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Consumers with adjustable-rate mortgages face a number of challenges in the sagging housing market. As many ARMs near their initial reset date, consumers holding the ARM have very few viable options. Declining property values (which have led to upside-down mortgages in many instances) and tighter lending criteria limit the refinancing options available to consumers. A glut of homes available for sale makes the option of selling the property equally as challenging. The end result is that many of these consumers must remain in their ARM, face the initial rate change and try to find the funds to make their higher monthly mortgage payment.
This situation presents a challenge for credit unions that have members with ARMs that are about to reset or that have already reset. Credit unions must consider how a resetting ARM may impact the member’s ability to repay their other debt obligations. Does the resetting ARM put the member’s credit card, home equity loan, auto loan or other payments at risk?
Another challenge for credit unions is that ARM resets are not a short-term issue and will continue well into future years. The concern around ARM resets until recently focused primarily on the subprime consumer base. In future years, the volume of initial resets shifts away from the subprime consumers and moves more towards the prime and near-prime consumers. Analytic studies by TransUnion show that consumers with an ARM, even in the near-prime and prime space, pose an increased risk. As many credit unions begin to experience increased delinquencies and losses from near-prime and prime borrowers, near-prime and prime borrowers with ARMs are now the central focus.
To understand the increased risk associated with adjustable rate mortgages, TransUnion observed a random sample of 7 million consumers. The population included both consumers with an ARM and consumers without an ARM. Findings included the following:
What should you do to better understand and mitigate the risk associated with your members with an ARM?
Here are three high-level strategies that can be implemented to better serve your members:
Scott Keefer is a credit union major account executive in the financial services group at Chicago-based TransUnion. He can be reached at firstname.lastname@example.org.
Ross Minervini is a senior product manager in the solution planning & development group at TransUnion.
This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.
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October 6, 2008
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