Increased Defaults as Interest-Only Loans Recast -Fitch

The ghosts of originations past could still come back to haunt the housing industry according to a new report from Fitch Ratings.  The company says that half of those borrowers who have loans in performing residential mortgage backed securities (RMBS) are facing increases in their mortgage payments over the next five years.

Fitch says the mortgages that will be affected by increases are those with adjustable interest rates (ARMs), loans that have had interest only payment features (IOs), and loans that were modified to save or redeem them from default.  Fitch notes that payment increases have historically led to high rates of default with a correlation between the size of the payment increase and the default rate.

‘Interest-only loans are in store for the largest payment increases,’ said Director Sean Nelson. ‘As a wave of peak vintage 10-year IOs approaches recast, many mortgage borrowers could see their monthly payments more than double.’

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