Defaults on Sub-prime Adjustable Rate Mortgages Expected to Rise 10%

[RedEarth]

Increases in benchmark London interbank offered rates may boost homeowner defaults on resetting adjustable-rate mortgages, contributing to a ``vicious cycle'' in the credit crunch, according to Citigroup Inc.

Among subprime loans, defaults may climb by 10 percent, analysts Rahul Parulekar, Udairam Bishnoi, Sumeet Kapur and Tanuj Garg wrote in a report yesterday. About $23.7 billion, or 87 percent, of the ARMs underlying bonds whose interest rates begin adjusting next month track Libor rates. Six-month dollar Libor has climbed to 4.02 percent, from 3 percent on Sept. 15.

The deepening of the credit crisis that started last year amid record defaults on subprime mortgages, contributing to $593 billion in writedowns and losses at banks worldwide, may end up causing more borrowers to fail to make their monthly payments. Libor rates, which track how much banks charge each other for loans, help set the cost of everything from credit cards to corporate loans.

``America's homeowners are going to get uncomfortably familiar with 'LIBOR' starting next month,'' the New York-based Citigroup analysts wrote.

The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase of about 18 percent based on Libor rates as of Sept. 30, rather than the 10 percent that would have occurred based on the rates on Sept. 15, the analysts wrote. The payment would be $1,951, instead of $1,807, they said. Fannie Mae and Freddie Mac loans would be boosted to $1,021 on average, instead of $904.

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