Why do ARMs have to reset to higher rates?

[lendingbubblecontinues]

MBS 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.

[Diego Mamani]

No questions are silly. If an answer is on the primer, then a referral to it would be appreciated. What is really silly is not asking questions, or flaming those who do (after all, if you don’t like a question, you could always ignore it.)

Interest rates are not set by any bank, they are set by the market. It’s like asking, why doesn’t Safeway lower it prices? That way the poor would be able to afford food and no one would hungry, right?

ARMs “don’t have to” reset to higher rates. Rates could go up or down, as determined by the market. The market is comprised of hundred of thousands, if not millions of funding agencies, banks, consumers, foreign central banks, corporations large and small, etc.

In many countries, like the UK, etc., ARMs are more prevalent than fixed-rate loans. There’s nothing inherently wrong with ARMs, contrary to popular belief in today’s post boom environment. Fixed rates offer the convenience of fixed payments for the life of the loan, but we consumers pay dearly for that. Moreover, non-exotic ARMs have plenty of safeguards: a fixed rate period, a cap of how high rates can go for the life of the loan, a cap of how high any annual increase can be, and no pre-payment penalties.

Unfortunately, during the recent credit orgy (2001-2006) such safeguards were eliminated, especially in subprime loans.

[Diego Mamani]

No questions are silly. If an answer is on the primer, then a referral to it would be appreciated. What is really silly is not asking questions, or flaming those who do (after all, if you don’t like a question, you could always ignore it.)

Interest rates are not set by any bank, they are set by the market. It’s like asking, why doesn’t Safeway lower it prices? That way the poor would be able to afford food and no one would hungry, right?

ARMs “don’t have to” reset to higher rates. Rates could go up or down, as determined by the market. The market is comprised of hundred of thousands, if not millions of funding agencies, banks, consumers, foreign central banks, corporations large and small, etc.

In many countries, like the UK, etc., ARMs are more prevalent than fixed-rate loans. There’s nothing inherently wrong with ARMs, contrary to popular belief in today’s post boom environment. Fixed rates offer the convenience of fixed payments for the life of the loan, but we consumers pay dearly for that. Moreover, non-exotic ARMs have plenty of safeguards: a fixed rate period, a cap of how high rates can go for the life of the loan, a cap of how high any annual increase can be, and no pre-payment penalties.

Unfortunately, during the recent credit orgy (2001-2006) such safeguards were eliminated, especially in subprime loans.

[Diego Mamani]

No questions are silly. If an answer is on the primer, then a referral to it would be appreciated. What is really silly is not asking questions, or flaming those who do (after all, if you don’t like a question, you could always ignore it.)

Interest rates are not set by any bank, they are set by the market. It’s like asking, why doesn’t Safeway lower it prices? That way the poor would be able to afford food and no one would hungry, right?

ARMs “don’t have to” reset to higher rates. Rates could go up or down, as determined by the market. The market is comprised of hundred of thousands, if not millions of funding agencies, banks, consumers, foreign central banks, corporations large and small, etc.

In many countries, like the UK, etc., ARMs are more prevalent than fixed-rate loans. There’s nothing inherently wrong with ARMs, contrary to popular belief in today’s post boom environment. Fixed rates offer the convenience of fixed payments for the life of the loan, but we consumers pay dearly for that. Moreover, non-exotic ARMs have plenty of safeguards: a fixed rate period, a cap of how high rates can go for the life of the loan, a cap of how high any annual increase can be, and no pre-payment penalties.

Unfortunately, during the recent credit orgy (2001-2006) such safeguards were eliminated, especially in subprime loans.

[Fearful]

There are no silly questions. There are only silly people asking questions.

Okay, that was uncalled for. Sorry.

[Fearful]

There are no silly questions. There are only silly people asking questions.

Okay, that was uncalled for. Sorry.

[Fearful]

There are no silly questions. There are only silly people asking questions.

Okay, that was uncalled for. Sorry.

[Navydoc]

Congratulations on finding the best resource on the current housing mess in SoCal. Be warned however thet when you ask a question some here would consider “stupid” you expose yourself to some torment. Don’t worry about it, it’s an anonymous forum, and nobody really cares. I urge you to review some of the archives in this forum, it will greatly help get you up to speed as to why some will think you asked a stupid question.

