Originally Posted by CaptainNJ
all the GSE's were corrupt and involved in trying to destroy america. also, while the subprime loans may not make up a very large % of their holdings (i believe around 10% for fannie) the subprime ARMs made up an extremely high % of the foreclosures
13 months ago:
Mish's Global Economic Trend Analysis: Closer Look At The ARMs Reset Problem
Inquiring minds may be asking, "What's changed?"
The answer is: there's been much improvement across the board, but especially for 5-1 ARM's. In addition, those in ARM's tied to the Cost of Funds Index (COFI) will be pleased to note that, on April 30, the COFI sank to an all-time low.
The History of COFI shows the March 2009 index value at 1.627 -- a record low. A year ago, index value was 3.280. Last month it was 2.003
COFI is the weighted average of the cost of funds (CD's, savings deposits, checking deposits, etc.) for member banking institutions of the Federal Home Loan Bank of San Francisco (11th District).
COFI is a lagging index.
The index value for a given month is typically reported on the last day of the following month. For Example: At or after 3 p.m. on the last business day in September, the bank announces the August COFI.
The most common indices used to compute ARM's are:
1-Year Constant Maturity Treasuries (CMT)
ARM Index Rates:
COFI - 1.627%
1-Year CMT - .64%
1-Year LIBOR - 1.97%
1-Month LIBOR - .41%
ARM rates consist of an index rate (typically one of the above), plus a margin component (e.g. 1-month LIBOR + a spread). The amount of the spread is based on credit risk and other factors at the time of the loan.
Regardless of what the index rate is, ARM's that are now resetting are likely to be coming in at lower rates, perhaps even much lower rates.
Across the board, those in 3-year ARM rates that have recently reset, or are about to reset, will do so at a much lower rate (unless there's a floor).
Moreover, with the specific exception of 1-Year LIBOR-based loans, there will also be a reduction in 5-Year ARM rates when those loans reset.
Looking ahead just one month, even 5-Year ARM's tied to 1-Year LIBOR are likely to reset lower.
Thus, even homeowners ineligible to refinance now because they're underwater on their homes, have already (or soon will) see a significant reduction in mortgage interest rates (assuming there's no floor that prevents rates from going lower).
I don't have stats on the percentage of loans with and without a floor, but even with a floor, rates shouldn't rise.
(Principal Payments Need to Be Factored In)
There's still one more issue to address, and that's higher payments when the interest-only period ends. For example, a 5-year ARM loan typically goes from interest-only payments to interest + principal amortized over 25 years on the first rate reset
Likewise, a 3-year ARM loan typically goes from interest-only payments to interest + principal amortized over 27 years on the first rate reset
Some ARM's have a 10-year interest-only period, which postpones this particular problem.
Across the board, those in 3-Year ARM's with principal and interest payments will likely see their total mortgage payment drop
. However, those paying interest only (especially those in 5-1 ARM's) may see their total payments rise. Even so, the situation has hugely improved from a year ago.
The problem with Pay Option ARM's is that over 80% of POA mortgagees only make the minimum payment. Given that minimum payments typically don't cover interest owed, the loan balance increases every month. This is called negative amortization, and it's been going on for years. And yes, negative amortization is compounded by falling home prices.
At some point, typically 110-125% of the mortgage, an enormous "gotcha" kicks in. That "gotcha" requires a fully indexed, fully amortized principal and interest payment, amortized over the remaining years. People who could only afford the minimum payment will be forced to pay principal, plus interest, on top of a loan balance that's been growing monthly. Good luck on lenders getting all their money back on those loans.
The second problem in regards to POA's is that a huge portion of these loans originated in the least affordable, biggest bubble areas, like Florida, California, Las Vegas, etc. From a lender's perspective, that hugely increases the likelihood of default, as well as the size of the problem, should default occur.
In conclusion, other than the ticking time bomb of Pay Option Arms (which is still a huge problem, especially for California), the ARM reset problem has vanished for as long as rates stay low
, or permanently if ARM holders roll over into affordable fixed-rate mortgages.