BANKS CLOSE TO DECIDING THAT THEY CAN LIVE WITH LOWER PRIME RATE, AFTERALL
Hank Paulson's plan is drawing fire from a number of quarters, but freezing rates at 7% or so doesn't look like a hardship, given that it looks like the Prime Rate should be falling anyway, right? (Much real-estate lending is tied to prime, but not all).
Chart 1. Prime Rate vs. 10-year treasury cost of funds [click chart to embiggen]
Meanwhile, here is some quick math on how much of an impact that resets can have on an ordinary budget:
Lend $200K, less 10% downpayment, at 7%, to get a $1,200 monthly payment that we might assume is 40% of the monthly budget (few get away with the old-fashioned 33%).
Now rates "reset" to 11%, payment balloons 43% to $1,700 or $500/mo more, pushing housing, before taxes, to a whopping 60% of the budget (technically, you are supposed to throw in property taxes and insurance, too, for "housing").
You and I might think that is ridiculous, but apparently there are loans out there just like that. The "good" ARMs (started in the early 90s, as I recall), the ones that ran a short-term funding of 3-4% and then locked in to reasonable long-term rates (circa 6-7%) are still worth preserving, but an 11% reset?
Friday, November 30, 2007
A Farewell to ARMs
