the interest rate in an adjustable rate mortgage is tied to an economic factor called the
Negative amortization


. NegAM loans today are mostly straight adjustable rate mortgages (ARMs), meaning that they are fixed for a certain period and adjust every time that period has elapsed; e.g., one month fixed, adjusting every month. The NegAm loan, like all adjustable rate mortgages, is tied to a specific financial index which is used to determine the interest rate based on the current index and the margin (the markup the lender charges). Most NegAm loans today are tied to the Monthly Treasury Average, in keeping with the monthly
3137429
Adjustable-rate mortgage


fixed interest rate. Other forms of mortgage loan include the interest-only mortgage, the fixed-rate mortgage, the negative amortization mortgage, and the balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls but loses if the interest rate increases. The borrower benefits from reduced margins to the underlying cost of borrowing compared to fixed or capped rate mortgages
5627939
Subprime crisis background information


LIBOR means that financial instruments with variable interest terms are increasingly expensive. For example, adjustable rate mortgages, car loans and credit card interest rates are often tied to LIBOR; some estimate as much as $150 trillion in loans and derivatives are tied to LIBOR. Higher interest rates place additional downward pressure on consumption, increasing the risk of recession. Credit defaults swaps (CDS) are insurance contracts, typically used to protect bondholders from the risk of default, called credit risk. As the financial health of banks and other institutions
10309199
Adjustable-rate mortgage


, limitations on charges—known as "caps" in the industry—are a common feature of adjustable rate mortgages. Caps typically apply to three characteristics of the mortgage: For example, a given ARM might have the following types of interest rate adjustment caps: Mortgage payment adjustment caps: Life of loan interest rate adjustment caps: Caps on the periodic change in interest rate may be broken up into one limit on the first periodic change and a separate limit on subsequent periodic change, for example 5% on the initial adjustment
5627943
Fixed-rate mortgage


this fixed cost. Other forms of mortgage loans include interest only mortgage, graduated payment mortgage, variable rate mortgage (including adjustable-rate mortgages and tracker mortgages), negative amortization mortgage, and balloon payment mortgage. Unlike many other loan types, FRM interest payments and loan duration is fixed from beginning to end. Fixed-rate mortgages are characterized by amount of loan, interest rate, compounding frequency, and duration. With these values, the monthly repayments can be calculated. Unlike adjustable-rate mortgages (ARM),
5627986
Reverse mortgage


amount of the principal limit (if available) to be carved out into a Life Expectancy Set Aside (LESA) for the payment of property charges (property taxes, homeowners insurance, etc.). The HECM reverse mortgage offers fixed and adjustable interest rates. The fixed-rate program comes with the security of an interest rate that does not change for the life of the reverse mortgage, but the interest rate is usually higher at the start of the loan than a comparable adjustable-rate HECM. Adjustable-rate reverse
20726947
Floating interest rate


A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. Floating interest rates typically change based on a reference rate (a benchmark of any financial factor, such as the Consumer Price Index). One of the most common reference rates to use as the basis for applying floating interest rates is the London Inter-bank Offered
10157149
Adjustable-rate mortgage


A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market or index the rate can be changed at the lender
5627936
Adjustable-rate mortgage


Adjustable Rate Mortgages in the United States contain an error regarding the variable interest rate charged to the homeowner. The study estimated the total amount of interest overcharged to borrowers was in excess of $8 billion. Inadequate computer programs, incorrect completion of documents and calculation errors were cited as the major causes of interest rate overcharges. No other government studies have been conducted into ARM interest overcharges. George Avgerakis, a Brooklyn, NY real estate investor and filmmaker, may have created the first privately issued adjustable-rate mortgage in the United
5627982
Adjustable-rate mortgage


to the inherent interest rate risk, long-term fixed rates will tend to be higher than short-term rates (which are the basis for variable-rate loans and mortgages). The difference in interest rates between short and long-term loans is known as the yield curve, which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and is relatively infrequent. The fact that an adjustable rate mortgage has a lower starting interest rate does not indicate what the
5627975
Adjustable-rate mortgage


interest rate certainty to those who gamble with initial fixed rates on ARM loans. There are three types of Caps on a typical First Lien Adjustable Rate Mortgage or First Lien Hybrid Adjustable Rate Mortgage. Initial Adjustment Rate Cap: The majority of loans have a higher cap for initial adjustments that's indexed to the initial fixed period. In other words, the longer the initial fixed term, the more the bank would like to potentially adjust your loan. Typically, this cap is 2–3% above the Start Rate on a loan with
5627961
Adjustable-rate mortgage


