There have been countless graphics floating around the media outlining the large quantity of adjustable rate mortgage (ARM) rate resets that are anticipated in the coming months and years. For some excellent background and analysis on the subject of ARM resets, I encourage readers to investigate what Calculated Risk has to say on the subject.
One of the silver linings in the global economic slowdown is that as interest rates continue to fall, these ARM resets are going to be executed at rates which are increasingly favorable to borrowers. Setting aside the flip side – that lower rates will be less favorable to already struggling lenders – the prospect of lower ARM rates may help to accelerate the formation of a housing bottom and will certainly provide consumers with additional disposable income.
In the chart below, I have constructed a ten year history of the 11th District Cost of Funds Index (COFI) data. The COFI is one of the most widely used ARM indices. As the graphic indicates, COFI has fallen from 4.4% in September to 2.7% in July. It has dropped 1.3% since the beginning of the year and is now at one of the most affordable levels of the past decade.