Regarding loan resets, I think there is little doubt that we find ourselves in an entirely different scenario than we were in as recently as last summer. USD LIBOR indices have fallen off a cliff and can now be found in a familiar place relative to the FFR. What percentage of impending resets are on loans with extremely (1-3%) teaser rates (and I’m talking straight 3/1 or 5/1 IO ARMS, not neg-ams) is worth discussing but my sources indicate that the majority of such ARMS did not carry the ultra-low teaser rates but instead the prevailing ARM intro rates in the mid to high 5’s. What I am hearing is that the ultra-low rates were found primarily in neg-ams, which is an entirely different animal. That’s what I’m hearing, for whatever that’s worth.
In any event and back to my original point, there is no doubt that many, many borrowers have dodged the proverbial exploding ARM thanks to LIBOR’s plunge. If they were in an 80/20 deal they were probably getting pinched on their second mtg. over the years due to the ongoing rise in the Prime rate but now that has been falling and their first mtg. is going to reset close to or below their intro rate. Instead of a short sale or foreclosure, they stay in the house. At least for now.
I just do not see a “V” in the LIBOR or FFR – I think we are looking at low rates for at least several years. I think LIBOR and the FFR are going lower and staying lower for awhile. There will likely be a day of reckoning for all those in these ARMS, particularly those with fatter margins and the IO variety, but it ain’t this year, that is for certain. And who knows what sort of additional mechanisms will be in place down the road to save the upside-down ARM holder whose rate is increasing or whose IO period is up? Make no mistake about it, the LIBOR cliff-dive is having a very large impact on housing in this area.
