While many experts in the US have predicted a sharp increase in foreclosures of subprime, adjustable-rate mortgages (ARMs) following recent interest rate rises, there is actually little chance this will happen because the index which many ARMs are tied to is the six-month London inter-bank offered rate (Libor) which has actually fallen.
Much of the discussion about the danger of resets has focused on the initial interest rate, or ``teaser rate,'' that ARMs carried.
That left the impression it was a very low rate that would adjust up a lot. Most of the initial rates were 8.5% or above, and now many are set to adjust hardly at all.
Most of the defaults and foreclosures in the US market to date haven't been due to interest rate resets, but rather the fact that many borrowers bought a house or apartment they couldn't afford, and falling property prices have meant they're now making payments on a mortgage balance which is greater than the current value of their home.
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