, five, or seven years of the loan, after which the interest rate fluctuates. In Singapore, ARM is commonly known as floating rate or variable rate mortgage. Unlike fixed-rate mortgage in the country, a floating rate mortgage has its interest rate varying during the entire duration of the loan. The loans can be pegged to the bank board rate, SIBOR, or SOR Typically, the structure of the interest rate of the mortgage is as follows: The loan can be pegged to SIBOR or SOR of any duration
5627973
Floating interest rate


mortgage is a mortgage with a floating rate, as opposed to a fixed rate loan. In many countries, floating rate loans and mortgages are predominant. They may be referred to by different names, such as an adjustable rate mortgage in the United States. In some countries, there may be no special name for this type of loan or mortgage, as floating rate lending may be the norm. For example, in Canada substantially all mortgages are floating rate mortgages; borrowers may choose to "fix" the interest rate for
10157154
Fixed-rate mortgage


does not indicate that it is a worse type of borrowing than an adjustable-rate mortgage. If interest rates rise, the ARM will cost more, but the FRM will cost the same. In effect, the lender has agreed to take the interest rate risk on a fixed-rate loan. Some studies have shown that the majority of borrowers with adjustable rate mortgages save money in the long term but also that some borrowers pay more. The price of potentially saving money, in other words, is balanced by the risk
5627993
Adjustable-rate mortgage


future cost of borrowing will be (when rates change). If rates rise, the cost will be higher; if rates go down, cost will be lower. In effect, the borrower has agreed to take the interest rate risk. The actual pricing and rate analysis of adjustable rate mortgage in the finance industry is done through various computer simulation methodologies like Monte Carlo method or Sobol sequences. In these techniques, by using an assumed probability distribution of future interest rates, numerous (10,000–100,000 or even 1,000,000) possible interest rate
5627976
Government policies and the subprime mortgage crisis


adjustable-rate, balloon-payment and interest-only mortgages. These new loan types are credited with replacing the long-standing practice of banks making conventional fixed-rate, amortizing mortgages. Among the criticisms of banking industry deregulation that contributed to the savings and loan crisis was that Congress failed to enact regulations that would have prevented exploitations by these loan types. Subsequent widespread abuses of predatory lending occurred with the use of adjustable-rate mortgages. Approximately 90% of subprime mortgages issued in 2006 were adjustable-rate mortgages.
17283593
Fixed-rate mortgage


finance. Fixed-rate mortgages are usually more expensive than adjustable rate mortgages. The inherent interest rate risk makes long-term fixed rate loans tend to have a higher interest rate than short-term loans. The relationship between interest rates for short and long-term loans is represented by the yield curve, which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and occurs less often. The fact that a fixed-rate mortgage has a higher starting interest rate
5627992
Adjustable-rate mortgage


or index plus margin, the initial rate is not explicitly tied to any index; the "adjustments" are tied to an index. The most important basic features of ARMs are: The choice of a home mortgage loan is complicated and time consuming. As a help to the buyer, the Federal Reserve Board and the Federal Home Loan Bank Board have prepared a mortgage checklist. Any mortgage where payments made by the borrower may increase over time brings with it the risk of financial hardship to the borrower. To limit this risk
5627942
Adjustable-rate mortgage


that the interest rate will equal the underlying index plus a margin. The margin is specified in the note and remains fixed over the life of the loan. For example, a mortgage interest rate may be specified in the note as being LIBOR plus 2%, 2% being the margin and LIBOR being the index. The final way to apply an index is on a movement basis. In this scheme, the mortgage is originated at an agreed upon rate, then adjusted based on the movement of the index. Unlike direct
5627941
Adjustable-rate mortgage


, fixed-rate mortgages and so were caught when Paul Volcker raised interest rates in the early 1980s. Therefore, banks and other financial institutions offer adjustable rate mortgages because it reduces risk and matches their sources of funding. Banking regulators pay close attention to asset-liability mismatches to avoid such problems, and they place tight restrictions on the amount of long-term fixed-rate mortgages that banks may hold in relation to their other assets. To reduce the risk, many mortgage originators sell many of their mortgages, particularly the
5627948
Commercial mortgage


structured as a mezzanine note or as preferred equity, which generally carries a higher interest rate. Interest rates for commercial mortgages may be fixed-rate or floating rate. Fixed-rate mortgages on stabilized commercial real estate are generally priced based on a spread to swaps, with the swap spread matched to the term of the loan. Market interest rates as well as underwriting factors greatly affect the interest rate quoted on a particular piece of commercial real estate. Interest rates for commercial mortgages are usually higher than those for residential mortgages.
710590
Balloon payment mortgage


mortgages without a reset option or if the reset option is not available, the expectation is that either the borrower will have sold the property or refinanced the loan by the end of the loan term. That may mean that there is a refinancing risk. Adjustable rate mortgages are sometimes confused with balloon payment mortgages. The distinction is that a balloon payment may require refinancing or repayment at the end of the period; some adjustable rate mortgages do not need to be refinanced, and the interest rate is automatically adjusted at the end of
10532632
Adjustable-rate mortgage


year (if there is a cap, it must be specified in the loan document); and (c) a maximum (cap) that interest rates can rise over the life of the mortgage (this also must be specified in the loan document). In September 1991, the Government Accountability Office (GAO) released a study of Adjustable Rate Mortgages in the United States which found between 20% and 25% of the ARM loans out of the estimated 12 million at the time contained Interest Rate Errors. A former
5627980
Adjustable-rate mortgage


the first three or five years of the loan. Adjustable rate mortgages are sometimes sold to consumers who are unlikely to repay the loan should interest rates rise. In the United States, extreme cases are characterized by the Consumer Federation of America as predatory loans. Protections against interest rate rises include (a) a possible initial period with a fixed rate (which gives the borrower a chance to increase his/her annual earnings before payments rise); (b) a maximum (cap) that interest rates can rise in any
5627979
Gary Gensler


of Libor, the London interbank offered rate. Early in his tenure, Gensler listened to tape recordings of two Barclays employees as they discussed plans to report false interest rates in an effort to manipulate Libor. Libor is the average interest rate estimated by leading banks in London that the average leading bank would be charged if borrowing from other banks. It is used as a reference rate for many financial products, including adjustable rate mortgages, student loans, and car payments. "A driving force behind the latest crackdown tied to LIBOR
20953962
Adjustable-rate mortgage


