I know everyone (including me) is rather distracted by the events going on in the financial market mayhem over the past two weeks, but many mortgage holders of ARM’s tied to the LIBOR Index should be re-evaluating their long term mortgage strategy. Because LIBOR has been very low, many were complacent to make serious consideration of refinancing into a fixed rate. I read many comments about LIBOR Index being very favorable, and to an extent is has been true, until…….
The overnight Libor rate in US dollars ratcheted up 3.3 percentage points to 6.44 percent, the largest increase in 7 yrs.
This could change the tone of all the ARM mortgage holders, whose mortgage index is tied to the LIBOR, who were hoping for little payment change when their adjustment period arrives.
About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate, or Libor, according to First American CoreLogic in Santa Ana, California.
Further down the article, Seattle’s Bill Fleckenstein remarks:
“If the Libor market seizes up and stays that way, it’s going to complicate everything,” said Bill Fleckenstein, president of Fleckenstein Capital in Seattle. “What you are seeing is the unwinding of the financial system as we know it.”
Tim, that is HUGE. A majority of ARMs are tied to LIBOR. Anyone with an adjustable rate mortgage really should drag out their Note to review when it adjusts and what the CAPS are.
Most common is 5/2/5 meaning the most your rate could adjust is 5% if you’re at the first adjustment. Some (I tried to offer this as much as possible) may be 2/2/6 — with a 2% cap on the first adjustment. If you have a 2% cap-this big jump to LIBOR will not be nearly as dramatic to you vs somone with a 5%. CAPS do vary. I’ve written about reviewing your ARMS here at RCG before.
If you (home owners w/ARMs) cannot find your Note, then contact your Loan Originator to see if they have that information for you.
Do NOT wait until your ARM adjusts!
I’m noticing that several online index tracking sites are sorely in need of updating this information.
Hold on!
The recent spike in O/N LIBOR has mainly been due to Banks hoarding cash and not lending overnight prob in fears of losing more money from Lehman/AIG exposure to CDS.
We haven’t seen the spike yet in 1Mth LIBOR and futher out the curve because the Fed is continuing to add money to the system via Repo.
I don’t think it’s responsible spreading fear just yet as ARMS are tied to 1Mth, 3Mth, 6Mth and 12Mth LIBOR, not overnight Fed Funds/LIBOR.
News flash for all you LIBOR observers:
It’s 1%-1.5% bid/ask for O/N Fed Funds as of 1:05PM PST.
I’m interested in how this news and if Bill Fleckenstein’s comment, ““If the Libor market seizes up and stays that way, it’s going to complicate everything,
Q-
I think you may be right. This could be a temporary situation, only affecting those mortgages that are adjusting right now, not in the near term future, as this may get sorted out soon.
I was stuck by the contradictory stories on Bloomberg this morning, one saying the Fed lowered the overnight rate, and another saying the overnight rate (for the LIBOR) had doubled.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ag_0LsxCHN3g&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0oU00SRuLFU&refer=home
Then I got a rate sheet from a lender that uses only the 1yr Libor for ARMS, whose rates IMPROVED today by 0.25%.
Wow, it has been a tough day to forecast the weather!
Tim-
1Mth-12Mth LIBOR today is pretty much the same as 2004 and 2005-2006 LIBOR were both higher. You’ll see that there isn’t much of an impact if their rates do reset.
What’s happening in the O/N market hasn’t spread to the rest of the curve yet and I think it’s just speculation to say that it will.
Roger Wrote:
“I think you may be right. This could be a temporary situation, only affecting those mortgages that are adjusting right now, not in the near term future, as this may get sorted out soon.”
My point was, the resets are not based on OVERNIGHT rates. They are based on something longer like 12 months in your example and the 1-12mth part of the curve have not seen the spike.
Q-
thanks, Q.
So true, shoulda been obvious. No ARMS I know reset on the “one day” LIBOR.
There are still real monsters in the financial closet (Lehman, AIG, ???).
This ain’t one of them, at least not yet. These days it’s hard not to jump when a fake one says “BOO”.
Roger-
Lehman and AIG are a bigger problem because a lot of financial institutions maybe exposed to CDS sold by them. If they bought some CDS from Leh/AIG and they are in the money, bankruptcy may wipe out those gains. Probably why institutions are hesistant to lend overnight – waiting to see what the impact will be.
This shouldn’t be a surprise. The LIBOR is a sport rate index versus the MTA which an average. The spot rate indexes have more volatility, higher peaks and lower valleys than an index based on an average. The LIBOR is Euro based. The US$ is getting beat up.
This still serves as a good reminder to pull out your Note if you have an ARM and know your caps/margin/index.
Tim, please forgive me for adding this link 😉 : http://www.wsjprimerate.us/libor/libor_rates_history.htm
Thanks Rhonda, no problem.
Q & Roger – I agree. It is obvious it is overnight rates, if people
read the article. That’s what the Bloomberg article states and what I mention. My point, perhaps I did a lousy job conveying, is that people should be on alert. The Bloomberg article clearly states that they are referencing the overnight rates, including my remark. The Bloomberg article raises the clear potential implications for ARM note holders with a LIBOR index. Spreading fear? LOL. Oh ‘come on.
I enjoy keeping people abreast of what may impact their financial well being. Blogging is one of the very few any of us have of making a positive impact on some consumers. My wife and I have received some nice e-mails from consumers who say so, even though they may have used another service. Once consumers open escrow and get to the closing table, it is often too late in the game to make financial decisions without pressure.
Perhaps I should have bold typed ‘overnight’ and ‘may’ pressure ARM’s. Let’s hope that the overnight spike does not translate into the complication that Fleckenstein suggests. Speculation is why we are where we are. I don’t spread fear or rumors that can take a company down. My intent is to state information or take up topics that is useful for consumers and hopefully get a few people to make a sound financial decision that will foster a sound market. There are quite a few transactions our office has closed with LIBOR Index terms. Quite a few. And many of them should be receiving market updates from their loan officers, but I suspect are not.
Is there an update? I’d do it myself, but I want to make sure I’m comparing apples to apples.
Tim, overnight LIBOR rates came back down to 2.97 this morning.