Just remember one thing, banks are not in business to get you into a home. They are in business to make money, plain and simple. In order to sell their product, a home loan, (and make no mistake, it IS a product) they need to advertise. Recently the best advertisement has been these 2/28, 5/25 etc. loans in which you pay an introductory teaser rate, which is often 1-2% interst. These are the types of loans that are getting people into trouble. A normal ARM which is simply tied to the prime rate is no problem, you simply pay a slightly higher rate when the interst rate goes up slightly, but you break even when the rate goes back down. However, with these newer teaser ARMs the introductory rate isn’t just a gift, they recoup the losses at the end of the loan period by raising the rates to a level EVEN HIGHER than what a normal ARM would adjust to. This is what is meant, by and large, by loans resetting. The banks simply will not continue to take a loss on the interest rate to “keep people in their homes”.

Unfortunately these loans had the well known (in this foum anyway) of inflating home values beyond normal affordability in the median income range, as affordability became defind by the monthly payment at the teaser rate. The banks are suddendly going to become de facto homeowners when people can’t make the payment at the new rates, and can’t refi when the home is worth less than they owe on it.

I hope that helps, don’t be afraid to post. Amid the flames someone will attempt to answer your question.

[Navydoc]

Congratulations on finding the best resource on the current housing mess in SoCal. Be warned however thet when you ask a question some here would consider “stupid” you expose yourself to some torment. Don’t worry about it, it’s an anonymous forum, and nobody really cares. I urge you to review some of the archives in this forum, it will greatly help get you up to speed as to why some will think you asked a stupid question.

Just remember one thing, banks are not in business to get you into a home. They are in business to make money, plain and simple. In order to sell their product, a home loan, (and make no mistake, it IS a product) they need to advertise. Recently the best advertisement has been these 2/28, 5/25 etc. loans in which you pay an introductory teaser rate, which is often 1-2% interst. These are the types of loans that are getting people into trouble. A normal ARM which is simply tied to the prime rate is no problem, you simply pay a slightly higher rate when the interst rate goes up slightly, but you break even when the rate goes back down. However, with these newer teaser ARMs the introductory rate isn’t just a gift, they recoup the losses at the end of the loan period by raising the rates to a level EVEN HIGHER than what a normal ARM would adjust to. This is what is meant, by and large, by loans resetting. The banks simply will not continue to take a loss on the interest rate to “keep people in their homes”.

Unfortunately these loans had the well known (in this foum anyway) of inflating home values beyond normal affordability in the median income range, as affordability became defind by the monthly payment at the teaser rate. The banks are suddendly going to become de facto homeowners when people can’t make the payment at the new rates, and can’t refi when the home is worth less than they owe on it.

I hope that helps, don’t be afraid to post. Amid the flames someone will attempt to answer your question.

[Navydoc]

Congratulations on finding the best resource on the current housing mess in SoCal. Be warned however thet when you ask a question some here would consider “stupid” you expose yourself to some torment. Don’t worry about it, it’s an anonymous forum, and nobody really cares. I urge you to review some of the archives in this forum, it will greatly help get you up to speed as to why some will think you asked a stupid question.

Just remember one thing, banks are not in business to get you into a home. They are in business to make money, plain and simple. In order to sell their product, a home loan, (and make no mistake, it IS a product) they need to advertise. Recently the best advertisement has been these 2/28, 5/25 etc. loans in which you pay an introductory teaser rate, which is often 1-2% interst. These are the types of loans that are getting people into trouble. A normal ARM which is simply tied to the prime rate is no problem, you simply pay a slightly higher rate when the interst rate goes up slightly, but you break even when the rate goes back down. However, with these newer teaser ARMs the introductory rate isn’t just a gift, they recoup the losses at the end of the loan period by raising the rates to a level EVEN HIGHER than what a normal ARM would adjust to. This is what is meant, by and large, by loans resetting. The banks simply will not continue to take a loss on the interest rate to “keep people in their homes”.

Unfortunately these loans had the well known (in this foum anyway) of inflating home values beyond normal affordability in the median income range, as affordability became defind by the monthly payment at the teaser rate. The banks are suddendly going to become de facto homeowners when people can’t make the payment at the new rates, and can’t refi when the home is worth less than they owe on it.