-average payment increases. A hybrid ARM features an interest rate that is fixed for an initial period of time, then floats thereafter. The "hybrid" refers to the ARM's blend of fixed-rate and adjustable-rate characteristics. Hybrid ARMs are referred to by their initial fixed-rate and adjustable-rate periods, for example, 3/1, is for an ARM with a 3-year fixed interest-rate period and subsequent 1-year interest-rate adjustment periods. The date that a hybrid ARM shifts from a fixed-
5627950
Causes of the United States housing bubble


rates and percentage change in home prices. For interest-only mortgages (at 2005 rates), this yields about a 16% change in principal for a 1% change in interest rates at current rates. Therefore, the 2% drop in long-term interest rates can account for about a 10 × 2% = 20% rise in home prices if every buyer is using a fixed-rate mortgage (FRM), or about 16 × 3% ≈ 50% if every buyer is using an adjustable rate mortgage
6916394
United States housing market correction


ability to meet their mortgage obligations. Many of these homebuyers took out adjustable-rate mortgages during the period of low interest rates in order to purchase the home of their dreams. Initially, they were able to meet their mortgage obligations thanks to the low "teaser" rates being charged in the early years of the mortgage. As the Federal Reserve Bank applied its monetary contraction policy in 2005, many homeowners were stunned when their adjustable-rate mortgages began to reset to much higher rates in mid-2007 and their monthly payments jumped far
16648050
Adjustable-rate mortgage


federal mortgage banking auditor estimated these mistakes created at least US$10 billion in net overcharges to American home-owners. Such errors occurred when the related mortgage servicer selected the incorrect index date, used an incorrect margin, or ignored interest rate change caps. In July 1994, Consumer Loan Advocates, a non-profit mortgage auditing firm announced that as many as 18% of Adjustable Rate Mortgages have errors costing the borrower more than $5,000 in interest overcharges. In December 1995, a government study concluded that 50–60% of all
5627981
Adjustable-rate mortgage


the mortgage industry of the United Kingdom has traditionally been dominated by building societies. Since funds raised by UK building societies must be at least 50% deposits, lenders prefer variable-rate mortgages to fixed-rate mortgages to reduce potential interest rate risks between what they charging in mortgage interest and what they are paying in interest for deposits and other funding sources. Countries where fixed rate loans are the common form of loan for a house purchase usually need to have a specific legal framework in place to make this possible. For example
5627969
Adjustable-rate mortgage


structuring the Cap than a typical First Lien Mortgage. The typical First Lien Monthly Adjustable loans with Negative amortization loan has a life cap for the underlying rate (aka "Fully Indexed Rate") between 9.95% and 12% (maximum assessed interest rate). Some of these loans can have much higher rate ceilings. The fully indexed rate is always listed on the statement, but borrowers are shielded from the full effect of rate increases by the minimum payment, until the loan is recast, which is when principal and interest
5627965
Adjustable-rate mortgage


mortgages with fixed rates. For the borrower, adjustable rate mortgages may be less expensive but at the price of bearing higher risk. Many ARMs have "teaser periods", which are relatively short initial fixed-rate periods (typically, one month to one year) when the ARM bears an interest rate that is substantially below the "fully indexed" rate. The teaser period may induce some borrowers to view an ARM as more of a bargain than it really represents. A low teaser rate predisposes an ARM to sustain above
5627949
Subprime mortgage crisis


(AMTPA), which allowed non-federally chartered housing creditors to write adjustable-rate mortgages. This bi-partisan legislation was, according to the Urban Institute, intended to "increase the volume of loan products that reduced the up-front costs to borrowers in order to make homeownership more affordable." Among the new mortgage loan types created and gaining in popularity in the early 1980s were adjustable-rate, option adjustable-rate, balloon-payment and interest-only mortgages. Subsequent widespread abuses of predatory lending occurred
13134104
Super jumbo mortgage


typical 12% rates of the time. While 30-year fixed rate mortgages are available in the super jumbo category, they do not represent the majority of super jumbo mortgages. 3/1 ARM, 5/1 ARM, 7/1 ARM and 10/1 ARM Adjustable Rate Mortgages are more popular among super jumbo mortgage applicants than with the general public, but the greatest increase in originations as a category has been so called "exotic" Super Jumbo Mortgages. Offering interest only and negative amortization features, these loans allow borrowers to choose a lower payment option than a
5639055
Mortgage calculator


rate, and the length of time over which the loan is repaid; (2) the amount owed every month equals the amount owed from the previous month plus interest on that amount, minus the fixed monthly payment; (3) the fixed monthly payment is chosen so that the loan is paid off in full with interest at the end of its term and no more money is owed. While adjustable-rate mortgages have been around for decades, from 2002 through 2005 adjustable-rate mortgages became more complicated as did the
8885722
Streamline refinancing


are free to set minimum credit scores. The Federal Housing Administration and VA do not permit the refinancing of a home unless there is a net benefit to the borrower. This net benefit is a reduction of five percent or more in the monthly house payment, including principal, interest and mortgage insurance. Adjustable rate mortgages are dangerous because their interest rate could spike to five or ten percent, especially for sub-prime borrowers whose loans started with low teaser adjustable rates but compensate by charging several times the official interest rate later.
10117109
Adjustable-rate mortgage


scenarios are explored, mortgage cash flows calculated under each, and aggregate parameters like fair value and effective interest rate over the life of the mortgage are estimated. Having these at hand, lending analysts determine whether offering a particular mortgage would be profitable, and if it would represent tolerable risk to the bank. Adjustable rate mortgages, like other types of mortgage, usually allow the borrower to prepay principal (or capital) early without penalty. Early payments of part of the principal will reduce the total cost of the loan (total
5627977
Fixed-rate mortgage


