The ARMs Reset Crisis Revisited

Just over a year ago, I took a Close Look at the ARMs Reset Problem.

Inquiring minds may be asking, "What's changed?"

The answer is: There's been much improvement across the board, but especially for 5-1 ARMs. In addition, those in ARMs tied to the Cost of Funds Index (COFI) will be pleased to note that, on April 30, the COFI sank to an all-time low.

The History of COFI shows the March 2009 index value at 1.627 - a record low. A year ago, index value was 3.280. Last month it was 2.003.

COFI is the weighted average of the cost of funds (CDs, savings deposits, checking deposits, etc.) for member banking institutions of the Federal Home Loan Bank of San Francisco (the Eleventh District). COFI is a lagging index. The index value for a given month is typically reported on the last day of the following month. For Example: At or after 3 p.m. on the last business day in September, the bank announces the August COFI.

The most common indices used to compute ARMs are COFI, 1-Year Constant Maturity Treasuries (CMT), 1-Year LIBOR, and 1-Month LIBOR.

Rate Comparisons - COFI, 1-Yr CMT, 1-Yr LIBOR



Those in interest-only loans are frequently tied to 1-Month LIBOR.

1-Month LIBOR



All charts courtesy of Money Cafe.

ARM Index Rates
 

• COFI - 1.627%
• 1-Year CMT - .64%
• 1-Year LIBOR - 1.97%
• 1-Month LIBOR - .41%

ARM rates consist of an index rate (typically one of the above), plus a margin component (e.g. 1-month LIBOR + a spread). The amount of the spread is based on credit risk and other factors at the time of the loan. Regardless of what the index rate is, ARMs that are now resetting are likely to be coming in at lower rates, perhaps even much lower rates.

1-Year CMT Table



1-Month LIBOR Table



1-Year LIBOR Table



COFI Table



Across the board, those in 3-year ARM rates that have recently reset, or are about to reset, will do so at a much lower rate unless there's a floor. Moreover, with the specific exception of 1-Year LIBOR-based loans, there will also be a reduction in 5-Year ARM rates when those loans reset. Looking ahead just one month, even 5-Year ARMs tied to 1-Year LIBOR are likely to reset lower.

Thus, even homeowners ineligible to refinance now because they're underwater on their homes, have already (or soon will) see a significant reduction in mortgage interest rates (assuming there's no floor that prevents rates from going lower). I don't have stats on the percentage of loans with and without a floor, but even with a floor, rates shouldn't rise.