ARM Reset Question

[XBoxBoy]

I’m sure somebody here knows the correct answer.

When ARMs reset, what is the most common basis for calculating the reset? Is it the fed funds rate, the discount rate, LIBOR, or what? I keep seeing different things mentioned in the news.

Thanks in advance.

[Daniel]

Depends on ARM. LIBOR is pretty common, and so are short-term Treasury rates. Not the fed funds though (as far as I know).

[SD Realtor]

Daniel is correct. LIBOR is absolutely the most common but I am sure there are others as well. Also the reset rate is not just to the index, as additional margin may be added to the index. The calculation of the monthly payment also may vary. Again it all really depends on the loan. The payment may adjust every 6 months, or once per year, or it may adjust each payment… again it all depends.

Talk about a horror story.

SD Realtor

[HLS]

It is specific in each set of loan docs. It can be LIBOR (1 month, 3 month, 6 month or 1 yr, they are all different rates) OR COFI, COSI etc. ALWAYS plus a margin.

The Option Arm loan, which is the WORST loan ever created for the borrower, and the best for the lender, could become the downfall of several lenders.
The higher the margin was, the larger the commission was to the “mortgage pro” selling it, up to 4%, for screwing the borrower. It still exists today.

It’s actually been very surprising to me that the media hasn’t jumped on this yet. Had the market just stayed even, there would still be thousands of people who would owe 15% to 25% more than the house was worth. With the decline, they have negative equity built in added to the market decline.
It was easy to owe 15% more than your loan started at within 3 years.

[SHILOH]

Must ARMs reset? I know investments would suffer if they don’t make their money on these packaged loans…but would there ever be a scenario which the gov. could prevent a widespread resetting –since so much havoc has occured?

[SD Realtor]

Hi Shiloh –

As HLS commented the loan docs spell out all the conditions of loan and by signing them, the buyer is obligated to their requirements. The other thread talking about loan modification is what you are implying…. So basically yes can the loan servicer rewrite or essentially change the conditions of the loan at the expense of the investors. The question is yes but the latitude with how much they can change is something that is between them and the investors.

As for the govt…don’t get me started…How about Hillary’s idea for a foreclosure “break”… basically halting all foreclosures for awhile… or John Edwards house fund… even Bushes crackpot scheme… they all totally reek. Good thing that the housing dump isn’t being politicized…. and it is only Sept of 07!

SD Realtor

[4spotentialbuyer]

Help is on the way:

http://www.msnbc.msn.com/id/20587894/

Fed Governor Randall Kroszner said the joint guidance was meant to encourage the companies that collect payments on mortgages packaged into certain debt securities and sold in debt markets to “reach out to financially stressed homeowners.”

“Keeping families in their homes is a matter of great importance to the Federal Reserve,” said Kroszner, one of the Fed board members who has taken the lead in dealing with the mortgage crisis.
———————————–

The President, Congress, and now the Fed want to “keep families in their homes…” families or FLIPPERs who were irresponsible enough to take out 100% financing or other risky ARMs/interest only loans for homes they could not afford help create the rise in home prices in the last 4-5 years…What about helping responsible families who are patiently waiting for the market to correct itself and are saving for at least 20% down for a house they can AFFORD?
A home is a place where you or your family loving reside…it does not have to be a house, families can make a home in an apartment, the government does not have to bail our irresponsible people with our tax payers dollar. Instead, why don’t we use the money intended to bail out these folks and just give a refund to every tax paying individual?

[JWM in SD]

“. Instead, why don’t we use the money intended to bail out these folks and just give a refund to every tax paying individual?”

Because that would be hyperinflation and that would be bad…very bad…like Weimer Bad.

[sdgal]

http://money.cnn.com/2007/09/18/real_estate/toxic_rate_reset_shock/index.htm?postversion=2007091810

“And one large class of ARM borrowers – as many as half, according to Gumbinger – may not get a break because their loans are tied to LIBOR, the London Interbank Offered Rate. And those rates have been rising: Short-term LIBOR rates are above 5.5 percent, versus 5.33 percent 30 days earlier.”

Does this mean that the Fed cut today will have minimal impact in CA where there are a lot of ARM borrowers?

[SD Realtor]

It just depends on the LIBOR. As you have read there are alot of postings that contend the Fed Funds rate does correlate with the LIBOR. So I am not gonna step into that argument other then to say we will have to wait and see. Also don’t forget there is margin built into those resets as well.

SD Realtor

[HLS]

sdgal.. Great question. Please refer to this thread for a bit of clarity and levity !

http://piggington.com/50_point_cut

[DaCounselor]

“Does this mean that the Fed cut today will have minimal impact in CA where there are a lot of ARM borrowers?”
__________________________________

No. The Bank of England is likely to follow suit. The BoE also injected L4.4 billion into the British banking system last week, another L4.4 billion a few days ago and just announced a surprise L10 billion injection today. Not sign that all is well. And inflation appears in check over there, which helps clear the way for a cut.

BBA LIBOR is coming down.

[kev374]

A good website that gives info on the various indexes is:

http://www.armindexes.com

[Author]

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