Wednesday, May 26, 2010

Rate Increase Risk for Jumbo Loan Borrowers

The following is a guest post by Jeff Bowman of TheGreatLoanBlog. If you like the following post, show your appreciation with comments.

Ten's of millions of luxury homeowners have adjusted from an ARM with a fixed rate period into a fully adjustable jumbo loan. Following the large drop in LIBOR rates since 2007, floating with the 6-month or 1 year LIBOR index has been an excellent risk homeowners took the last few years. Even if they were not aware of the relationship of their mortgage payment and the workings of the global short-term money market.

In the last few weeks it has become crystal clear that Europe is having a massive government debt crisis which started in Greece and is spreading throughout the European Union. This crisis is causing major moves in all the various LIBOR indexes and the action in Europe will translate into higher mortgage payments in the US whenever someone reaches their semi-annual adjustment period.


The underlying rate trend in these indexes in the last few weeks is a steady march higher as governments, banks and corporations are going to market to borrow hundred of billions of Euros. This is pushing LIBOR rates up for the 6- month and 1 year about .25% within the last two weeks. All the LIBOR indexes are at the highest levels in over a year despite massive liquidity being pumped into the system by the EU Central Bank and the FED.


Now we aren’t in the danger zone yet for US based jumbo mortgage loans that are floating considering that the average margin to the 1Y LIBOR is 2.50% arriving at a current floating rate of 3.25%. But a plausible scenario of a consistent flow of gov/corp borrowers, an improving global economy over the next year could push LIBOR rates consistently higher. Any real growth in the economy will be meet with higher interest rates and this will be reflected on the hundreds of billions of dollars worth of jumbo loan mortgages that are sitting with rates of about 3.25-4% now.

We think homeowners that are floating against the LIBOR indexes without a plan to sell soon or get another ARM this year or a fixed jumbo mortgage are gambling with their mortgage payment. Not having a solid plan is a very dangerous proposition given the huge debt crisis that continues to unfold around the world. I am a firm believer in having full coverage auto insurance given the cost of coverage vs the financial risk of an accident. Millions of American’s are just waiting for a financial accident when they get their new rate increase notice. Most ARMs adjust every six months with a 30-60 day notice of the new interest rate and payment. The jumbo loan trend has only been down for the last few years as the world almost fell into a financial black hole during the 07-08 meltdown.

I think with the economic recovery gaining speed that it is only prudent to lock in another ARM or a fixed jumbo mortgage while we are at the lowest rates in history. Avoiding an interest rate increase that for millions would come as a nasty surprise. If you need to refinance your jumbo mortgage within the next few years it’s prudent to explore your jumbo loan options now.







8 comments:

Anonymous said...

http://pragcap.com/bernankes-great-monetarist-gaffe

That's counter-view.

getyourselfconnected said...

Not a bad post. Why an ARM when rates will never be lower I dunno.

I offer my interview of my pug dog:
http://economicdisconnect.blogspot.com/2010/05/economic-disconnect-special-exclusive.html

Michael J said...
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Michael J said...
This comment has been removed by a blog administrator.
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Anonymous said...

Now a days the rate of interests of loans are high, borrowers must be very smart.Now a days forex market is also volatile.