Risk from new ARM called low

March 05, 2006|By ANNETTE HADDAD | ANNETTE HADDAD,LOS ANGELES TIMES

The potential for loan losses from new types of adjustable-rate mortgages issued since 2004 is relatively small, a recent study says.

Defaults on these loans could result in $110 billion in losses nationwide over the next five years, less than 1 percent of the total amount of home loans sold in 2004 and the first three quarters of 2005, said Christopher Cagan, an economist at First American Real Estate Solutions. First American is a division of title insurer First American Corp., which conducted the study.

"It's not great, [and] it doesn't break the economy," Cagan said. He said the loan losses would be spread over the next four to five years because not all distressed borrowers will find themselves in trouble at the same time.

Cagan's study calculated the risk based on homeowner equity associated with so-called hybrid ARMs.

These loans allow borrowers to make little or no down payments along with low monthly payments for an initial period. But after that period payments adjust upward based on prevailing interest rates.

He said the ARMs most at risk of default were those with low initial "teaser" rates of 2 percent or less and whose borrowers had less than 15 percent equity.

Annette Haddad writes for the Los Angeles Times.

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