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rick dudley Asked:

I have been hearing and reading for the past year about the mortagage crisis and resulting foreclosures and don't understand why these experts are coming to this conclusion. I can't wait until my loans convert. I have a 5.75% fixed rate that will convert shortly. My index is the 12 month treasury moving average which is at 2.0%. My margin is 2.25% giving me a fixed rate for the next twelve months of 4.25% which I confirmed with my lender if my loan were to convert today ie. a lower payment. I believe that most of the no interest loans originated three to five years ago would be fixed for the initial period at approx. 5.375% to 6.25% with margins of 2.25% to 2.75%. Also, most indexs used are the 6 mo. LIBOR, 12 mo. LIBOR, 11 district or one year treasury, all very low. By adding the margin most of these loans should refix at very favorable rates. Yes, there will be principal (repaid to yourself) and a 25 year amort period. Nevertheless, is the whole world wrong or am I not seeing this right? This mortgage resetting is a monumental part of this national crisis and causing widespread foreclosures because of supposedly higher monthly payments. As far as I can see the numbers just don't support higher payments and this foreclosure meltdown. Can you please clarify. Thanks, Rick [San Jose CA]



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Answer Provided by: Deborah Manning [12/17/2008]

Rick: Great analysis. Thank you for taking the time to show how a good adjustable rate mortgage is supposed to work. The trouble comes with some ARM's with a higher say 11 or 14%. The come-on was an extremely low start rate for the borrower, who probably had a low FICO below 620 or didn't have the cash downpayment. These loans were supposed to be refinance by now...but couldn't when the home values plunged. I simplified the answer for the sake of time.