The Option ARM Non-Bomb?

I just had someone email me something interesting today about their adjustable-rate mortgage resetting –- but to considerably lower levels. How widespread is this phenomenon? Or, asked differently, what percentage of ARMs are tied to Treasuries, as opposed to Libor, etc.? I’d love to see some data.

Here is the relevant part of the email (in anonymized form):

My seven-year ARM came up for reset this month, which I had been dreading, figuring that by putting off my refi I’d exposed myself to bad craziness in this market. Would I not be able to refi? Would I have to accept 8% or worse? The loan was 6.25 percent at origination, with a 2% annual cap on adjustments. I’d not refid at the bottom [for personal reasons].

Quite the opposite happened. My rate went down 2 points to 4.25%. It would have gone to 4 but for the 2 pct annual cap, which works in both directions. (I had only ever thought of it as a protection for me in the other direction). The net impact on my budget was $312 monthly, before tax effects. Which could let me do salutary consumption like buying a car, or adding some bedroom furniture, without the slightest impact on my budget. Or just dump it into a 529 plan. Between that and the falling price of gas, it’s a pretty huge impact.


  1. In many cases this has, in fact, been happening. Look at the trends in "1 Year Constant Maturity Treasury Rate", which serves as the index rate for many ARMs. Last year at this time it was at 4.1%, now it is at 1.42%. For a mortgage with a 2.5% margin, that is still a sub 5% overall rate.

    Similar to the situation above, my ARM has a 2% margin above the 1 year CMT and would also have reset in the 4%s but is at 5% due to limits in the loan documents. If this continues, there really is no reason to try to refinance.

    The real question, as you stated, is what are the index rates for the majority of the ARMs?

  2. I worked in Long Beach securitizations for 2 years and then on the prime side of WaMu for a year. All subprime loans were off the 6M Libor with ridiculous margins. LIBOR +5% for example. there were caps in place, but still the rate reset much higher than the origination rate. if libor was lower, the margin generally made up for it. oh, and we had floors. sorry. The prime side is different. Option ARM's are off the MTA and a few off of COFI. The only floor is the margin of about 1.5%. however after 5 (or 7 years) it resets to a full payment. There won't necessarily be a payment shock, but obviously people are still underwater on their mortgages and will walk away due to that reason. There are still a few subprime loans left to reset in 2009, but we're in the tail end of the production. Everything that is left will be prime. not entirely sure what % are ARM vs Option ARM. So good point, a lot of people will benefit from the resets IF the MTA is still low at the time.