Mortgage Resets: COFI Numbers Improving

Countless graphics have been floating around the media outlining the large quantity of adjustable rate mortgage [ARM] rate resets that are anticipated in the coming months and years. (For some excellent background and analysis on the subject of ARM resets, I encourage readers to investigate what Calculated Risk has to say on the subject.)

One of the silver linings in the global economic slowdown is that as interest rates continue to fall, these ARM resets are going to be executed at rates which are increasingly favorable to borrowers. Setting aside the flip side – that lower rates will be less favorable to already struggling lenders – the prospect of lower ARM rates may help to accelerate the formation of a housing bottom and will certainly provide consumers with additional disposable income.

In the chart below, I have constructed a ten year history of the 11^th District Cost of Funds Index [COFI] data. The COFI is one of the most widely used ARM indices. As the graphic indicates, COFI has fallen from 4.4% in September to 2.7% in July. It has dropped 1.3% since the beginning of the year and is now at one of the most affordable levels of the past decade.

Comments

[jswede:]

"The COFI is one of the most widely used ARM indices"

>> It used to be - like 10 years ago. There's still paper/loans out there using COFI, but 90+ % of last 5yrs production has been tied to USTs or LIBOR.

2008 Sep 04 02:09 PM

[Tom Lindmark:]

The author ignores two facts.
One, many ARMs have floors on the interest rate at reset, so the actual level of the index can be irrelevant.
Two, the concern is not with interest rate resets but with recasting payments for Option ARMs. Increased mortgage balances amortized over shorter time periods produces ugly results. Here's a link with the latest estimate of the effects blog.metro-real-estate...

2008 Sep 05 12:57 PM

[sumosama:]

Tom, the author clearly states in the first sentence he is talking about ARM's. Agreed, most of which are now tied to Treasuries which, again, are lower now than last year.

2008 Sep 05 01:21 PM