Lets do some brainstorming folks. Which lenders and loan programs will this impact the most…
A recent story came out highlighting how the LIBOR spike will hurt those in Subprime ARMs set to adjust. However, LIBOR was a choice for many Jumbo Prime and Alt-A loans such as 5/1, 7/1, 10/1 AMs and the now imfamous Pay Option ARM.
Arguably, given that Pay Option ARMs adjust monthly or quarterly in most cases, if LIBOR comes down quickly payments will roll back down with their respective index term value. However, if LIBOR hangs up there this will borrowers will scream towards their maximum negative amortization allowance of 110%, 115% or 125% accelerating the time-line to the ‘Pay Option ARM Implosion.
There is more trouble. Other loan types that only adjust yearly such as the 5/1 Jumbo Prime or Alt-A resets the borrower in higher rates for an entire year. Not only that, but many go from interest only to fully amortized. Lastly, on the 5/1 product the first adjustment can be as high as 5% over the start rate. Given the margin on these were between 2.25 and 3.25%, borrowers will get squeezed. Getting squeezed on a monthly payment when the value of your home is now a double-digit percentage less than the loan amount can turn the most ‘Prime’ of borrowers into subprime very quickly.
Anyone have an idea on which banks or lenders offered 5/1 product with the highest margins over LIBOR from 03-04? Lehman’s Aurora products come to mind first. Also, which lender’s Pay Option ARM offerings were primarily LIBOR based? Most lenders offered LIBOR and MTA but if my memory serves me, most chose the LIBOR Index on the false premise it was safer and because the rate/rebates were better/larger. -Best, Mr Mortgage
Libor Rise to Boost Subprime ARM Defaults 10%, Citigroup Says – By Jody Shenn
Oct. 7 (Bloomberg) — Increases in benchmark London interbank offered rates may boost homeowner defaults on resetting adjustable-rate mortgages, contributing to a “vicious cycle” in the credit crunch, according to Citigroup Inc.
-The Libor rate for overnight loans in dollars between banks rose 1.57 percentage point today to 3.94 percent, the British Bankers’ Association said.”
Among subprime loans, defaults may climb by 10 percent, analysts Rahul Parulekar, Udairam Bishnoi, Sumeet Kapurand Tanuj Garg wrote in a report yesterday. About $23.7 billion, or 87 percent, of the ARMs underlying bonds whose interest rates begin adjusting next month track Libor rates. Six-month dollar Libor has climbed to 4.02 percent, from 3 percent on Sept. 15.
The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase of about 18 percent based on Libor rates as of Sept. 30, rather than the 10 percent that would have occurred based on the rates on Sept. 15, the analysts wrote.
About 121,000 mortgages will reset for the first time next month, according to the Citigroup report, which looked at only securitized mortgages. About 1.8 million loans have already begun adjusting based on benchmark rates, the report said, while 3.7 million face resets scheduled for after next month.
“Almost all” subprime and Alt-A ARMs with a few years of fixed rates, about 60 percent of those prime-jumbo mortgages and about 75 percent of such loans in Fannie Mae, Freddie Macand Ginnie Mae bonds are linked to Libor, the report said. The loans most often are pegged to six-month Libor.