Our Real Estate Blog

As ARMs reset, little of the expected chaos is coming to fruition

May 19th, 2008 1:35 PM by Lehel Szucs

San Francisco Chronicle

As ARMs reset, little of the expected chaos is coming to fruition

Worries that subprime mortgages originated during the peak real estate market would sideswipe borrowers with giant monthly payment increases have been reduced by Federal Reserve rate cuts and other steps to stimulate the nation’s credit markets.  In fact, some borrowers with resets occurring today are finding their monthly payments staying much the same.

MAKING SENSE OF THE STORY 

  • Many Adjustable Rate Mortgages (ARMs) start with a lower introductory rate that adjusts periodically (typically once a year for prime loans, twice a year for subprime loans) after an initial period of two, three, five or 10 years.  ARMs generally are tied to a Treasury or London Interbank (Libor) index, with the mortgage rate typically set at 2 to 6 percentage points above that index rate.
  • The good news is that Libor rates have been stable, thanks in part to the actions of the Federal Reserve to lower interest rates.   For example:  Let’s say a borrower in Spring 2006 obtained a mortgage indexed at five points above Libor (then at around 5 percent).  That would have meant an indexed rate at that time of 10 percent. 
  • However, a two-year introductory rate capped the payment at 8 percent.  As of last week, Libor was at 3.08 percent, which means this fictional mortgage would reset at 8.08 today – only a slight change for the borrower.
  • Without the Fed’s rate cuts, more than $100 billion in subprime ARMs would have jumped at least two percentage points.  Now, only about $60 billion in these mortgages will adjust up by more than two points.

To read the full story, please click here:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/27/BU7P10BUDM.DTL&hw=ARMS+reset&sn=001&sc=1000

Posted in:General
Posted by Lehel Szucs on May 19th, 2008 1:35 PM

Archives:

Categories:

My Favorite Blogs:

Sites That Link to This Blog: