Well, yeah... resets weren't an issue as long as home prices kept going up -- you just refinanced into another loan. Hopefully, NMN asked Mozilo why Countrywide cutback ARM production from $19.3 billion in August 2006 to $8.3 billion last month. (Turn sarcasm on.) The resets can't possibly be a problem. Investors love a solid reset from 5% to 7% on their loan portfolio, nothing lines the pockets better. The real problem is these borrowers. They can't pay the higher rates. In the 2-3 years their loan was fixed, all was well. Then property started to decline and many of these folks can't refinance or haven't boosted their 'stated income' the 20-40k to handle the payment increase.(Sarcasm off) If they can the rates are between 6-8% depending on FICO, loan to value, document type, their preference in music, etc To break it down in real terms, clients resetting are moving from 4-5% for prime clients to 6-7%. The annual cap on increases is 2%. Most folks mortgages are based on a 2 or 2.5% spread against LIBOR. LIBOR stands at 5.275% today. On a 500k mortgage loan amount the payment increase is about $800 a month in interest. Here is a chart of LIBOR the last few years:
As you can see global markets are demanding higher rates. All major financing is based against LIBOR. As an example the First Data Corporation private equity buyout deal is pricing $5B worth of loans at LIBOR plus 2.75%. Bloomberg piece here. Client's should carefully evaluate whether they want to keep their loan till the reset or look at a fixed rate. For prime conforming loans they are right at 6% for a 30Y fixed and jumbo mortgage rates are right about 7%. I think these rates are very attractive relative to the prospect of floating against an index that may take years to drop as the global economy slows down.