How ARM resets are calculated

With all the news out there of the coming deluge of ARM (Adjustable Rate Mortgage) resets on both conforming and non-conforming loans, I thought it might be a good time to explain how a lender comes up with a new payment when an interest rate adjusts.

First, some terms that you should become familiar with:

Index: This is the base rate to which the new adjusted rate will be based upon.

Some common indexes to base rates on are the U.S. Treasury's and the LIBOR. These indexes change as the markets go up and down.

Margin: This is a fixed amount to be added to the index to calculate the new rate.

In your loan documents this is stated as a number (i.e. 3.00% or 2.50%)
to be added to a specific index. It will also state when the index will be examined for purposes of calculating your new rate, usually 30 to 45 days before the adjustment date.

Caps: These refer to the maximum amount a rate can adjust at any one adjustment and over the course of the loan.

Some common caps are 1/5 (change a maximum of 1% up or down from the current rate during any one change and a maximum of 5% from the original rate), and the 2/6 (change a maximum of 2% up or down from the current rate during any one change and a maximum of 6% up or down from the original rate).

Let me show you an example:

Original Terms of 3 Year ARM

Loan Rate = 7.00%
Margin = 3.00% over the current LIBOR 45 days prior to change date
Cap = 2/6

*Note: That means that at the time of the loan the LIBOR had to be 4.00%
(7.00%-3.00%=4.00%)

Now let's say three years are almost up. 45 days before the new rate will go into effect the LIBOR is at 5.50%

To calculate the new rate you must add the margin to the index
5.50%(LIBOR) + 3.00%(Margin) = 8.50%

But, what would happen if the index had gone up to 6.50% instead.

6.5%(LIBOR) + 3.00%(Margin) = 9.50%
But that is not the new rate.
The loan had a cap of 2/6 so the most the loan rate could increase would be to 9.00%
(7.00% + 2.00% = 9.00%)

What would the highest rate be that this loan can ever have?

7.00% (original rate) + 6.00% (maximum rate per cap) = 13.00%

The same applies when the index falls. What would the new rate be if the LIBOR fell to 1.50%?

1.50%(LIBOR) + 3.00%(Margin) = 4.50%
Again the caps apply. The most the rate can go down in any one adjustment is 2.00% from the previous rate. So the new rate could not be any less than 5.00%
(7.00%(Current rate) - 2.00%(Margin) = 5.00%).

As you can see the calculation is fairly easy addition or subtraction. Hopefully this has taken some of the mystery out of how your new rate is calculated when you have an ARM.

Any questions or comments are always welcome!

Brought to you by Professional Mortgage Group, Inc. in Columbia, Missouri.

Helpful Links

The whole purpose for Professional Mortgage Group, Inc. to publish this blog on www.pmg-inc.net is to provide useful information to visitors. Each day we provide valuable information and insight into the current market in Columbia, MO and sometimes Nationwide. It has been quite awhile since we did a refresher on some of the valuable websites out there that can be of assistance to you. I will just give a quick rundown of several sites that may be useful to you.

www.pmg-inc.net - Our website of course!
www.google.com - You can find anything on this powerful search engine.
www.gocolumbiamo.com - The City of Columbia website.
www.missouri.edu - The University of Missouri
www.zillow.com - Real Estate Valuations
www.bankrate.com - Rate and Lending comparison site.
www.realtor.com - Search for home for sale.
www.fanniemae.com - They are the largest buyer of securitized mortgage paper.
www.freddiemac.com - Another large buyer of mortgage paper.
www.bloomberg.com/markets/rates - Check Mortgage and Bond rates.
www.countrywide.com - Large Nationwide Lender
www.wellsfargo.com - Large Nationwide Lender
www.bankofamerica.com - Large Nationwide Lender and Bank with local branches.
www.realestatebook.com - Another site for home listings.
www.boonebank.com - Boone County National Bank Website. Largest local bank.
www.fnb-columbia.com - First National Bank. Another large local bank.
www.pisinspections.com - Local Respected Home Inspector.
www.myfico.com - Information about credit scores.
www.annualcreditreport.com - Obtain a free credit report once a year.


Here are some links to Local Real Estate Companies

Re-max Boone Realty
House of Brokers
Plaza Real Estate Services
Central Missouri Real Estate LLC
Weichert Realtors (First Tier)
3D Realty
Reece and Nichols
Gaslight Properties
Century 21 Advantage

These are several links to browse for information.
PMG hopes this information can be useful to you.

If you have a link that you think should be on this list, please post a comment and we can add it.

Brought to you by:
Professional Mortgage Group, Inc.
"Your Columbia, MO Mortgage Broker"

Columbia Apartment Association

A couple of weeks ago I was asked to speak at the Columbia Apartment Association, with a resounding yes I accepted their invitation. It seems recently I have been asked to give several interviews/opinions on the current state of the housing and mortgage market both from a national and local perspective. Below is an outline of what will be addressed or commented on at this meeting.



Since late 2006' over 161 lenders are out of business including 5 out of the top ten. Below is a small list on some of the larger players no longer originating or funding loans.

1) Wells Fargo (Wholesale sub-prime division)

2) New Century Mortgage

3) First Magnus

4) Decision One (A division of HSBC)

5) American Home Mortgage

6) NovaStar Mortgage

7) Ameriquest Mortgage

8) H&R Block Mortgage



Foreclosures & Delinquency:

- .65% of 1-4 unit properties have entered into foreclosure according

to MBA that is a record high since it started keeping track 55 years ago.