A fixed-rate mortgage (FRM), often referred to as a "vanilla wafer" mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float". As a result, payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan benefits from a consistent, single payment and the ability to plan a budget based on
5627985
Fixed-rate mortgage


fixed-rate mortgages are not tied to an index. Instead, the interest rate is set (or "fixed") in advance to an advertised rate, usually in increments of 1/4 or 1/8 percent. The fixed monthly payment for a fixed-rate mortgage is the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term. The United States Federal Housing Administration (FHA) helped develop and standardize the fixed rate mortgage as an alternative to the
5627987
Subprime mortgage crisis


with the use of adjustable-rate mortgages. Approximately 90% of subprime mortgages issued in 2006 were adjustable-rate mortgages. The Glass-Steagall Act was enacted after the Great Depression. It separated commercial banks and investment banks, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter. In 1999 Glass-Steagall was repealed by the Gramm-Leach-Bliley Act. Economist Joseph Stiglitz criticized the repeal of Glass Steagall because, in his opinion, it enabled the
13134105
Streamline refinancing


The only exception to this net benefit rule is when someone refinances to a fixed rate mortgage from an adjustable rate mortgage. In that case, the new interest rate may actually be higher than the ARM interest rate. Streamline refinancing reuses the original paperwork from a home loan, allowing someone to refinance the property before private mortgage insurance (PMI) or insurance rates rise. The FHA streamline refinancing program requires no repairs be made to the property except for the removal of lead-based paint. For example, repairs to a roof
10117110
Reverse mortgage


IIR can never change. For adjustable-rate reverse mortgages, the IIR can change with program limits up to a lifetime interest rate cap. The expected interest rate, or EIR, is used mainly for calculation purposes to determine how much a reverse mortgage borrower qualifies for based on the value of the home (up to the maximum lending limit of $726,525 ) and age of the youngest borrower. The EIR is often different from the actual note rate, or IIR. The EIR does "not" determine the amount of
20726949
Mortgage loan


promoted the Danish mortgage market model. Mortgages in Malaysia can be categorised into 2 different groups: conventional home loan and Islamic home loan. Under the conventional home loan, banks normally charge a fixed interest rate, a variable interest rate, or both. These interest rates are tied to a base rate (individual bank's benchmark rate). For Islamic home financing, it follows the Sharia Law and comes in 2 common types: Bai’ Bithaman Ajil (BBA) or Musharakah Mutanaqisah (MM). Bai' Bithaman Ajil
11288114
Alan Greenspan


rates, and in some countries, the housing market is a key channel of monetary policy transmission". In a February 23, 2004 speech, Greenspan suggested that more homeowners should consider taking out adjustable-rate mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market. The Fed's own funds rate was at a then all-time-low of 1%. A few months after his recommendation, Greenspan began raising interest rates, in a series of rate hikes that would bring the
2086447
Housing in Israel


economies, rents and average income. This real estate bubble was blamed on the country-wide housing shortage. However, many economists and investors do not see it as a bubble. In response to the global economic recession in 2008, Israel's central bank governor, Stanley Fischer, lowered interest rates to an all-time low of 0.5%. That resulted in prices rising very fast in 2009, after rising steadily in the preceding decade. Most mortgages taken out in 2007–2009 were adjustable-rate mortgages pegged to the prime
164919
Subprime mortgage crisis


. By 2005, this figure had increased to 11.5% GDP." This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages. These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for the remainder of the mortgage's
13134016
Consumer Price Index (United Kingdom)


excluding mortgage interest payments. This was felt to be a better measure of the effectiveness of macroeconomic policy. It was argued that if interest rates are used to curb inflation, then including mortgage payments in the inflation measure would be misleading. Until 1997, interest rates were set by the Treasury. On election in May 1997, the new Labour government handed control over interest rates to the politically independent Bank of England Monetary Policy Committee. This committee is given the responsibility of adjusting interest rates in order to meet an inflation target set
17526469
Adjustable-rate mortgage


and 2% on subsequent adjustments. Although uncommon, a cap may limit the maximum monthly payment in absolute terms (for example, $1000 a month), rather than in relative terms. ARMs that allow negative amortization will typically have payment adjustments that occur less frequently than the interest rate adjustment. For example, the interest rate may be adjusted every month, but the payment amount only once every 12 months. Cap structure is sometimes expressed as "initial adjustment cap" / "subsequent adjustment cap" / "life cap
5627944
Amortization calculator


