Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The ARMs Reset Crisis Revisited


A possible spike in foreclosures makes these mortgages a critical concern.


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.

< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos