Bailout bill fails

[Danzig]

Originally Posted by dalakhani

The effect of the rate adjustments were partially negated by the lowering of the indexes in which the FIAR would adjust to.

When a rate adjusts, the calculation goes like this:

Index + margin= new rate (fiar) fully indexed accrual rate

A vast majority of adjustable rate mortgages originated within the last decade use Libor as an index. Libor was hovering around three percent for most of this year. The standard margin over libor is 2.25%. Using this calculation:

index (3%) + margin (2.25%)= new rate of 5.25%

What was a smaller issue (but the media totally sensationalized) was that subprime loans had margins that were through the roof so when they adjusted, borrowers would go from a 6% teaser rate to a new FIAR of 11%. UGLY. On top of that, there would be a prepayment penalty and on top of that, housing values decrease so they were stuck! Vicious cycle. FHA put out a program called FHA SECURE but the limited use of that program shows that subprime arm adjustments werent the big problem.

i'm just glad i got my fixed rate. 5.5%, i'm happy.