$1 Trillion in ARMs resetting in the next 18 months
Many people chose to finance their purchases in 2003-2005 with an adjustable rate, interest only mortgage. These not quite subprime loans and not quite A paper loans were marketed by lenders and Realtors as the “way to get in the game” in rapidly increasing markets like Southern California, the Northeast, Florida, and the Southwest.
What does “resetting” the ARM really mean? Well, the rate charged by a lender for an ARM is based on two things: the index plus the margin. Common indeces inclide the London Interbank Offering Rate (LIBOR), the Managed Treasury Average (MTA) and the Cost of Funds Index (COFI). The index is usually pretty close to what the bank’s cost of money is. The margin is the bank’s profit. That is how you determine the TRUE rate on an ARM.
Borrowers elected to take two and three year “fixed rate periods” when they bought their homes to give them a bit of “payment safety”. That payment safety is about to turn into payment SHOCK! Let me explain with a real life example:
I have a customer who bought a home and secured a $400,000 2 year ARM, interest-only, in 2004. The loan was due to reset in September to LIBOR (around 5.4%) plus a 3% margin. This means that his rate was due to go to 8.4%. It would still be interest-only (for another 8 years) but his “start rate” was fixed at 4.875% for two years. You can do the math. His start payment was at $1,625 and it was about to adjust to 8.4% for the next year bringing his new payment to $2,800. That’s an increase of some 72%. Now I don’t care how high your income is, a 72% increase in ANY expense is traumatic. I mean, at least it took three years for a gallon of gas to increase that much.
His refinance was REALLY hard because his home increased about 8% during that period. We were able to get him into a 5 year ARM at 6% so his payment only rose $325. DAMN! That’s still a 2 year old KIA.
Anyway, I digress. Here’s the really scary (or opportunistic) statistic. There are $330 million in ARMs resetting in 2006 and ONE TRILLION DOLLARS in ARMs resetting in 2007. Now, fellow lenders, don’t lick your chops just yet. These loans were made back when stated income was truly a “liars loan” and banks have really tightened up on those loans since then. Prices have risen since then but most of these loans were backed up with HELOCs for 100% financing. Better get the old PMI insurance premium guides out for the next year.
I estimate that there is some $20 million per day resetting in Southern California for the next 15 months. WOW!
Comment by Brian Brady — November 4, 2006 @ 10:11 pm
Markus…
It was quite useful reading, found some interesting details. Thanks….
Trackback by George W. — November 28, 2006 @ 6:43 pm
$1 Trillion in ARMs resetting in the next 18 months
Many people chose to finance their purchases in 2003-2005 with an adjustable rate, interest only mortgage. These not quite subprime loans and not quite A paper loans were marketed by lenders and Realtors as the “way to get in the game” in rapidly increasing markets like Southern California, the Northeast, Florida, and the Southwest.
What does “resetting” the ARM really mean? Well, the rate charged by a lender for an ARM is based on two things: the index plus the margin. Common indeces inclide the London Interbank Offering Rate (LIBOR), the Managed Treasury Average (MTA) and the Cost of Funds Index (COFI). The index is usually pretty close to what the bank’s cost of money is. The margin is the bank’s profit. That is how you determine the TRUE rate on an ARM.
Borrowers elected to take two and three year “fixed rate periods” when they bought their homes to give them a bit of “payment safety”. That payment safety is about to turn into payment SHOCK! Let me explain with a real life example:
I have a customer who bought a home and secured a $400,000 2 year ARM, interest-only, in 2004. The loan was due to reset in September to LIBOR (around 5.4%) plus a 3% margin. This means that his rate was due to go to 8.4%. It would still be interest-only (for another 8 years) but his “start rate” was fixed at 4.875% for two years. You can do the math. His start payment was at $1,625 and it was about to adjust to 8.4% for the next year bringing his new payment to $2,800. That’s an increase of some 72%. Now I don’t care how high your income is, a 72% increase in ANY expense is traumatic. I mean, at least it took three years for a gallon of gas to increase that much.
His refinance was REALLY hard because his home increased about 8% during that period. We were able to get him into a 5 year ARM at 6% so his payment only rose $325. DAMN! That’s still a 2 year old KIA.
Anyway, I digress. Here’s the really scary (or opportunistic) statistic. There are $330 million in ARMs resetting in 2006 and ONE TRILLION DOLLARS in ARMs resetting in 2007. Now, fellow lenders, don’t lick your chops just yet. These loans were made back when stated income was truly a “liars loan” and banks have really tightened up on those loans since then. Prices have risen since then but most of these loans were backed up with HELOCs for 100% financing. Better get the old PMI insurance premium guides out for the next year.
I estimate that there is some $20 million per day resetting in Southern California for the next 15 months. WOW!
Comment by Brian Brady — November 4, 2006 @ 10:11 pm
Markus…
It was quite useful reading, found some interesting details. Thanks….
Trackback by George W. — November 28, 2006 @ 6:43 pm