Adjustable rate mortgage reset schedule

[TravelingGal]

TGuy works in IT at a bank and sent this to me as a colleague of his had to pull some data. Thought some of you might find it interesting. Looks like subprime has had its day of reckoning and the others are yet to come. This is pertinent for us because in our area, most funky loans weren''t subprime, but Alt-A.

 

[House Cat]

Do you think that with all of the mortgage remodification loans that are being offered to people, maybe things won''t be so bad in 2010?

 

[purrfectpear]

Nope. There''s another year to go at least.

 

[TravelingGal]

I think it will be bad. How bad, I wish I could say.

 

[Beacon]

At least the absolute numbers are not as bad as in 2007, nor is the projected 2010 peak as long lasting in duration as the 2007 incidence.

There will be many refinances now that might take some of the option ARMs out altogether.

Another feature is this: if a peson has been paying their ARM as principal plus interest (and since many of these are prime ARMs and option ARMs they might), upon reset at current rates the payment might change very little or even go down. Most option ARMs are written as margin plus index on the 1 yr Tbill index. Well, that index is practically nil right now.

I almost refied onto an option ARM in 2005. If I had, my payment would be dropping like a stone for the past year! I wish from time to time that I did have that option ARM. I had an ARM for 17 years and loved it as it fell almost all the time. Just this April I refied into a 30 yr fixed and am very pleased with that now.

Not all ARMs are a disaster.

 

[Mara]

Our ARM for our townhouse reset in Jan...at first we weren't sure what to expect and we were trying to sell anyway so we left it, but it turns out it dropped our payment $500 a month due to the low 6 month LIBOR at the time. It resets again in July but the LIBOR is even lower I think than it was in Jan.

We just rented the TH for a year lease to a couple, so we will have to figure out if we are ok with leaving it on ARM for the time being (a bit risky for 6 more months) or if we want to refi...we may want to sell in a year depending on how things are next summer for housing. If it's still fairly depressed we may want to hang onto it one more year, we'll see...it may or may not be worth refi'ing. But yes, ARMs are not all bad depending on the timeline. We have been paying double mortgages for 6 months and saved $3k+ thanks to the ARM resetting.

Our new house is a 30 year fixed which is of course stable, but currently with how low the ARM is...it makes for a bleak comparison! Key word-currently.

 

[TravelingGal]

Unfortunately rates are on the uptick.

http://www.msnbc.msn.com/id/31403377/ns/business-real_estate/

 

[Beacon]

Date: 6/17/2009 12:58:27 PM
Author: TravelingGal
Unfortunately rates are on the uptick.

http://www.msnbc.msn.com/id/31403377/ns/business-real_estate/

Not that relevant to prime or option ARM adjustments.

THose ARMs are invariably tied to short term interest rates, like the 1 yr Tbill, 6 mos LIBOR. These are the rates that the government can actually control, unlike the 10 year Treasury, which is where 30 year mortgage rates are priced.

At this time short term rates are less than 1 percent. So the ARMs adjust on those and they will be low for a while as the government is dead set on keeping them low to encourage economic and housing recovery.

Longer run, yes, ARM poses risk as we deal with any future inflation which will require short term rates to up tick. But we have a LONG way to go to create an ARM repricing difficulty.

This is what REALLY bugs me about everyone's concern with ARMs. Right now, provided you have been paying on time and making your full (princial plus interest) payment, you will get an better rate from your prime ARM than has exisited in America, ever! Yet ARMs are vilified and everyone is scared of them. Not necessary.

It is ironic that the option ARMs no longer exist just when they would be incredibly beneficial to people. Seriously, except for the longer run risk of inflation, I really wish I had an Option ARM. BTW, when they were written in 2005, many prime option ARMs had a max life cap of 9.99%. Very good loan if you know what you are doing with it.

N.B. the above may not apply to subprime ARMs as those are written on very bad terms to the borrower against a whole range of weird indicies with big margins. I restrict my discussion to prime and option ARMs as the subprime are mostly blown up already.

 

[Beacon]

Date: 6/17/2009 11:27:07 AM
Author: Mara
Our ARM for our townhouse reset in Jan...at first we weren''t sure what to expect and we were trying to sell anyway so we left it, but it turns out it dropped our payment $500 a month due to the low 6 month LIBOR at the time. It resets again in July but the LIBOR is even lower I think than it was in Jan.

We just rented the TH for a year lease to a couple, so we will have to figure out if we are ok with leaving it on ARM for the time being (a bit risky for 6 more months) or if we want to refi...we may want to sell in a year depending on how things are next summer for housing. If it''s still fairly depressed we may want to hang onto it one more year, we''ll see...it may or may not be worth refi''ing. But yes, ARMs are not all bad depending on the timeline. We have been paying double mortgages for 6 months and saved $3k+ thanks to the ARM resetting.

Our new house is a 30 year fixed which is of course stable, but currently with how low the ARM is...it makes for a bleak comparison! Key word-currently.

