Home › Forums › Financial Markets/Economics › Why do ARMs have to reset to higher rates?
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PerryChase.
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August 14, 2007 at 6:15 AM #9851August 14, 2007 at 6:25 AM #74831
JWM in SD
ParticipantAsk the RMBS investors that question and see what response you get.
Read the bubble primer before you post silly questions.
August 14, 2007 at 6:25 AM #74955ParticipantAsk the RMBS investors that question and see what response you get.
Read the bubble primer before you post silly questions.
August 14, 2007 at 6:25 AM #74950ParticipantAsk the RMBS investors that question and see what response you get.
Read the bubble primer before you post silly questions.
August 14, 2007 at 8:58 AM #74900davidt1
ParticipantIs it silly to ask a question one seeks an answer to? It’s a question of what would be better for the banks. Foreclose on properties and incur the loss and headache that come with it or reduce rates slightly and let the home owner keep the house. Thank you for your patience and understanding.
August 14, 2007 at 8:58 AM #75025ParticipantIs it silly to ask a question one seeks an answer to? It’s a question of what would be better for the banks. Foreclose on properties and incur the loss and headache that come with it or reduce rates slightly and let the home owner keep the house. Thank you for your patience and understanding.
August 14, 2007 at 8:58 AM #75019ParticipantIs it silly to ask a question one seeks an answer to? It’s a question of what would be better for the banks. Foreclose on properties and incur the loss and headache that come with it or reduce rates slightly and let the home owner keep the house. Thank you for your patience and understanding.
August 14, 2007 at 9:12 AM #75027(former)FormerSanDiegan
ParticipantAlthough, I don’t think lenders will voluntarily reduce rates, one should consider potential scenarios for rates actually re-setting at reasonably low rates at some point in this cycle.
Nobody here seems to think that could happen.
First, it is instructive to consider the terms of many of these loans. For your more standard ARMS (Alt-A and Prime), they will typically reset to an index (e.g. 6- or 12- month LIBOR 6 month or 1 year treasury) plus a margin (e.g. 2.25%).
Consider that the LIBOR is at about 5.2-5.3 for the 6- or 12-month index. That means that for typical ARM loans resetting now, the rates would be something in the range of 7.45 to 7.55.
This is based on the terms when the loan was taken out.
If the economy tanks and short-term rates decline (as they have in 5 of the past 6 recessions), it is possible that loan resets could be in the 6% range or lower.
It’s too late for many of the loans about to reset this year. But, this is a plausible scenario for loans resetting in the second wave of resets.
August 14, 2007 at 9:12 AM #75033ParticipantAlthough, I don’t think lenders will voluntarily reduce rates, one should consider potential scenarios for rates actually re-setting at reasonably low rates at some point in this cycle.
Nobody here seems to think that could happen.
First, it is instructive to consider the terms of many of these loans. For your more standard ARMS (Alt-A and Prime), they will typically reset to an index (e.g. 6- or 12- month LIBOR 6 month or 1 year treasury) plus a margin (e.g. 2.25%).
Consider that the LIBOR is at about 5.2-5.3 for the 6- or 12-month index. That means that for typical ARM loans resetting now, the rates would be something in the range of 7.45 to 7.55.
This is based on the terms when the loan was taken out.
If the economy tanks and short-term rates decline (as they have in 5 of the past 6 recessions), it is possible that loan resets could be in the 6% range or lower.
It’s too late for many of the loans about to reset this year. But, this is a plausible scenario for loans resetting in the second wave of resets.
August 14, 2007 at 9:12 AM #74910ParticipantAlthough, I don’t think lenders will voluntarily reduce rates, one should consider potential scenarios for rates actually re-setting at reasonably low rates at some point in this cycle.
Nobody here seems to think that could happen.
First, it is instructive to consider the terms of many of these loans. For your more standard ARMS (Alt-A and Prime), they will typically reset to an index (e.g. 6- or 12- month LIBOR 6 month or 1 year treasury) plus a margin (e.g. 2.25%).
Consider that the LIBOR is at about 5.2-5.3 for the 6- or 12-month index. That means that for typical ARM loans resetting now, the rates would be something in the range of 7.45 to 7.55.
This is based on the terms when the loan was taken out.
If the economy tanks and short-term rates decline (as they have in 5 of the past 6 recessions), it is possible that loan resets could be in the 6% range or lower.
It’s too late for many of the loans about to reset this year. But, this is a plausible scenario for loans resetting in the second wave of resets.
August 14, 2007 at 9:15 AM #74914PerryChase
ParticipantFor one thing, without cash flow, the lenders will soon close their doors. Looks at an Option ARM. The borrower pays the minimum but the bank books the whole amount of interest (a big chunk not paid) as income. How long do you think the lender will last with accrual income but no cash flow?
The loans don’t reset then income cannot be booked, or huge write downs must be taken. Lender goes out of business and the executives don’t get big bonuses.
August 14, 2007 at 9:15 AM #75030ParticipantFor one thing, without cash flow, the lenders will soon close their doors. Looks at an Option ARM. The borrower pays the minimum but the bank books the whole amount of interest (a big chunk not paid) as income. How long do you think the lender will last with accrual income but no cash flow?
The loans don’t reset then income cannot be booked, or huge write downs must be taken. Lender goes out of business and the executives don’t get big bonuses.
August 14, 2007 at 9:15 AM #75035ParticipantFor one thing, without cash flow, the lenders will soon close their doors. Looks at an Option ARM. The borrower pays the minimum but the bank books the whole amount of interest (a big chunk not paid) as income. How long do you think the lender will last with accrual income but no cash flow?
The loans don’t reset then income cannot be booked, or huge write downs must be taken. Lender goes out of business and the executives don’t get big bonuses.
August 14, 2007 at 9:17 AM #74916lendingbubblecontinues
ParticipantMBS buyers weren’t making money on the 1% teaser rate….they were “betting on the come”, so to speak. The banks made their origination fees, Wall Street made their securitization fees…now the MBS purchasers want delivery of the goods they paid for: interest payments at the reset rates, NOT teaser rates.
August 14, 2007 at 9:17 AM #75040ParticipantMBS buyers weren’t making money on the 1% teaser rate….they were “betting on the come”, so to speak. The banks made their origination fees, Wall Street made their securitization fees…now the MBS purchasers want delivery of the goods they paid for: interest payments at the reset rates, NOT teaser rates.
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