Adjustable Rates and Index

Most Americans do not understand how (ARMs) Adjustable Rate Mortgages work here it is in a nutshell. Your teaser rate which can be fixed for 2 years 3 years or 5 years will adjust based on 2 things; a banks margin + an index....In the case of most adjustables that would be the LIBOR INDEX, then there is COSI and COFI and MTA indexes which are all relatively correlated in the same fashion to the FED Funds rate. When the FED moves the FED rate up it also increase the the index that will determine where your adjust can adjust which will be a higher rate. For example in 2003 the LIBOR INDEX was 1.25% lets say you have a 2yr fixed rate 28 year adjustable and your intial rate was a 6.75% your banks margin was 4.25% and the index is 1.25%. You will not adjust out of your teaser rate because after the teaser rate your bank margin plus index is only 5.5%....

Now lets take the same scenario with the FED moving rates up 4 points and you will have this this to look forward to; a bank margin of 4.25% plus and index of 5.5% (the high the LIBOR INDEX reached). Adjustables are capped on how much they can adjust above the intial teaser rate on the first adjustment, 2 points for 2yr fixed 28 year adjustables and 3 points for 3 year fixed 27 year adjustable....your new rate would equal 4.25+5.5=9.75%. This would allow your bank to adjust both 2 yr and 3 yr teaser rates to the maximum of their respective caps. Higher rates mean higher rate of default unless your income is adjusting upward hundreds of dollars to offset this hit to your mortgage payment which it is not.

In a nutshell the FED giving us higher rates means they are giving Americans higher payments on various forms of debt mortgages the largest, credit cards, and lines of credit. Remember the FED Rate also controls Prime rate which is equal to the FED FUNDS rate plus 3%.....currently the FED RATE Is 3.5% plus 3% which gives you prime rate at 6.5% most credit cards are also pegged to prime rate with a bank margin. Higher rates means higher defaults this is know to the FED so why I ask would a 4 pt rate hike in the largest American Debt/Housing boom be a good thing for achieving the "American Dream?"

CRISIS INDEED!!!

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Shanty towns and tent cities in Southern California why isn't this on prime time news....I wonder. California is the nations largest economy and where they go we all tend to go to varying degrees. I am not saying that in Florida this scenario looms on the horizon necessarily, but if this is the fallout from our current mortgage crisis in the nations hottest housing market it warrants a certain amount of attention. What does this really say about the "American Dream?"

75 Basis Point Rate Cut So What...

This week the FED stunned with a 75 basis rate cut but does that really change things? No not really, what is happening here in our housing market is so much larger than the average citizen and most savvy analysis have manage to grasp. Imagine that our housing downturn can have a global impact on all banks in all countries. That in itself should raise so many questions as to how this could really be possible and what it will take to stop it. The emergency rate cut really amounts to a pebble getting in the way of a run away bus down a mountain. What the FED put in motion with its rate hikes and rapid escalation of the LIBOR INDEX and subsequent increasing defaults in adjustable rate mortgages in both Subprime and Prime markets has cause a chain reaction of events that cannot be turned off overnight. Most Americans do not understand how adjustables work here it is in a nutshell. Your teaser rate will adjust based on 2 things; a banks margin + an index....In the case of most adjustables that would be the LIBOR INDEX, then there is COSI and COFI and MTA which are all relatively correlated in the same fashion to the FED Funds rate. When the FED moves the FED rate up it also increase the the index that will determine where your adjust can adjust which will be a higher rate. Higher rates mean higher rate of default unless you income is adjusting to your mortgage payment which it is not. In a nutshell the FED giving us higher rates means they are giving Americans higher payments on various forms of debt mortgages credit cards and lines of credit.

Subprime is not the disease but merely the symptom of an epidemic that has now infected all markets everywhere. Put it this way, when rates where at 1.25% if the FED went on television and told Americans they think there going to go ahead and raise rates 4% to 5.25% during your housing boom people would have been up in arms about such a proposition. The bottom line is the default rate in adjustable rate mortgages increased lock step with the rate hikes until it put in motion these downwardly cascading home prices which removed the equity in homes necessary to refinance out of teaser rates while teaser rates where now adjusting more aggressively due to the rate hikes. In effect trapping other home owners in there homes strapped to a chair just watching the clock on the adjustable time bomb countdown to zero with no escape..The rate hikes where the kindling for this bonfire and now they are trying to put it out with squirt guns.

The fact of the matter is the the foreclosure surge has a created reduction in home equity, an increase in LTV/Risk to lenders, destruction of the Subprime and ALT-A markets, a reduction of mortgage products to service a market that grew based on there availability, a surge in home inventory, and compromised the entire credit markets liquidity globally. If you can turn that off with a 75 basis cut I'm a monkey's uncle....and I'm not.

Most Important

What do homeowners consider the most pressing matter regarding the current housing situation?

Countrywide

Countrywide saved by Bank of America now the consolidation phase is underway in the banking world will this mean less choice in the future? I would think so with the decimation of Sub-Prime and Alt-A markets it seems conforming and FHA are here to stay once more. There are still a number of ailing companies out there that need to close and help this problem wash out. A lender that comes to mind as the next biggest problem is Washington Mutual who I expect will follow the path of Countrywide to either being acquired for pennies of the dollar or closing their doors outright.


Take a look at the winners that made this list. www.mortgageimplode.com

Interest Rates

3 Month LIBOR

3 Month CMT

Federal Funds

The LIBOR Index, which is the index that controls the adjustment of most all adjustable rate mortgages and thusly a direct contributer to the rampant foreclosure problem, is depicted here.

Note the correlation to the Fed Funds Rate.

Did our own Central bank knowingly sabotage our raging housing market. 17 consecutive rate hikes in a massive debt boom what would you expect to happen. The escalation of the LIBOR Index which now is forcing very high adjustments to teaser rates on adjustable rate mortgages did not happen by itself. Now the FED is here to save the day with rate cuts if the market needs it. What!?! Does anyone want to ask them why they cranked it up in the first place and are now trying to play hero to a problem it appears they were in direct control of creating? Your thoughts....

"Sub-prime"

Due to the recent freezing in the credit markets many "Sub-Prime" mortgages products that are key for home owners with less than perfect credit seemed to disappear over night. Luckily though it seems that investors that are seeking higher returns on their funds are returning to the markets and sponsoring a new wave of more aggressive mortgage products that are desperately needed to stabilize the housing market. Liquidity had all but dried up recently in mortgage products geared toward borrowers having credit scores 620 and below. Now they are fixed and adjustable options back in the market again for borrowers with less than perfect payment history on their mortgages and with scores as low as 530. This is a critical development given that with out this, these borrowers will have no where to turn to try to avoid foreclosure brought on by the current wave of mortgage resets. If the trend continues we may indeed be in for a better 2008 as this will help curb the foreclosure problem that has been depressing property values nationwide and disenfranchising our home owners.