Although the fed has been cutting rates, many of the loans are tied to the Libor. Libor has gone from 5.36% in June to 5.11%. At the same time, the treasuries have gone from 4.8% to 2.95%.
The fed is finding it's helpless when it comes to the Libor rate. So far, the spread has remained stubbornly high because banks are reluctant to lend to each other.
Libor is frequently used to set rates for ARMs made to subprime borrowers -- mainly people with scuffed credit -- as well as many ARMs that fall into the "jumbo loan" category, which currently refers to most mortgages for $417,000 or more, says Keith Gumbinger, vice president of mortgage-tracker HSH Associates. Also, roughly half of non-subprime ARMs that were originated in recent years are tied to Libor, he estimates.
The higher Libor rates complicate the Fed's efforts to assist troubled borrowers and prevent problems related to the housing crisis from spreading further through the economy....
A recent report from the Federal Reserve Bank of New York shows that the six-month Libor rate will determine the reset rates for an estimated 99% of subprime ARMs and 38% of Alt-A ARMs in the U.S. that have been securitized. A further 1% of subprime ARMs and 22% of Alt-A ARMs will reset based on the one-year Libor rate. Alt-A is a category between prime and subprime that often involves borrowers who don't fully document their income or assets.
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