• Real Estate

    Posted on May 2nd, 2008

    Written by Ed Gory


    This Just In: ARMs Reset, No Chaos Happens…Media Doesn't Know What to Report On Anymore

    Crack_in_the_earth And look, no crack in the earth opened up!!  As ARMs reset, little of the expected chaos is coming to fruition.  An interesting article here, from the SF Chronicle a few days ago.

    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.

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    • 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.
    This entry was posted on Friday, May 2nd, 2008 at 12:42 am and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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