BTW, Mara, it is easy to make a calculation of where your ARM will reset upon the adjustment. You calculate the balance that will remain at the end of the adjustment period, the number of months remaining on your loan and the interest rate, which is the margin (in your loan docs) plus the index. The index is published in major newpapers. Run all this into a mortgage amortization program and you will get the new amount.

You can even make different assumptions about where the index might be in the future and see how that affects your payments. So you can run a variety of scenarios.

I used to do it myself every time it adjusted to make sure my bank was calculating it right. There used to be some issues with banks doing it incorrectly.

Yes I am a double major in Finance and accounting, so I am a geek on this.

 

[TravelingGal]

Date: 6/17/2009 1:13:36 PM
Author: Beacon

Date: 6/17/2009 12:58:27 PM
Author: TravelingGal
Unfortunately rates are on the uptick.

http://www.msnbc.msn.com/id/31403377/ns/business-real_estate/

Not that relevant to prime or option ARM adjustments.

THose ARMs are invariably tied to short term interest rates, like the 1 yr Tbill, 6 mos LIBOR. These are the rates that the government can actually control, unlike the 10 year Treasury, which is where 30 year mortgage rates are priced.

At this time short term rates are less than 1 percent. So the ARMs adjust on those and they will be low for a while as the government is dead set on keeping them low to encourage economic and housing recovery.

Longer run, yes, ARM poses risk as we deal with any future inflation which will require short term rates to up tick. But we have a LONG way to go to create an ARM repricing difficulty.

This is what REALLY bugs me about everyone''s concern with ARMs. Right now, provided you have been paying on time and making your full (princial plus interest) payment, you will get an better rate from your prime ARM than has exisited in America, ever! Yet ARMs are vilified and everyone is scared of them. Not necessary.

It is ironic that the option ARMs no longer exist just when they would be incredibly beneficial to people. Seriously, except for the longer run risk of inflation, I really wish I had an Option ARM. BTW, when they were written in 2005, many prime option ARMs had a max life cap of 9.99%. Very good loan if you know what you are doing with it.

N.B. the above may not apply to subprime ARMs as those are written on very bad terms to the borrower against a whole range of weird indicies with big margins. I restrict my discussion to prime and option ARMs as the subprime are mostly blown up already.

Interesting Beacon, thanks.

Would it be fair to say that some people who bought using ARMs bought more house than they could afford, and should their payments go up when it resets (whenever that might be), it would cause a mess somewhat similar to the subprime mess?

And does the article that I mention affect people who ARMs who want to refi for whatever reason (although if their payments go down at reset, I can see why they don''t, as Mara hasn''t).

 

[Beacon]

Date: 6/17/2009 1:38:52 PM
Author: TravelingGal

Date: 6/17/2009 1:13:36 PM
Author:

Interesting Beacon, thanks.

Would it be fair to say that some people who bought using ARMs bought more house than they could afford, and should their payments go up when it resets (whenever that might be), it would cause a mess somewhat similar to the subprime mess?

And does the article that I mention affect people who ARMs who want to refi for whatever reason (although if their payments go down at reset, I can see why they don't, as Mara hasn't).

Yes, I think many people who bought with ARMs bought more than they should have and bought towards the top of the market. Many of these are already in foreclosure. They are not so much a reset threat , but just folks who bet wrong and bought wrong and walked away either through job loss or just lack of interest in holding the depreciated real estate.

If people have been making only the "minimum payments" (thereby increasing the loan balance) on their ARMs then they may see an unpleasant number on reset, depending how long they have been letting the loan go negative. This will be offset to some degree by the ultra low short term rates we have. People who have made full payments may get good news, as Mara did.

The data would be hard to get, but knowing how many loans in a given portfolio are being allowed to run negative would likely give a good indication of foreclosure rates upon reset.

Having a ARM does not affect your ability to refi, unless you have let it run negative and the value of the property has simultaneously fallen. I must add, that property prices are falling far faster than negative amortization would eat up equity, so that is the main problem. People in a fixed loan have the same trouble: falling real estate values make it hard to refi. In this goofy market, where it is quite hard to refi in any case, people are perhaps better off if they have an ARM as it may adjust downwards, whereas if they had a fixed on purchase they are stuck with it.

 

[TravelingGal]

Fascinating, thanks Beacon for taking the time to respond. I enjoy learning about this stuff!

 

[Mara]

Thanks Beacon, we probably would have been interested in doing the calcs if we hadn''t just bought another place around the time we knew our ARM was going to reset and planned to sell the old place anyway..we were distracted hahaa. We figured if it reset and went up slightly ... we''d just pay double until we sold. But when it reset and went down such a large amt (it was a ~20% decrease) we were ecstatic, esp cuz we were paying double mortgages.

After having our house on the market for 6 months, we were able to rent our place in 3 days and more than cover mortgage, HOA, garbage, and prop management fees on a monthly basis with it so low, and the july LIBOR should be lower as well the way it''s looking. We''ll just sock away the extra we get from the rent in case something comes upwe need to take care of. Keeping fingers crossed for now.