Servicers Facing Boom in ARM Rate Adjustments.(Adjustable Rate Mortgage)

CHICAGO -- The refinancing boom may be slowing down, but servicers have another portfolio churning challenge looming ahead of them.

One expert says that rising rates pose a potentially big threat to housing markets and companies with exposure to real estate values, especially as adjustable-rate mortgages originated in recent years begin to reset at higher interest rates.

Dirk Van Dijk, director of equity research at Zacks, estimates that $1.5 trillion of adjustable mortgage debt will reset at higher rates between now and the end of next year. Moreover, the interest rate on one-year ARMs has increased by about 75% over the last two years, and rates show no sign of dropping anytime soon.

He told Mortgage Servicing News that the $1.5 trillion figure comes from a website that tracks risk issues (calculatedrisk.blogspot.com).

Mr. Van Dijk notes that housing is "far more leveraged" than the stock market as an asset class. Most recent home purchases have been made with less than a 10% downpayment and the balance financed, he said, often with variable-rate loans. While foreclosure rates remain low, he says it is likely they will increase in light of the rate increases.

"Lenders were aggressively pushing ARMs with low introductory rates a few years ago, and it was generally easier to qualify for an ARM than a fixed-rate mortgage. Thus the people who have the fewest financial resources to fall back on are the ones who are most likely to face large increases in their mortgage bills. As transaction volumes fall, it will become more difficult for people who can no longer afford their homes to simply sell the house," he predicted in a recent article for Zacks.

Historically, Mr. Van Dijk said banks have been quick to sell foreclosed real estate without a lot of price sensitivity. If a big increase in bank-owned real estate has lenders dumping properties, that in itself could put additional downward pressure on prices, he said.