An amortization calculator is used to determine the periodic payment amount due on a loan (typically a mortgage), based on the amortization process. The amortization repayment model factors varying amounts of both interest and principal into every installment, though the total amount of each payment is the same. An amortization schedule calculator is often used to adjust the loan amount until the monthly payments will fit comfortably into budget, and can vary the interest rate to see the difference a better rate might make in the kind of home or car one can
20876838
Adjustable-rate mortgage


's discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government, with caps on charges. In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages. Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the cost of funds index (COFI
5627937
Floating interest rate


higher rates for longer-term fixed-rate loans, because they are bearing the interest rate risk (risking that the rate will go up, and they will get lower interest income than they would otherwise have had). Certain types of floating rate loans, particularly mortgages, may have other special features such as interest rate caps, or limits on the maximum interest rate or maximum change in the interest rate that is allowable. In business and finance, a "floating rate loan" (or a variable or adjustable rate
10157152
Jerry Brown


Financial engaged in "unfair and deceptive" practices to get homeowners to apply for risky mortgages far beyond their means. Brown accused the lender of breaking the state's laws against false advertising and unfair business practices. The lawsuit also claimed the defendant misled many consumers by misinforming them about the workings of certain mortgages such adjustable-rate mortgages, interest-only loans, low-documentation loans and home-equity loans while telling borrowers they would be able to refinance before the interest rate on their loans adjusted. The suit was settled
9606770
Cost of funds index


. Interest rates on COFI loans and mortgages tend to fluctuate more slowly than variable-rate loans linked to other indexes. An index used to determine interest rate changes for some adjustable-rate mortgages. The 11th District Cost of Funds Index was first introduced in December 1982. It is a National Monthly Median Cost of Funds defined as interest (dividends) paid or accrued on deposits for Western American Financial Institutions. It is calculated on the last day of the month. interest expanded/average of current and previous years deposit plus
19995262
Causes of the United States housing bubble


. The interest rate on one-year adjustable rate mortgages (1/1 ARMs) fell 3 percentage points (from about 7% to about 4%). Richard Fisher, president of the Dallas Fed, said in 2006 that the Fed's low interest-rate policies unintentionally prompted speculation in the housing market, and that the subsequent "substantial correction [is] inflicting real costs to millions of homeowners." A drop in mortgage interest rates reduces the cost of borrowing and should logically result in an increase in prices in a
6916392
Subprime lending


, regardless of their actual composition or performance. Because of the "originate-to-distribute" model followed by many subprime mortgage originators, there was little monitoring of credit quality and little effort at remediation when these mortgages became troubled. To avoid high initial mortgage payments, many subprime borrowers took out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up costing much more. So a $500,000
12582367
Adjustable-rate mortgage


rate payment schedule to an adjusting payment schedule is known as the reset date. After the reset date, a hybrid ARM floats at a margin over a specified index just like any ordinary ARM. The popularity of hybrid ARMs has significantly increased in recent years. In 1998, the percentage of hybrids relative to 30-year fixed-rate mortgages was less than 2%; within six years, this increased to 27.5%. Like other ARMs, hybrid ARMs transfer some interest-rate risk from the lender to the borrower, thus allowing
5627951
Adjustable-rate mortgage


the lender to offer a lower note rate in many interest-rate environments. An "option ARM" is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment. These types of loans are also called "pick-a-payment" or "pay-option" ARMs. When a borrower makes a Pay-Option ARM payment that is less than the accruing interest, there
5627952
Adjustable-rate mortgage


volumes of mortgages at fixed rates but derived most of its funding from deposits (or other short-term sources of funds), it would have an asset–liability mismatch because of interest rate risk. It would then be running the risk that the interest income from its mortgage portfolio would be less than it needed to pay its depositors. In the United States, some argue that the savings and loan crisis was in part caused by the problem: the savings and loans companies had short-term deposits and long-term
5627947
Adjustable-rate mortgage


", for example 2/2/5 for a loan with a 2% cap on the initial adjustment, a 2% cap on subsequent adjustments, and a 5% cap on total interest rate adjustments. When only two values are given, this indicates that the initial change cap and periodic cap are the same. For example, a 2/2/5 cap structure may sometimes be written simply 2/5. ARMs generally permit borrowers to lower their initial payments if they are willing to assume the risk of interest rate changes. There is evidence that consumers tend
5627945
Super jumbo mortgage


field review appraisals, desk review appraisals, and broker price opinions may be ordered to substantiate the property's value. This is a significant concern for the lender as the asset in which they are taking a security interest must have a reasonable value to justify their risk and associated premiums. While historically super jumbo mortgages were primarily short term adjustable rate principal & interest mortgages, interest only options and payment cap or negative amortization loans (currently called "Option ARM" mortgages) were introduced to the category in the early 1980s to counteract
5639054
Libor


widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There are three major classifications of interest rate fixings instruments, including standard inter bank products, commercial field products, and hybrid products which often use Libor as their reference rate. Standard interbank products: Commercial field products: Hybrid products: In the United States in 2008, around sixty percent of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the US dollar Libor. In 2012, around 45 percent of prime adjustable
9302722
Political positions of Hillary Clinton


after five years. On December 5, 2007, Clinton unveiled her plan to ameliorate the effects of the 2007 subprime mortgage financial crisis on homeowners. She called for a 90-day moratorium on foreclosures, in order that lenders and mortgage servicers have sufficient time to get through paperwork complications and an expected high volume of troubled borrowers without having to shut out the lights, and a five-year freeze on the interest rates of adjustable rate mortgages, so that borrowers would not get slammed by expected 30, 40 or more percent increases in
7977364
Adjustable-rate mortgage


