Refinance Window Now Closed For Homeowners Chained To Arm Mortgage

For home and condominium owners chained to an adjustable-rate mortgage, a year ago would have been a good time to refinance into a loan with a fixed interest rate.

Unfortunately, the refinance ticket window has closed and the train has left the station. According to ATTOM Data Solutions, residential refinance mortgage originations on 1-to-4-unit properties nationwide declined in the third quarter of 2018 to 681,455 loans, down 15% from the previous quarter and down 21% from a year ago—the lowest level since early 2000.

Refinance dollar volume in the U.S. in the third quarter represented an estimated $175.1 billion, a decline of 14% from the previous quarter and down 21% from a year ago—the lowest level since early 2014.

In December of 2017, the Home Front column strongly advised borrowers paying off an adjustable-rate mortgage (ARM) to refinance because it was not a good idea to hang on to a variable-rate loan with interest rates on the rise and likely to go higher in 2018.

Rates on one-year adjustable-rate mortgages are modified annually based on short-term interest rates, typically based on U.S. Treasury indexes.

One-year ARM rates have been on a roller-coaster ride over the past decade and a half. For example, in January of 2002, the 1-year ARM rate average was 5.18%, reported Freddie Mac.

By January of 2011 the average fell to 3.25%. By December 20, 2012, the average 1-year ARM rate hit 2.52%, and by January of 2015, it slid to a rock-bottom 2.38%. Since then, it has started trending upward.

In addition, over the past decade, lenders also began offering the more popular 5-year Treasury indexed hybrid ARM.

“Homeowners who financed their home or condominium purchase several years ago with a one-year ARM especially should be shopping now to refinance into the safe haven of a fixed-rate loan,” advised the Home Front column in late 2017.

If a home or condo owner’s 1-year ARM rate currently is 4.75%, the three quarter-point Fed hikes put in place in 2018 will push the loan rate to 5.75% at adjustment time. When the lender adjusts the ARM-loan interest rate in early 2019, it likely will boost the typical mortgage payment by hundreds of dollars.

With interest rates rising, the 1-year Treasury Constant Maturity index hit 2.70% on December 7, 2018, up from 1.67% on December 7, 2017. This Treasury index has steadily increased to 0.83% in December of 2016 from 0.67% in December of 2015. Back in December of 2014, the index was as low as 0.15%.

The Federal Reserve Board has signaled it wants to gradually raise its Fed-funds interest rates in the coming months to 3% or slightly higher. The funds rate, which the Fed charges banks for loans, currently is in a range of 2% to 2.5%. Another rate increase is expected at the Fed’s next meeting, scheduled for December 19th. If a borrower currently holds an older 1-year ARM mortgage that is tied to the 1-year Treasury index, it likely carries a lender profit margin of 3.25%. This means that a 1-year ARM loan with a current 4.75% mortgage rate would jump to 5.95% when the December 7, 2018 margin kicks in at 2.70%.

Earlier this month, the owner of a 2-bedroom, 2-bath condominium was shocked when she received a notice from her lender that the interest rate on her mortgage would increase to 6% from 4.75%.

The increase happened because the Treasury index rose to 2.74% on November 7, 2018, sparking the January 1, 2019 rate increase. So, effective February 1, 2019, the condo owner’s monthly payment will increase to $1,538 from $1,468—an increase of $80 a month.

What’s worse is the interest share of the payment will jump to $735 from $586—an interest gain of 25%, or $149 a month. And, principal pay down will shrink 11%—or $51 a month—to $458 from $509.

The bank’s terse statement said: “We calculate your interest rate by taking a published ‘index rate’ and adding a certain number of percentage points, called the ‘margin.’ Under your loan agreement is the weekly average of 1-year Treasury Constant Maturity and your margin is 3.25%.”

The bank statement also said under the ARM-loan agreement, the borrower’s interest rate cannot go higher than a whopping 11.25% over the life of the loan, and the rate cannot change each year by no more than 2%. The condo owner’s older ARM loan was originated in 2002 with the interest rate set at a fixed level for seven years and payments amortized on a 30-year paydown schedule.

However, during the financial crisis of the Great Recession, the bank that made the original mortgage failed and was taken over the Federal Deposit Insurance Corporation (FDIC), and the loan was sold to another lender. In 2008, the second lender also failed and was taken over by the FDIC. The condo owner’s loan was sold to yet a third lender—a major national bank.

Following the original mortgage documents, the seven-year fixed feature ended in 2010, and the third bank converted the ARM loan to a one-year annual rate adjustment schedule. Based on the 1-year Treasury index, the interest rate initially was boosted from 3.75% to 4.75% in 2018, and soon will be raised to 6% in early 2019.

Earlier, the self-employed condo owner vainly attempted to refinance the ARM loan into a 30-year fixed-rate mortgage through the federal government’s Home Affordable Refinance Program (HARP), but she was rejected.

Forecasts say that the Federal Reserve Board is scheduled to raise its short-term rate three more times in 2019. If this happens, the condo owner could see her ARM loan rate jump to 7% by December of 2019, analysts say.

Obviously, home-loan borrowers who sign up for an ARM loan hope the worst-case scenario—a hike to 11.25%—never happens. However, one must always remember banks and mortgage companies are in business to make a profit.

Here’s how the late Herbert L. Benson, Jr., entrepreneur and South Carolina real estate developer, eloquently summed the bank profit concept in the pages of “Escaping Condo Jail,” the survival guide for condo living:

“Your bank is not a synagogue, temple or church. It is not a charitable institution. You owe it no loyalty. Banks today have some 300 fees and charges that they put on the innocent. Beware!” Benson noted.

“They still use their same old rules: 1. You can always borrow money if you can prove to them that you don’t need it. 2. Deposit $10,000 and they will be glad to lend you $5,000. Shop around, read the small print and then decide what is best for you.”

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.