Closer Look At The ARMs Reset Problem

The Fed vaporized much of the ARM reset problem in 2008-2009 by slashing interest rates. This is especially true for those in 3-1 ARMs. It is highly likely the Fed's panic rate cuts in early 2008 were made with this in mind.

A good analysis. The point that 5/1's originated in '05/'06 are likely to be a bigger problem is insightful. However we take issue with the claim that we are out of the woods as far as 3/1's. One problem is that most of the loans are LIBOR, which has not fallen as much (relative to when the loans were originated) as Treasuries have. The second problem is that LIBOR rates are more volatile than Treasuries, and the rates for both have only been "low" for a couple months. It is taking unprecedented support by foreign central banks to create this phenomenon, and there is no guarantee it will last for much longer.

Again, if you think we are out of the woods, you might look at another recent Mish post on a WaMu Alt-A pool continuing to deteriorate. Obviously something is still very wrong here. The hidden factor in all the rate reset discussion may be that declining earnings and rising unemployment continue unabated.