, and a spread (margin) is tacked to the X-month SIBOR/SOR. The spread is usually adjusted upwards after the first few years. SIBOR-pegged ARMs are more popular than SOR-or board&rate-pegged mortgages. However, recently, ANZ introduced an ARM that is pegged to the average of SIBOR and SOR. So far, it is the only bank in Singapore to offer such a mortgage. Adjustable rate mortgages are typically, but not always, less expensive than fixed-rate mortgages. Due
5627974
Emergency Economic Stabilization Act of 2008


, not just bailing out Wall Street firms: "If we do not take action to address the crisis facing borrowers, we'll never solve the crisis facing lenders." She proposed a new Home Owners' Loan Corporation (HOLC), similar to that used after the Depression and which was launched in 1933. The new HOLC was to administer a national program to help homeowners refinance their mortgages. She also called for a moratorium on foreclosures and freezing of rate hikes in adjustable-rate mortgages. Barack Obama, the Democratic
11289924
FHA insured loan


, particularly during periods when interest rates are low, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan. In 2006 FHA received approval to allow hybrid ARMs, in which the interest is fixed for the first 3 or 5 years, and is then adjusted annually according to market conditions and indices. The FHA Hybrid provides for an initial
9611100
Floor loan


loan to the builder and release the remaining 20% upon the successful construction lease or sale of the building's residential units. This partition of funding means the lower risk for lender. A word floor is used for more financial terms in financial area and means minimum, e.g. the interest rate floor is the lowest interest rate the lender can offer you to adjustable (sometimes called variable) rate mortgage. The related term is a floor to ceiling loan. In this type of loan there are two separate funding amount: first upon
18916023
Mortgage servicer


A mortgage servicer is a company to which some borrowers pay their mortgage loan payments and which performs other services in connection with mortgages and mortgage-backed securities. The mortgage servicer may be the entity that originated the mortgage, or it may have purchased the mortgage servicing rights from the original mortgage lender. The duties of a mortgage servicer vary, but typically include the acceptance and recording of mortgage payments; calculating variable interest rates on adjustable rate loans; payment of taxes and insurance from borrower escrow accounts; negotiations of workouts and modifications
15244555
Adjustable-rate mortgage


interest paid), but will not shorten the amount of time needed to pay off the loan like other loan types. Upon each recasting, the new fully indexed interest rate is applied to the remaining principal to end within the remaining term schedule. If a mortgage is refinanced, the borrower simultaneously takes out a new mortgage and pays off the old mortgage; the latter counts as a prepayment. Some ARMs charge "prepayment penalties" of several thousand dollars if the borrower refinances the loan or pays it off early, especially within
5627978
Adjustable-rate mortgage


In some countries, true fixed-rate mortgages are not available except for shorter-term loans; in Canada, the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years. In many countries, it is not feasible for banks to lend at fixed rates for very long terms; in these cases, the only feasible type of mortgage for banks to offer may be adjustable rate mortgages (barring some form of government intervention). For example,
5627968
Mortgage underwriting


underwriter assess the quality of the loan, banks and lenders create guidelines and even computer models that analyze the various aspects of the mortgage and provide recommendations regarding the risks involved. However, it is always up to the underwriter to make the final decision on whether to approve or decline a loan. Risks for the lender are of three forms: interest rate risk, default risk, and prepayment risk. There is a risk to the lender that the rate on an adjustable-rate mortgage may decrease. If this is not matched
1785299
Causes of the United States housing bubble


these loans were also called "no doc" (no documentation) loans and, somewhat pejoratively, as "liar loans") to finance home purchases described above have raised concerns about the quality of these loans should interest rates rise again or the borrower is unable to pay the mortgage. In many areas, particularly in those with most appreciation, non-standard loans went from almost unheard of to prevalent. For example, 80% of all mortgages initiated in San Diego region in 2004 were adjustable-rate, and 47
6916428
Causes of the United States housing bubble


Observers and analysts have attributed the reasons for the 2001–2006 housing bubble and its 2007–10 collapse in the United States to "everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan". Other factors that are named include "Mortgage underwriters, investment banks, rating agencies, and investors", "low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance" Politicians in both the Democratic and Republican political parties have been cited for "pushing to keep derivatives unregulated"
6916364
Reverse mortgage


loan size) is determined by several factors: The cost of getting a reverse mortgage depends on the particular reverse mortgage program the borrower acquires. These costs are frequently rolled into the loan itself and therefore compound with the principal. Typical costs for the reverse mortgage include: The interest rate on the reverse mortgage varies. Some programs offer fixed rate loans, while others offer variable rate loans. In addition, there may be costs during the life of the reverse mortgage. A monthly service charge may be applied to the balance of
20726925
Mortgage calculator


calculations involved. Lending became much more creative which complicated the calculations. Subprime lending and creative loans such as the “pick a payment”, “pay option”, and “hybrid” loans brought on a new era of mortgage calculations. The more creative adjustable mortgages meant some changes in the calculations to specifically handle these complicated loans. To calculate the annual percentage rates (APR) many more variables needed to be added, including: the starting interest rate; the length of time at that rate; the recast; the
8885723
Adjustable-rate mortgage


