The Incredible Shrinking A.R.M.

Not long ago, not a day would go by without some respected publication running an article about the exploding A.R.M. mortgages. Such articles would predict that thousands of people who had either 2, 3, 5, or even 7 year adjustable rate mortgages, would see enormous increases in their payments due to rising interest rates. In fact, many did see increases when their loans adjusted. However, as the Prime rate has dropped 2.25 points in last six months, and due to fall another half point in March, so has the most common index for AR.M.'s fallen. The L.I.B.O.R index has dropped over two points in the last few months. So after "those in the know" got through warning of the next wave of foreclosures from rising interest rates on adjustables, the exact opposite has occured!!!

You heard it right, the opposite has occured. Most prime mortgages that were fixed for 3, 5, or 7 years that are adjusting this year will likely either stay the same or actually decrease!!! Most of these loans to better quality borrowers had margins set at 2.25- 2.75 over either the six or twelve month LIBOR prevailing rate. Those rates have slipped below 3% and continue to slide, just like Prime has dropped due to the Federal Reserve reduction of their key indexes.

Most good quality credit customers had teaser rates under 6% in loans issued in 2004 and 2005. so these loans are now adjusting at 5.5%- 6%. Lesser quality clients on subprime loans who took out financing in 2005 or early 2006, and had 2 year adjusting loans had rates around 7%. While their margins were higher, their initial rate was also higher. So a 4.0% margin over LIBOR, would mean an adjustment of little, if at all! And even those with the highest possible margins around 6% will see an increase of maybe one point. This in contrast to a recent article in a highly regarded business magazine that used a hypothetical example of a 7.0% current rate mortgage that would adjust to 12%, essentially pricing the homeowner out of their home. This was blatantly overstated by the magazine, even with rates of six months ago. However, using todays rates, this poor sap of a homeowner would actually still see an adjustment, but a more managable 8%.

So if short term rates continue to fall, look for less and less people in A.R.M.'s losing their homes , at least because of monthly payments. But, I have to ask, why isn't the mass media talking about this?