinger said.
About US$460 billion of adjustable-rate loans are scheduled to reset in the US this year, according to analysts at New York-based Citigroup Inc.