Defaults tied to adjustable-rate mortgages will likely jump 10 percent thanks to a recent surge in the Libor, according to a research note from Citigroup Global Markets.
Citigroup analysts said following recent turmoil in global financial markets, the increase in the Libor over the past two weeks will increase the monthly payment on loans set to adjust by as much as 13 percent.
The 1-month Libor has surged from 2.49 percent a month ago to 3.93 percent, while the 6-month Libor has increased nearly a full point to 3.98 percent from 3.10 percent.
So borrowers with an ARM tied to one of these indexes could see their interest rate increase by a point to a point-and-a-half, pushing already stressed borrowers past the point of no return.
The Libor is the most common interest rate index used by mortgage lenders to price adjustable-rate mortgages, though other indexes are used as well.
Both the COFI (Cost of Funds Index) and the MTA (12-Month Treasury) are used frequently, especially with infamous option-arms.
The MTA has plummeted to 2.479 percent from 4.863 percent a year ago, while the COFI has slipped to 2.693 percent from 4.359 percent.
So for many option-arm borrowers, the fully-indexed rate could easily slip below five percent (depending on the margin), making it a fairly sustainable loan, assuming they could actually pay more than the 1% payment to begin with.
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