I hope that helps, don’t be afraid to post. Amid the flames someone will attempt to answer your question.

[SD Realtor]

davidt welcome to the board. Have a thick skin and you will be okay.

Someone may have already mentioned this and I know we have had several posts on this as well.

For now, forget about who originated the loan. The entity servicing the loan is more important. Chances are like 99.999% that the original loan was sold. It was then bundled up and securitized and resold. The original terms of the loan are what makes it attractive to investors so that they get a return. The entity servicing the loan may not be able to change the terms of the loan such as the reset date, or the margin in the new rate. I am not knowledgeable enough to answer the question thoroughly. By altering the terms of the original loan, the entity servicing it may incur substantial liability to the entity that bought the security.

An earlier post in the thread brought up a good point that the possibility should be entertained. How would things be affected if there was a widespread rewriting or altering of the loans. It is hard for me to wrap my arms around how that can happen as there has been so much reselling, leveraging, and shuffling the decks of the tranches… It is worthy of discussion but I just don’t see how it can happen. You see what I mean? The underlying mortgage for the homeowner is Lemon Grove who is about to get reset is all over the place now. Even Wall St may not know where the heck it is…

I think what you are seeing right now is interesting. Wall St is trying to inject money straight into the funds to prop them up. They are not changing the rate of return on them.

Once more, we had a poster awhile ago who worked in loss mitigation and he had some better insights into this.

SD Realtor

[SD Realtor]

davidt welcome to the board. Have a thick skin and you will be okay.

Someone may have already mentioned this and I know we have had several posts on this as well.

For now, forget about who originated the loan. The entity servicing the loan is more important. Chances are like 99.999% that the original loan was sold. It was then bundled up and securitized and resold. The original terms of the loan are what makes it attractive to investors so that they get a return. The entity servicing the loan may not be able to change the terms of the loan such as the reset date, or the margin in the new rate. I am not knowledgeable enough to answer the question thoroughly. By altering the terms of the original loan, the entity servicing it may incur substantial liability to the entity that bought the security.

An earlier post in the thread brought up a good point that the possibility should be entertained. How would things be affected if there was a widespread rewriting or altering of the loans. It is hard for me to wrap my arms around how that can happen as there has been so much reselling, leveraging, and shuffling the decks of the tranches… It is worthy of discussion but I just don’t see how it can happen. You see what I mean? The underlying mortgage for the homeowner is Lemon Grove who is about to get reset is all over the place now. Even Wall St may not know where the heck it is…

I think what you are seeing right now is interesting. Wall St is trying to inject money straight into the funds to prop them up. They are not changing the rate of return on them.

Once more, we had a poster awhile ago who worked in loss mitigation and he had some better insights into this.

SD Realtor

[SD Realtor]

davidt welcome to the board. Have a thick skin and you will be okay.

Someone may have already mentioned this and I know we have had several posts on this as well.

For now, forget about who originated the loan. The entity servicing the loan is more important. Chances are like 99.999% that the original loan was sold. It was then bundled up and securitized and resold. The original terms of the loan are what makes it attractive to investors so that they get a return. The entity servicing the loan may not be able to change the terms of the loan such as the reset date, or the margin in the new rate. I am not knowledgeable enough to answer the question thoroughly. By altering the terms of the original loan, the entity servicing it may incur substantial liability to the entity that bought the security.

An earlier post in the thread brought up a good point that the possibility should be entertained. How would things be affected if there was a widespread rewriting or altering of the loans. It is hard for me to wrap my arms around how that can happen as there has been so much reselling, leveraging, and shuffling the decks of the tranches… It is worthy of discussion but I just don’t see how it can happen. You see what I mean? The underlying mortgage for the homeowner is Lemon Grove who is about to get reset is all over the place now. Even Wall St may not know where the heck it is…

I think what you are seeing right now is interesting. Wall St is trying to inject money straight into the funds to prop them up. They are not changing the rate of return on them.

Once more, we had a poster awhile ago who worked in loss mitigation and he had some better insights into this.

SD Realtor

[davidt1]

Thanks so much. I appreciate your informative responses.

[davidt1]

Thanks so much. I appreciate your informative responses.

[Author]

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