an initial fixed rate term of three years or lower and 5–6% above the Start Rate on a loan with an initial fixed rate term of five years or greater. Rate Adjustment Cap: This is the maximum amount by which an Adjustable Rate Mortgage may increase on each successive adjustment. Similar to the initial cap, this cap is usually 1% above the Start Rate for loans with an initial fixed term of three years or greater and usually 2% above the Start Rate for loans that have an initial fixed term of five
5627962
Norwest Corporation


quickly built into the second largest holder of mortgages in the United States. In the summer of 1984, Norwest Mortgage lost nearly $100 million from an unsuccessful effort to hedge its mounting interest-rate risk on adjustable-rate mortgages. The loan losses and the mortgage debacle led to a drop in net income from $125.2 million in 1983 to $69.5 million in 1984. In August 1984 the head of Norwest Mortgage was fired because of the hedging losses. By early 1995 substantial portions of Norwest Mortgage were divested, including
13391753
Mortgage-backed security


need to be reinvested at a lower interest rate. Hence the term "prepayment risk". Professional investors generally use arbitrage-pricing models to value MBS. These models deploy interest rate scenarios consistent with the current yield curve as drivers of the econometric prepayment models that models homeowner behavior as a function of projected mortgage rates. Given the market price, the model produces an option-adjusted spread, a valuation metric that takes into account the risks inherent in these complex securities. There are other drivers of the prepayment function (or
18491784
Cost of funds index


A cost of funds index or COFI is a regional average of interest expenses incurred by financial institutions, which in turn is used as a base for calculating variable rate loans. The interest rate on an adjustable rate mortgage, for example, is often linked to a regional COFI specified in the particular loan documents. COFIs, in turn, are usually calculated by a self-regulatory agency like Federal Home Loan Banks. In California, for example, many home mortgage loans are indexed to the Federal Home Loan Bank of San Francisco
19995261
Mortgage loan


fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In some countries, such as the United States, fixed rate mortgages are the norm, but floating rate mortgages are relatively common. Combinations of fixed and floating rate mortgages are also common, whereby a mortgage loan will have a fixed rate for some period, for example the first five years, and vary after the end of that period. The charge to the borrower depends upon the
11288071
Subprime mortgage crisis solutions debate


be adjusted to lower monthly payments and help homeowners: 1) Reduce the interest rate; 2) Reduce the loan principal amount; 3) Extend the mortgage term, such as from 30 to 40 years; and 4) Convert variable-rate ARM mortgages to fixed-rate. The Economist described the issue this way: "No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual,
3633965
Bank of America Home Loans


, accusing the lender of breaking the state's laws against false advertising and unfair business practices. The lawsuit also claims the defendant mislead many consumers by misinforming them about the workings of certain mortgages such adjustable-rate mortgages, interest-only loans, low-documentation loans and home-equity loans while telling borrowers they would be able to refinance before the interest rate on their loans adjusted. In August 2008, Connecticut Attorney General Richard Blumenthal also brought suit against Countrywide, alleging that deceptive lending practices had ripped off Connecticut homeowners.
15982223
Griftopia


financial evaluation. Greenspan is criticized for advising the public to use adjustable-rate mortgages (ARMs) in preference to fixed–rate mortgages shortly before his raising of interest rates. Taibbi accuses Greenspan of turning the Federal Reserve into a permanent bail-out system for the super-rich. Taibbi dissects the housing bubble crisis as a complex scam involving players at many levels. Entry level assessments, income levels, and credit scores were falsified or neglected, allowing unqualified customers to acquire mortgages they could not carry. Taibbi maintains that
18745400
Reverse mortgage


interest that accrues on the loan balance (the IIR does that). The total pool of money that a borrower can receive from a HECM reverse mortgage is called the principal limit (PL), which is calculated based on the maximum claim amount (MCA), the age of the youngest borrower, the expected interest rate (EIR), and a table to PL factors published by HUD. Similar to loan-to-value (LTV) in the forward mortgage world, the principal limit is essentially the percentage of
20726950
Adjustable-rate mortgage


. In some countries, banks may publish a prime lending rate which is used as the index. The index may be applied in one of three ways: directly, on a rate plus margin basis, or based on index movement. A directly applied index means that the interest rate changes exactly with the index. In other words, the interest rate on the note exactly equals the index. Of the above indices, only the contract rate index is applied directly. To apply an index on a rate plus margin basis means
5627940
Jim Cramer


