Rate Cuts Beget Lower Libor, But Little Cure
John Barry at Bloomberg explores why the drop in Libor since the Fed started cutting Sept 18th; 5.3% to 2.6%...
will actually reduce some mortgage payments on reset, and reduce the number of foreclosures, but save few homeowners.
Refering to a sample clutch of ARM loans...
The lifetime cap on the mortgages averaged 15.62%, while the floor was 8.62%, only 2 basis points lower than the initial rate.
Had Libor not come down, the reset in June would have raised the monthly rate to 10.13%, and the second, in December, would have lifted it to 11.53%.
If the Libor had remained unchanged, the monthly payment on a $225,000, 2/28 ARM would increase by 14% in the 25th month and another 12% in the 31st month.
If the Fed's lending rate target is lowered again, as many investors expect, the loans' interest rate might dip a couple of basis points to the floor of 8.62%.
Neg Am: the payment shock would have been greater for a majority of the borrowers,
because many loans were 30-year loans to be repaid on a 40-year amortization schedule, while others had an interest-only option for the first five years.
Unfortunately, most of the defaults and foreclosures that have wreaked havoc in financial markets haven't been due to resets so far.
Many borrowers simply bought a house or condo they couldn't afford unless bailed out by rising prices, and lower rates alone won't help them much.
The question now is how many borrowers can afford to keep making their payments even in the absence of resets,
and how many will be willing to do so if the mortgage balance is much greater than the current value of their home.
The Nattering One muses... this article references a research paper by the New York Fed.
This paper is a veritable pantheon of information regarding MBS, ABS, CDO, Libor, Spreads, Agency Debt Ratings, etc.
If you are ever to fathom the who, what, where, when, how, why and wherefore regarding
the gigantic economic mess and impending financial system failure, this paper is an absolute MUST READ.
will actually reduce some mortgage payments on reset, and reduce the number of foreclosures, but save few homeowners.
Refering to a sample clutch of ARM loans...
The lifetime cap on the mortgages averaged 15.62%, while the floor was 8.62%, only 2 basis points lower than the initial rate.
Had Libor not come down, the reset in June would have raised the monthly rate to 10.13%, and the second, in December, would have lifted it to 11.53%.
If the Libor had remained unchanged, the monthly payment on a $225,000, 2/28 ARM would increase by 14% in the 25th month and another 12% in the 31st month.
If the Fed's lending rate target is lowered again, as many investors expect, the loans' interest rate might dip a couple of basis points to the floor of 8.62%.
Neg Am: the payment shock would have been greater for a majority of the borrowers,
because many loans were 30-year loans to be repaid on a 40-year amortization schedule, while others had an interest-only option for the first five years.
Unfortunately, most of the defaults and foreclosures that have wreaked havoc in financial markets haven't been due to resets so far.
Many borrowers simply bought a house or condo they couldn't afford unless bailed out by rising prices, and lower rates alone won't help them much.
The question now is how many borrowers can afford to keep making their payments even in the absence of resets,
and how many will be willing to do so if the mortgage balance is much greater than the current value of their home.
The Nattering One muses... this article references a research paper by the New York Fed.
This paper is a veritable pantheon of information regarding MBS, ABS, CDO, Libor, Spreads, Agency Debt Ratings, etc.
If you are ever to fathom the who, what, where, when, how, why and wherefore regarding
the gigantic economic mess and impending financial system failure, this paper is an absolute MUST READ.
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