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LIBOR Loan Case Study #201 |
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October 10, 2009
Tom and Alisha Conover were worried. After all of the media attention on resetting ARM loans that were then toxic to the homeowner, they were not happy to be anticipating a traumatic March 10 when their 5/1 LIBOR ARM resets. They came to me to secure replacement financing for their current 5.875% 5/1 interest-only LIBOR ARM (based on the 1YR LIBOR at a margin of 2.25), and to inquire as to whether we could roll in about $15,000 of debt plus fees, and still remain close to their current monthly payment. They can't afford the payments on a 30-year fixed, and their home doesn't carry enough equity to get them into today's best-case conforming rates (greater than 75% Loan-To-Value).
What's next? Frustration. Given new laws governing the appraisal process, and lacking a local appraiser who knows our neighborhoods and their subtle-or-not-so-subtle valuation differences, LTV is a real issue on all conforming deals. Tom and Alisha can't shoulder the closing costs without risking their safety net.
An aside: Given our market, with this apparent "recovery" that we are all enjoying today, and the impending further degradation of Mortgage Backed Securities coming down the line (ready to lay waste again to the marketplace), we can all agree that no one can crystal-ball the future and ensure success in wealth building. However, being able to utilize the financial means and methods that present themselves to you for your betterment and peace of mind is a valuable capability that we can all agree upon. If it happens via providence, then so be it.
Back to our Case: Given the gradual rise and fall of the 1-Year LIBOR, this is not such a bad situation for our couple (we're at 1.26% as of October 7, 2009 as
per LIBORATED.com), Tom and Alisha's loan would be at 3.51% for the following year after their reset, which even fully amortized would be about 250.00 less in payment than their current loan! The 1-Year LIBOR would have to get above 2% by March 10 in order to top their current payment.
While Tom and Alisha are not entirely content in their situation, I was able to counsel them on LIBOR ARMs and how their reset may actually assist them in weathering out the storm, even given further widespread equity loss.
Most importantly there are a few things that are more important to them - their two sons, Adam and Gregory, and their cat, "Fluffalicious". Considering their commitment to the wellbeing of their family unit, and in spite of the uncertainty in regards to their home value and overall wealth picture, they are able to keep the roof overhead. Sometimes the magic of the financial instrument works in mysterious ways. It's good to know that a reset can be of benefit!
Jack Williams spends his time fielding facilitation, finance, and advisory requests from a global network. Jack can be found on LinkedIn and Skype and fields all inquiries and requests in short order. Jack's quote of the week is "Give Me Full Doc Super Jumbo or Give Me Death!"