August 3, 2007, Cramer made a plea for Federal Reserve Chairman Ben Bernanke to cut interest rates supposedly because of comments he was getting from investment banks and their concern about adjustable-rate mortgage borrowers' increasing loan rates. On July 8, 2008, in an article in TheStreet.com entitled, "Look At The Facts," Cramer said, "The losses are increasing, the auction-rate preferreds are now biting, the mortgage implode-a-meter now measures how many home-builders are going under."
12999442
Subprime mortgage crisis


debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007. When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other
13133988
Savings and loan association


pay higher interest rates on savings deposits compared to a regular commercial bank. This was known as Regulation Q (The Interest Rate Adjustment Act of 1966) and gave the S&Ls 50 basis points above what banks could offer. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more mortgage loans, which would keep the mortgage market liquid, and funds would always be available to potential borrowers. However, savings and loans were not allowed to offer checking
17274514
Subprime mortgage crisis


to prove, or even to state any owned assets. All that was required for a mortgage was a credit score. Types of mortgages became more risky as well. The interest-only adjustable-rate mortgage (ARM), allowed the homeowner to pay only the interest (not principal) of the mortgage during an initial "teaser" period. Even looser was the "payment option" loan, in which the homeowner has the option to make monthly payment that do not even cover the interest for the first two or
13134033
Mortgage industry of Denmark


study issued by the UN Economic Commission for Europe compared German, US, and Danish mortgage systems. The German Bausparkassen have reported nominal interest rates of approximately 6 per cent per annum in the last 40 years (as of 2004). In addition, they charge administration and service fees (about 1.5 per cent of the loan amount). In the United States, the average interest rates for fixed-rate mortgages in the housing market started in high double figures in the 1980s and have (as of 2004) reached about
18705635
Adjustable-rate mortgage


payments are due that will fully amortize the loan at the fully indexed rate. Since HELOCs are intended by banks to primarily sit in second lien position, they normally are only capped by the maximum interest rate allowed by law in the state wherein they are issued. For example, Florida currently has an 18% cap on interest rate charges. They are risky to the borrower in the sense that they are mostly indexed to the Wall Street Journal prime rate, which is considered a Spot Index, or a financial indicator that is
5627966
Susan Bies


Accountants, International Women's Forum, Economic Association of Memphis, University of Memphis, Memphis Area Chamber of Commerce, Memphis Youth Initiative, and Memphis Partners. In December 2008, Bies said she thought that regulators had been caught by surprise by the rapid growth in volume of so-called subprime and adjustable-rate mortgages in the mid-2000s subprime mortgage crisis, and that she regretted there was not quicker action taken to protect borrowers. "When you get into people whose mortgage payments are taking half of their cash flow, they
3253920
Alan Greenspan


funds rate to 5.25% about two years later. A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs that reset at much higher interest rates than what the borrower paid during the first few years of the mortgage. In 2008, Greenspan expressed great frustration that the February 23 speech was used to criticize him on ARMs and the subprime mortgage crisis, and stated that he had made countervailing comments eight days after it that praised traditional fixed-rate mortgages. In that speech, Greenspan had
2086448
Adjustable-rate mortgage


), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is distinct from the graduated payment mortgage, which offers changing payment amounts but a
5627938
Subprime mortgage crisis


fell, and adjustable-rate mortgage (ARM) interest rates reset higher. As housing prices fell, global investor demand for mortgage-related securities evaporated. This became apparent by July 2007, when investment bank Bear Stearns announced that two of its hedge funds had imploded. These funds had invested in securities that derived their value from mortgages. When the value of these securities dropped, investors demanded that these hedge funds provide additional collateral. This created a cascade of selling in these securities, which lowered their value further. Economist
13133993
Financial crisis of 2007–2008


purchasing Treasury bonds and thus avoided much of the direct effect of the crisis. US households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners. This may
15985113
Reverse mortgage


mortgages typically have interest rates that can change on a monthly or yearly basis within certain limits. Applicants for a HECM reverse mortgage will likely notice that there are two different interest rates disclosed on their loan documents: the "initial interest rate", or "IIR", and the "expected interest rate", or "EIR". The initial interest rate, or IIR, is the actual note rate at which interest accrues on the outstanding loan balance on an annual basis. For fixed-rate reverse mortgages, the
20726948
Loan purpose


loans that are connected with specific types of business activities. Pertaining to mortgages and their risk based pricing factors, the loan purpose factor is sub-categorized by purchase, rate and term refinance and cash-out refinance. Lenders assess that a purchase loan contains the least amount of risk and thus 'price' purchase loans most favorably (i.e. no interest rate increase or a risk-based pricing improvement in the order of .25%). Rate and term refinances are priced similar to purchase loans, with no interest rate increase
5735644
Streamline refinancing


it at all. Streamline refinancing is an option for borrowers who want to take advantage of low interest rates, get out of an adjustable rate mortgage (ARM) or graduated payment mortgage (GPM). Both the FHA and VA offer streamline refinancing for home mortgages. Banks are taking the risk that the home will not sell for more than is owed against it if they must foreclose on it. Streamline refinancing programs may allow at-risk borrowers to stay in their homes, but it does not solve the underlying problem of
10117106
Worldwide LaRouche Youth Movement


that would place federal- and state-chartered banks under protection, freeze all existing home mortgages for a period of time, adjust mortgage values to fair prices, restructure existing mortgages at appropriate interest rates, and write off speculative debt obligations of mortgage-backed securities". According to one opponent, Congressman Paul E. Kanjorski, on closer inspection the act "calls for seizure by the government" of all U.S banks. In 2009 LPAC members were noted for their posters which depicted Barack Obama with a Hitler-style toothbrush mustache.
21663450
Jumbo mortgage


liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". Traditionally, the interest rates on jumbo mortgages are higher than for conforming mortgages, however with GSE fees increasing, Jumbo loans have recently seen lower interest rates than conforming loans. On February 13, 2008 President George W. Bush signed the Housing and Economic Recovery Act of 2008 () which temporarily increased the jumbo conforming limit in the United States. The limit was raised
18553079