As ARMs reset, little of the expected chaos is coming to fruition.  Worries that subprime mortgages would sideswipe borrowers with giant monthly payment increases have been reduced by Federal Reserve rate cuts and other steps to stimulate the nation’s credit markets.  In fact, some borrowers with resets occurring today are finding their monthly payments staying much the same.

A little background for first-timers or those just sticking their baby toe into the real estate market:  Back in the day when real estate prices skyrocketed and money grew on trees, many Adjustable Rate Mortgages (ARMs) started with absurdly low introductory rates that were scheduled to jump at the end of a one-or-two year introductory period. The new rates were generally tied to a  Treasury or London Interbank (Libor) index, with the mortgage rate typically set at 2 to 6 percentage points above that index rate.  Thereafter, the rate is scheduled to adjust annually.

The good news is that Libor rates have been stable, thanks in part to the actions of the Federal Reserve to lower interest rates.   For example:  Let’s say a borrower in Spring 2006 obtained a mortgage indexed at five points above Libor (then at around 5 percent).  That would have meant an indexed rate at that time of 10 percent.  However, a two-year introductory rate capped the payment at 8 percent.  As of last week, Libor was at 3.08 percent, which means this fictional mortgage would reset at 8.08 today – only a slight change for the borrower.

You can read the full story in SFGate.

This entry was posted on Sunday, May 4th, 2008 at 4:58 pm and is filed under Mortgage Meltdown, Investors. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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