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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (26981)	2/22/2005 9:59:20 PM
From: TimbaBear	Respond to of 110194

One has to be careful when predicting gloom and doom on the basis of a high percentage of mortgages being ARMs. Anything that is not 15 or 30 yea fixed is labled an ARM. Several years ago the prevailing ARMs were 5/1s. That means the rate was fixed for 5 years before become a yearly ARM. I think last year the 3/1 gained in popularity. I'm just highlighting this feature to point out two things: 1). the immediacy for the impact of higher debt service isn't IMO quite upon us yet (perhaps another year or two); 2). when it hits, it will hit with ravaging force. Most ARMs when I was in the business (a number of years ago) had a formula of the new rate = margin plus 1yr treasury rate. The margin could be anywhere from 1.75% to 3%+, the initial adjustment could be up to 5% increase in rate thereafter capped at 2% max per annum increase. Most ARMs back then had a 6% above starting rate lifetime max increase, I don't know if the current ones do or not. Still.....if rates go up such that homeowners get a 2% increase in rates in back-to-back years....there will be big trouble for sure......especially at the price points that these mortgages were originated. Timba