Regulators may have a lot to look at now that the refi boom may be going bust. Mortgage bankers are developing a crop of new products based on the London Interbank Offered Rate they believe will bolster the business when refis dry up.
One of the options that some lenders are testing is the use of Liborbased B- and C-level adjustable rate mortgages. Libor is the interest rate banks charge each other for short-term Eurodollar loans ranging from overnight to five years in maturity. Many originators prefer dealing in the Libor market because many of their liabilities are based in that market and they want the match.
First Alliance Mortgage Co., a lender in Orange, Calif., has increased tts hold in the B and C loan market niche by expanding its business from $100 million annually in fixed-rate credit to more than $400 million in first mortgage ARMs. It has been developing its B and C ARM program for two years, but introduced its labor product this year and has since seen those originations increase by 378%.
B and C Libor ARMs are attractive to barrowers because Libor rates start so low compared to 30-year fixed rates, said John Dewey, a First Alliance consultant. An A-minus credit borrower might get a starting rate of 4.99% far below today's typical 30-year fixed rate near 7.25%. First Alliance's Libor ARM rate then would adjust every six months to 450 basis points plus whatever the six-month Libor rate had become; currently it's 3.38%. The rate cannot change more than 100 basis points in any six-month period or increase by more than 600 basis points over the life of the loan.
The originator can securitize these loans at cost of funds ranging from one-month Libor plus 50 basis points to a high of a six-month labor plus 125 basis points, locking in spreads of 325 to 400 basis points of excess servicing.
These instruments' main competition has been from fixed-rate second mortgages offered by the major finance company lenders such as Household Finance Corp., Prospect Heights, Ill.. and Advanta Mortgage Corp., San Diego. Many of these lenders have been reluctant to vary from mainstream fixed-rate business and some already offer an adjustable home equity line of credit program on a second mortgage basis.
Libor-based products are evolving in California, but they have found East Coast borrower resistance to programs other than traditional fixed rate products. East Coast lenders prefer Treasury indexes for their ARM products, but Dewey said that is probably so because the labor index has not been marketed actively there.