How does the increase in LIBOR affect mortgages?

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WaitingToBuyByAndBy_IHB

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Firstm I don't have a mortgage, however, I notices the increase in the London Inter Bank Offering Rate in the news today and read some mortgage rates are based on LIBOR.



Anybody know the rough percentage of loans based on LIBOR, and, if it is significant, what the ramifications are if LIBOR heads upward? Is there anyway to predict how high it could go?



I know Schadendude and MalibuRenter spoke on this a little bit in yesterday's post: <a href="http://www.irvinehousingblog.com/blog/comments/desire-is-not-demand/">Desire is not demand</a>.
 
The Libor is an index (like 1 year Treasury) plus Margin (Could be 2% or anything more or less) is what the LIBOR ARM uses to adjust itself every year or 6 months. I could be wrong on the number but there is about 20% of the ARMS and Option ARM Mortgages out there that use this index to determine interests rates. Usually on adjustables they have a cap of 2% at every adjustment and a max cap at 6%. So with LIBOR jumping over 3% a lot of people are going to see a 2% jump in their interest rates at their next loan adjustment.
 
The LIBOR climbed to 6.88 percent today.



<a href="http://www.bloomberg.com/apps/news?pid=20601103&sid=a_l2xXVi_XHg&refer=us">Libor Rises Most on Record After U.S. Congress Rejects Bailout </a>



If this doesn't come back down soon, it's guaranteed foreclosures for pretty much 100% of these option ARMs.
 
what are most arms at now? 5% or 6%? so that would boost them to 7-8%?



not quite so gloom and doom for ARMS, unless you are coming off a teaser rate...
 
[quote author="freedomCM" date=1222845506]what are most arms at now? 5% or 6%? so that would boost them to 7-8%?



not quite so gloom and doom for ARMS, unless you are coming off a teaser rate...</blockquote>


But isn't that the problem (the fact nobodys on a straight up ARM).
 
[quote author="no_vaseline" date=1222847312][quote author="freedomCM" date=1222845506]what are most arms at now? 5% or 6%? so that would boost them to 7-8%?



not quite so gloom and doom for ARMS, unless you are coming off a teaser rate...</blockquote>


But isn't that the problem (the fact nobodys on a straight up ARM).</blockquote>


Yes, exactly. What would be the point of an ARM if it wasn't cheaper than a fixed.



Maybe regular ARMs can be okay, but who would take an option ARM unless they either a) did not have ability to pay at fixed rates or b) were using leverage to speculate.



Besides, that's the median home price in Irvine now, 600K$ (it keeps changing so fast I can't keep track)? 8% of 600K is 50K in interest alone. That's like 60% of average GROSS household income, without counting property taxes, HOAs, and cost of living. And 600K is the "cheaper price". Make the house 700-800K and you rapidly get to close to 100% of gross income for housing alone.
 
[quote author="freedomCM" date=1222845506]what are most arms at now? 5% or 6%? so that would boost them to 7-8%?



not quite so gloom and doom for ARMS, unless you are coming off a teaser rate...</blockquote>


The add-on to the LIBOR rate is usually higher than that. I recall looking at a house in late 2006. The owners seemed desperate to sell. I pulled their deed of trust at the County Recorder's office and saw that their rate was about to reset. I think their add-on was about 6%, with a total max rate of 12%. If they didn't sell their house, their rate was going to go up to about 10%. The LIBOR add-ons are not small, especially if the loan was negotiated about the time LIBOR was around 2%.



<a href="http://www.mtgprofessor.com/Tutorials2/Libor_Loan_Tutorial.htm">From one source:</a>



<blockquote>



Common Features of Libor Mortgages



The remaining features of Libor ARMs are very similar to those of other ARMs.



Initial rate period. This is the period during which the initial rate holds. Initial rate periods on Libor ARMs range from 6 months to 10 years.



Subsequent adjustment period. This is period between rate adjustments after the first adjustment. For example, an ARM on which the initial rate holds for 3 years and is then adjusted every year is a "3/1". Most Libor ARMs adjust every 6 or 12 months.



Rate Adjustment Caps: Rate adjustment caps that limit the size of a rate change are generally 1% on 6-month Libors, and 2% on 1-year and 3-year Libors. On 7 and 10-year Libors, the cap is usually 5% on the first adjustment and 2% on subsequent (annual) adjustments. On some 5-year Libors, however, the adjustment cap is the same as that on 1-year and 3-year Libors, while on others it is the same as on 7-year and 10-year Libors.



Maximum Interest Rate: This is the highest interest rate allowed on the ARM over its life. The maximum rate on some Libor ARMs is set at 5% or 6% above the <strong>initial </strong>rate. On others it is set at an absolute level ? 11%, for example, regardless of the initial rate.</blockquote>
 
EvaLSeraphim:



Thanks for the link. Now that I understand how it works, it seems the pain would be felt by someone who financed with a low rate that will now be adjusting upward (limited by cap).



By the way, <a href="http://www.mtgprofessor.com/">The Mortgage Professor's Website</a> looks pretty useful. I've bookmarked it for later exploration.



muzie: I notice today's 15-year fixed is lower than the ARMs.
 
I posted this on another thread....



Daily/weekly/monthly swings in LIBOR may or may not have an impact on your mortgage. A typical 3, 5, 7, or 10 year ARM carries a fixed rate during the predetermined period. At the point of first adjustment, the rate is based on the predetermined margin plus the current index value.



Many LIBOR-indexed ARMS were 3/1, 5/1, 7/1, and 10/1 ARMS. The ?/1? simply means the rate adjusts once a year, every year thereafter. This means that the only time LIBOR matters is annual date that your mortgage readjusts. If today is your adjustment day you are in for pure hell. If your rate adjusted a few days/weeks ago you probably aren?t in too bad shape rate wise.



If you have a pure monthly adjustable mortgage then your rate is much more susceptible to volatile swings.
 
[quote author="lendingmaestro" date=1222924904]I posted this on another thread....



Daily/weekly/monthly swings in LIBOR may or may not have an impact on your mortgage. A typical 3, 5, 7, or 10 year ARM carries a fixed rate during the predetermined period. At the point of first adjustment, the rate is based on the predetermined margin plus the current index value.



Many LIBOR-indexed ARMS were 3/1, 5/1, 7/1, and 10/1 ARMS. The ?/1? simply means the rate adjusts once a year, every year thereafter. This means that the only time LIBOR matters is annual date that your mortgage readjusts. If today is your adjustment day you are in for pure hell. If your rate adjusted a few days/weeks ago you probably aren?t in too bad shape rate wise.



If you have a pure monthly adjustable mortgage then your rate is much more susceptible to volatile swings.</blockquote>


What about CMBS paper?

I?ve read that thus far delinquency rates are quite low, with the FED playing a big role in maintaining market liquidity in that sector.
 
lendingmaestro: When someone gets a 3/1, 5/1, 7/1 or even 10/1 ARM, does one have a better interest rate say if one gets a 3/1 vs 10/1 ARM? If someone took out a $1.0m or $2.0m ARM loan back in the hay days, is that $1.0 or $2.0m ARM loan more likely to be a 5/1 ARM, or a 10/1 ARM, or different ARM? Do you have any idea what percentage of ARMS in Orange County (particularly the high end) are part of the LIBOR? sorry for the million questions, this subject really interests me.
 
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