- Foreclosures for August are up 115% from a year ago 244,947 v. 113,300

- WAMU reported an income reduction approaching 75%

- HELOC delinquency is at a 5 1/2 year high

- The delinquency rate is currently at 5.12% as of the second quarter 2007'

up 73 basis points from last year



Home Sales:

- Existing home sales are down 12.8% nationally from a year ago

- Inventory is up 14% over last year and 77% from August of 2004'

- Inventory of new homes is at 8.2 months or 180,000 down from

182,000 seen as a record in May of 2007'

- Sales of new homes are down 21.2% from a year ago.

- National Association of Realtors was expecting a 2.1% decrease and

received a decline of 6.5%





Home Prices:

- Just 2.6% appreciation nationally

- California, Nevada, New York, Florida, New England and the Mid-west

showed price declines

- Median price of new homes fell 7.4% to $225,700



Key Rates:

- Federal Funds Rate: 5.25% 1 Year ago, 5.25% 1 Mos ago, 4.75% this week

- Discount Rate: 6.25% 1 Year ago, 5.75% 1 Mos ago, 5.25% this week

- 10 Yr T-Bill: 4.638 (close of business Monday 10/8/2007)

- Prime Rate: 8.25% 1 Year ago, 8.25% 1 Mos ago, 7.75% this week



Miscellaneous:

- 2007' will see anywhere from 400-500 Billion ARM resets

- 2008' could potentially see over 1.5 Trillion Arm resets

- In 1994' $35B in sub-prime origination's took place vs. $640 Billion in

2006' a ridiculous 185% increase

- Sub-prime mortgages make up anywhere from 10-14% of mortgage

origination's

- Mortgage Brokers make up 50% of all mortgage ordinations and 70% of

all sub-prime loans

- The peak ARM resets will be seen between March and June

2008'



WHAT DOES ALL OF THIS MEAN FOR A LANDLORD / MANAGEMENT COMPANY?



- More people will rent and for a longer period of time!!!!!



Brought to you by Professional Mortgage Group

Your Columbia Missouri Mortgage Broker

New Home Sales News

First the bad news: New home sales have hit a 7 year low last month. This is not great but was not totally unexpected given the current state of real estate.

There is some good news out there that bodes well for the future of the market, however. First, the yield curve is steepening indicating less of a risk of a recession. Next, lenders are going through with some big mergers and acquisitions which is another positive sign for the economy in general. And finally, the Federal Reserve reported that there are no outstanding loans to lenders at the discount window.

These three things are positive because they show that the Fed's moves have helped the market finally start digesting the bad subprime situation, recession isn't as big a worry to increase the housing problem, and if people are still employed they will eventually get around to buying real estate again. So, today was a good day as far as news goes.

Your comments are always welcome!

Brought to you by Professional Mortgage Group, Inc. in Columbia, Missouri.

Market News

I have had several discussions with people lately regarding the market and the recent rate cuts the FED made. Many thought rates would immediately drop when news hit the wire that the FED cut the Federal Funds rate and discount rate. Well this obviously that not happened and people are wondering why! Keep in mind the rates that were cut are ones that affect the mortgage market, but are not directly the rates offered to customers. It will take a little time to see what actually happens and we can only hope more will be done.

On another note, new reports came out today regarding the August market and in summary here is what was reported:

1. Existing home sales fell for the sixth month in a row and are now at a 5 year low!
2. Inventories rose to an 18 year high!
3. Home prices in 10 major cities are falling at the fastest rate in 16 years!
4. Sales of existing homes in the Mid-West fell 5.2%.

They did note that mortgages have become a little more affordable and available than they were in the worst days of August. This means that the coming months numbers could fair a little better. Apparently numerous sales contracts fell through in August due to the mortgage market turmoil and guideline changes.

On the local front an article ran in the Columbia Tribune covering local building permits.

According to county records, permits for single-family homes rose from 331 in 2002 to a peak of 378 in 2004. By 2006, however, the number had fallen to 232. Mid-year permit numbers are down in the county about 30 percent compared with last year.

City records reflect similar trends, with a peak of 1,239 single-family home permits in 2005 dipping to 675 last year

This shows that builders and lenders are pulling back, but as you can see the surplus of homes on the market must be taken care of before things return to normal.

You can read more about these 2 topics at
http://www.marketwatch.com/news/story/glut-unsold-homes-rises-18-year/story.aspx?guid=%7BC02E6F86%2D2D23%2D4D45%2DA83D%2DBF973D6432B9%7D

and

http://www.showmenews.com/2007/Sep/20070925News002.asp

Brought to you by:
Professional Mortgage Group, Inc.
"Your Columbia, MO Mortgage Broker"

Good News From The Fed!...(maybe)

Yesterday the Federal Reserve kept rates steady and indicated that they felt overall the economy is cooling enough to keep inflation in check. They still are concerned about a few areas, but overall seem to be in a wait-and-see mode rather than a tightening one. This is potentially good news not only for the stock market but also for borrowers.

The rates on mortgages do not necessarily move in lock step with the Fed funds rate. Most mortgages have their rates based on the U.S. Treasury or some other bond market index. The Federal Reserve can only affect the Fed funds rate (the rate charged to banks for borrowing overnight funds to meet reserve requirements) and the actual reserve requirements of the nation's banks. So, mortgage rates are not based directly on the rates set by the Federal Reserve.

The Fed funds rate does however affect the loan rates in an indirect way. Rates that a bank charges for its loans in the long term should be more than what it could make passing money through the Federal Reserve. Loaning money to people is "risky" where loaning it to the Government is not. As the Fed funds rate increases, so must bank loan rates...eventually.

What does all this mean for the consumer? It means that there will not be any pressure from the Federal Reserve on rates for now. However, since the Fed funds rate is only a part of what determines a mortgage rate, keep your eyes on the bond markets to see where rates are headed.

Of course, working with a professional mortgage lender allows you to use expertise on markets and rates to your advantage.