On Sun, 07 Sep 2003 03:10:18 GMT, "NOYB" wrote:

"Gould 0738" wrote in message
...
Our discussion was, I believe about how rising
interest rates could affect the affordability of housing and dampen the
current
market.

I'll agree there. We could be facing a flooded housing market (and a lot of
defaults) in 3-5 years when all of the 4 to 4 1/2% ARM's come due. Imagine
someone who bought the biggest house they could afford at a 4% 3-year ARM
with high rate caps? Will they be able to afford that house if rates hit
8%? On a $400k mortgage, that's another $1000 per month on the same house!

A couple of bits of information: first, when ARMs are underwritten, they are
typically underwritten with the "indexed rate" in mind; some ARMs (but not so
much any more) have jaw-droppingly low "teaser" rates, and those initial rates
are below the value of the index (typically the LIBOR index or 1 year Treasury,
among others) plus the margin. When the underwriter crunches the numbers on a
loan, she'll use the "actual" rate (what it would be if it were adjusting today)
as the qualifying rate, irrespective of the start rate.

Second: All ARMs have certain limitations on how they can adjust. For
intermediate term adjustables (3 or 5 year, for example), the initial "cap" is
typically 2% over the start rate for the initial adjustment, with subsequent
annual limitations of 2% (up or down) and lifetime limitations of 5% to 6% over
the start rate. I have never seen an adjustable rate mortgage hit its life
cap--even in the 70s, when rates were, well, ridiculous.

Someone who got a 5 year ARM at 6% based on the LIBOR index five years ago is
adjusting now to 4%--and they'd be going to 3.7% were it not for the 2% "floor."

Assuming the borrower in your example was a typical creditworthy borrower (as
most are), the worst case would be that the rate on their 4% 3 year ARM could go
to 6%--and that's not too far off what the underwriter would have qualified them
for in the first place. In order for their ARM to hit 8%, the index (the LIBOR,
for example) would have to move very quickly to nearly 6%--and that's territory
that hasn't been visited for a number of years.

Joe Parsons