A little more good news - ARM "time bomb" defused

[REWahoo]

Remember all the dire predictions of "you haven't seen anything yet" regarding the upcoming flurry of ARM resets?

"Low rates defuse 'exploding' ARMs: Thanks to low interest rates, resetting ARMs are no longer posing the dire threat to homeowners that many thought they would."

Adjustable rate mortgages are adjusting lower - Feb. 6, 2009

Proving once again how difficult it is to predict the future, even when the outcome is certain...

 

[ERD50]

Yep, my ARM,5 year fixed, 5% rate went up to ~ 6% last year (first year that it could change), but is down to 4.375% this year.

So many times, all these dire predictions are based on a static model. Most things are much more complex.

-ERD50

 

[Gearhead Jim]

I think it was Teddy Roosevelt who said that 75% of the problems you see coming down the track, will get derailed before they reach you.
If only we knew which ones...

 

[Gpond]

Fed cuts rates in December and interest rates have started heading back up since. Not a good sign for future resets.

 

[brewer12345]

Gpond, you do know that ARMs don't reset based on 10 or 30 year rates, right? Usually LIBOR, 1 year CMT or similar, all of which are very low and likely to stay that way for quite some time.

 

[Gpond]

Well since I can't post the graph. Brew are the banks charging a much higher fee then before?

My bank the 5 year arm is 5.83% with the 5 year CMT rate is 1.74%. I do not think the spread has been that high in years past.

 

[brewer12345]

I been watching that also:

Date 1-Year
CMT 3-Year
CMT 5-Year
CMT
12/19/2008 0.45 0.96 1.36 12/26/2008 0.40 1.12 1.50 1/2/2009 0.37 1.01 1.55 1/9/2009 0.44 1.12 1.62 1/16/2009 0.43 1.05 1.42 1/23/2009 0.43 1.11 1.58 1/30/2009 0.49 1.25 1.74
The banks must chuck a lot of fees on that because my bank 5 year ARM is being offered at 5.83%. That is a pretty good carry trade.

Would be just the 1 year CMT that the ARMs reset on.

Its been interesting to watch the mortgage market. The yield curve is quite steep in the treasury market, yet ARM rates have been over 15 and 30 year fixed rates for a while. I think there are a number of reasons for this, but I am somewhat disappointed. I was kind of hoping to get a 5 year ARM at 225BP over the 5 year treasury this time around (sub 4% rate). Looks like that will not be the case.

 

[CCdaCE]

My ARM is based on the 1 Year Constant Maturity Treasury Rate (CMT).

1 Year* Constant Maturity Treasury Rate (CMT) - Rate, Definition & Historical Graph

Rock bottom. Hopefully it's still that way in Oct., the month it resets every year.

-CC

 

[samclem]

We are sitting within 1% or so of the lowest 30yr fixed mortgage rates in more than a generation. Just out of curiosity--why are some people who could qualify for one taking the ARM instead? I can only think of a few possible reasons:
1) "I've got the money to pay the whole thing off, and will do so if rates climb. For now I just want the lowest rate possible." That's reasonable--but if rates take off because of inflation, wouldn't it be best to have a locked-in 5.5% 30 yr mortgage and pay it off slowly with ever-less-valuable dollars?
2) "I like these rock-bottom ARM rates now, and I'll get a fixed rate mortgage if it looks like rates will shoot up." Seems pretty risky--being able to reliably foretell the upcoming interest rates ahead of their climb and betting that cheap long-term $$ will be available as the liquidity "crisis" continues.
3) "I don't want to lock in a 30 yr fixed because I think rates will go down." Maybe so--but there's not much "down" and there's lots of "up" from here.

I'm sure these ARMs make sense because I see smart people here using them, so please 'splain it to me.

 

[ERD50]

samclem - I got my ARM ~ 6 years ago, and there was a sig dsiff between fixed and the ARM I got (though I don't recall the numbers at the moment).

I was in your scenario #1 - but I have to admit, your case for locking in a fixed if rates increase versus paying off the ARM makes a lot of sense. About all I can offer up is that the delta seemed attractive, plus the chance for it going down further was there. It seemed low risk - it could go down, if it goes up, pay it off. Hard for me to say it was the best move at the time though. And refi was easy, going through my CU.

-ERD50

 

[freebeer]

Another reason not to get a fixed rate is not having an expectation of being in the same home for 10+ more years. Since mortgages are in general no longer assumable, there is no way to preserve the asset value in the case where inflation goes up, other than by being locked in to a given home (or becoming a landlord which many don't want to do).

I think someone did a study that showed that given the rate of moving that Americans do, both geographic and trading up/down, that paying points or otherwise betting on holding that 30 year mortgage to term is most often a sucker's bet, i.e. plays on the human psyche's over-optimism (few of us think when they buy a home that we are not buying Casa Right, only Casa Right Now).

 

[Tadpole]

What about the reset time line?

Remember all the dire predictions of "you haven't seen anything yet" regarding the upcoming flurry of ARM resets?

"Low rates defuse 'exploding' ARMs: Thanks to low interest rates, resetting ARMs are no longer posing the dire threat to homeowners that many thought they would."



Adjustable rate mortgages are adjusting lower - Feb. 6, 2009

Proving once again how difficult it is to predict the future, even when the outcome is certain...

IMFresets.jpg (image)

It appears to me that we happen to be in a reset lull and that we are due to go through another peak including the Alt-A. How long can the current rates be sustained? I would think that refinancing would be as difficult for these future resets as for the current properties since they also are probably worth less right now than when the loans were originated. Can all of this be moved off the books before we hit it?

 

[samclem]

Another reason not to get a fixed rate is not having an expectation of being in the same home for 10+ more years. Since mortgages are in general no longer assumable, there is no way to preserve the asset value in the case where inflation goes up, other than by being locked in to a given home (or becoming a landlord which many don't want to do).

That may be a good reason to avoid paying points to get a reduced interest rate, but I don't see that it is a reason to go for an ARM vs a fixed loan. Right now, a 30 yr fixed refi can be had for 5% with zero points. A zero point 5/1 ARM is about 4%. The additional small monthly additional price for the fixed loan seems (to me) a small price to pay to avoid even the remote chance of going up to the 9% max rate on the ARM if you do end up keeping the house.

 

[freebeer]

...a 30 yr fixed refi can be had for 5% with zero points. A zero point 5/1 ARM is about 4%. The additional small monthly additional price for the fixed loan seems (to me) a small price to pay to avoid even the remote chance of going up to the 9% max rate on the ARM if you do end up keeping the house.

sanclem, without a spreadsheet model with some backtesting against historical interest rates movements, looking both at the mortgage costs and investment of the savings, we are both talking through our hats here, and personally, I'd probably go for the fixed rate too.

But, human psychology being what it is, when I hear "I'd rather pay a 'small' price now to avoid a remote chance of 'big' pain later", I suspect a variation on the lottery mentality of "I'd rather bet a 'small' amount now to get a chance at a 'big' payoff later". We tend to exaggerate the likelihood of these future eventualities and discount the impact of perceived smaller costs. Insurers and casinos make big profits from "sucker bets".

 

[W2R]

Remember all the dire predictions of "you haven't seen anything yet" regarding the upcoming flurry of ARM resets?

"Low rates defuse 'exploding' ARMs: Thanks to low interest rates, resetting ARMs are no longer posing the dire threat to homeowners that many thought they would."

Adjustable rate mortgages are adjusting lower - Feb. 6, 2009

Proving once again how difficult it is to predict the future, even when the outcome is certain...

That's certainly cheery news. Glad to hear it, and thank you for bringing a ray of sunshine to the board.

Now if only the predictions of massive inflation can be warded off for 30 years or so...

 

[brewer12345]

We are sitting within 1% or so of the lowest 30yr fixed mortgage rates in more than a generation. Just out of curiosity--why are some people who could qualify for one taking the ARM instead? I can only think of a few possible reasons:
1) "I've got the money to pay the whole thing off, and will do so if rates climb. For now I just want the lowest rate possible." That's reasonable--but if rates take off because of inflation, wouldn't it be best to have a locked-in 5.5% 30 yr mortgage and pay it off slowly with ever-less-valuable dollars?
2) "I like these rock-bottom ARM rates now, and I'll get a fixed rate mortgage if it looks like rates will shoot up." Seems pretty risky--being able to reliably foretell the upcoming interest rates ahead of their climb and betting that cheap long-term $$ will be available as the liquidity "crisis" continues.
3) "I don't want to lock in a 30 yr fixed because I think rates will go down." Maybe so--but there's not much "down" and there's lots of "up" from here.

I'm sure these ARMs make sense because I see smart people here using them, so please 'splain it to me.

My mortgage will be paid off in 9 years or less and I want the lowest cost of funds. If an ARM with a fixed period of at least 5 years offered that, it would be worth the interest rate risk on the back half. Simple as that.

 

[CCdaCE]

Samclem:

I've had my ARM for just over 5 years now. Interest rates each year have been 4%, 4, 5.125, 6, and now 5.125%. I think I'm still ahead. Maybe lower next year. Fixed has always been over 5 with a few exceptions here and there if a person was/is watching close enough. I think the 30 yr. was near 6 (upper 5's?) when I got my loan.

It's what the mortgage broker talked me into, max. re-adjust of 1% per year. The 4 to 5.125 was a rounding thing, apparently. I've gotten lucky so far. Might sell in a few years, we'll see if the golden handcuffs are inescapable. In any event, it'd be nice to build, too.

-CC

 

[audreyh1]

Well, looking forward a year ago it was indeed an impending "time bomb". But sudden deflation and aggressive Fed action has ensured that bond rates go way down. It only took a massive credit crisis to avert the other disaster! LOL!

I don't know if in the huge and sudden collapse of our banking system one crisis was better than the other! (turned out it wasn't only homeowners who had overleveraged - ooops!)

High and increasing unemployment is still a huge threat to homeowners/foreclosure. Maybe the situation will stabilize this year.

Audrey

 

[harley]

We are sitting within 1% or so of the lowest 30yr fixed mortgage rates in more than a generation. Just out of curiosity--why are some people who could qualify for one taking the ARM instead? I can only think of a few possible reasons:
1) "I've got the money to pay the whole thing off, and will do so if rates climb. For now I just want the lowest rate possible." That's reasonable--but if rates take off because of inflation, wouldn't it be best to have a locked-in 5.5% 30 yr mortgage and pay it off slowly with ever-less-valuable dollars?
2) "I like these rock-bottom ARM rates now, and I'll get a fixed rate mortgage if it looks like rates will shoot up." Seems pretty risky--being able to reliably foretell the upcoming interest rates ahead of their climb and betting that cheap long-term $$ will be available as the liquidity "crisis" continues.
3) "I don't want to lock in a 30 yr fixed because I think rates will go down." Maybe so--but there's not much "down" and there's lots of "up" from here.

I'm sure these ARMs make sense because I see smart people here using them, so please 'splain it to me.

In my case I took out an interest only mortgage, and you can't get them in a fixed rate. Our house is pretty expensive, and I didn't want all that money locked into such a non-liquid investment. And since I was freeing up equity, I didn't want to be paying back on the principal. I always intended to refi into a conventional fixed at a later date, and I'm working on that now. I just wanted the cash available for diversification. Worked out great because I left it sitting in cash, as opposed to equities (my original plan) or home equity, both of which have taken a beating recently. God watches out for fools and drunks.

I almost had a 4.5% fixed 30 year loan set up, then rates jumped and I missed out. I'm waiting, hoping to get back down into the 4s with no points. Hopefully it will happen. No matter what I plan to refi soon. I'm suspecting this low inflationary period won't last too much longer.

 

[Mickey]

Yeah, the first part of this article sounds as if everything is going to be better than expected ... for some of the ARM holders, because of interest rates being so low.

The biggest problem we got coming, and to be fair, the article did touch on it, is the option ARM mortgages (those where people are [usually? ... mostly?] in negative amortization status).

As the article states: "While the threat of traditional ARMs has been somewhat defused, another breed of exotic mortgage - option ARMs - will undoubtedly force more people out of their homes."

For a pretty good break down of what's coming, see the Feb 4th posting at this web site: Dr. Housing Bubble Blog

Unfortunately, what I think we are going to see is equal to or worse than the subprime "mess" - mainly because these folk that signed up for these option ARMs had good credit going in ... until the housing bubble burst. Now, they could be upside down in a house and owe more money than the original purchase price due to the negative amortization.

That is going to leave a mark.

Marilyn

 

[brewer12345]

I think that the negative ARMs will largely get renegitated to amortizing loans, assuming the properties are owner occupied and the owner wishes to stay put. Otherwise, foreclosure is it.

But I take issue with the whole notion that being upside down is taht big a deal. I dunno about the rest of you, but I could care less what the market value of my home is. I bought it because I wanted to live here and I took out a mortgage that I will pay off after a reasonable amount of time. Since I don't have any interest or plan on moving, I don't care what the market value is.

 

[tmm99]

I guess things are good as long as the mortgage rates are relatively low. And hopefully, while the rates are low, people living in these houses accumulate enough equity in their houses and save some money on the side even (or the housing prices miraculously recover to offset the negative equity) so they can refinance in time to lower their monthly mortgage payments again. Otherwise things could still get pretty ugly.

With Alt-A Option-A resets coming up in the next two years or so... Hmm... I don't know...

http://1.bp.blogspot.com/_1V7wnZxPqok/SJawEO209sI/AAAAAAAAINM/2PdEhnnjXFs/s400/arms+reset+imf.jpg

tmm

 

[tmm99]

I dunno about the rest of you, but I could care less what the market value of my home is. I bought it because I wanted to live here and I took out a mortgage that I will pay off after a reasonable amount of time. Since I don't have any interest or plan on moving, I don't care what the market value is.

brewer, you are right. As long as you plan to live in the house for life, it doesn't really matter as long as you won't find yourself in a ghost block with many abandoned foreclosures.

tmm

 

[audreyh1]

But I take issue with the whole notion that being upside down is taht big a deal. I dunno about the rest of you, but I could care less what the market value of my home is. I bought it because I wanted to live here and I took out a mortgage that I will pay off after a reasonable amount of time. Since I don't have any interest or plan on moving, I don't care what the market value is.

This was true for me after the big TX real estate crash in the 80s. I was underwater for many years, but I never even thought about it, because I needed to live somewhere and I had bought convenient to work and liked the place just fine and could meet the payments.

Audrey

 

[W2R]

This was true for me after the big TX real estate crash in the 80s. I was underwater for many years, but I never even thought about it, because I needed to live somewhere and I had bought convenient to work and liked the place just fine and could meet the payments.

Audrey

On the other hand (speaking of "underwater"), until 2005 I thought I would live in New Orleans no matter what, until I took my last dying breath. I wanted a home town at last, and warts and all, by George, New Orleans was it as far as I was concerned. Then Hurricane Katrina changed my plans.

Luckily I was not flooded, and I am not underwater as far as the value of my home, either. I'm just saying that you never know what life will throw at you, and how your plans may change. Being underwater makes it more difficult to respond flexibly to the unexpected.