4. Interest Rate Index

Introduction

This topic contains information on the ARM interest rate index, including

•	the two acceptable index types

•	interest rate changes

•	establishing the adjusted interest rate

•	regulation on setting interest rates, and

•	frequency of interest rate changes.

Change Date

May 10, 2009

4155.1 6.B.4.a Two Acceptable Index Types

FHA will insure forward adjustable rate mortgage loan products using either

•	the 1 Year London Interbank Offered Rate (LIBOR), or

•	the 1 Year Constant Maturity Treasury (CMT) index.

Note: The two index types cannot be commingled.

Eligible Index Types
Forward ARMs	LIBOR	CMT
1, 3, 5, 7, 10 Year	1 Year LIBOR	1 Year CMT

4155.1 6.B.4.b Interest Rate Changes

Changes in the interest rate charged on an ARM must correspond to changes in either the

•	weekly average yield on United States (U.S.) Treasury securities adjusted to a constant maturity of one year, or equivalent, as
	–	provided by the Department of the Treasury, and
	–	found on the Federal Reserve Statistical Release H.15, Selected Interest Rates Web site at www.federalreserve.gov/releases, or

•	LIBOR index as published in the Wall Street Journal.

Each change in the mortgage interest rate, except as otherwise provided in this handbook, must correspond to the upward/downward changes in one of these indices.

Notes:

•	The Federal Reserve Statistical Release is published weekly on Monday or on Tuesday if Monday is a Federal holiday.

•

The Wall Street Journal is published on the first business day of each week, which is typically a Monday, (or Tuesday if Monday is a non-publishing day). Should the Federal Reserve begin publishing the LIBOR indices in H.15, then lenders must use the H.15 as the source for these LIBOR rates. The LIBOR indices are effective the day they are published, until the day they are published the following week. The published LIBOR index must be rounded to three digits to the right of the decimal point.

4155.1 6.B.4.b Establishing the Adjusted Interest Rate

When establishing the adjusted interest rate, the lender must compare the initial contract interest rate to the sum of the current index figure and the mortgage margin (calculated interest rate).

The adjusted interest rate will be the interest rate charged to the borrower, subject to the limitations of the annual and lifetime caps for the respective ARM type.

The current index figure must be the most recent index figure available 30 calendar days before the Change Date (effective date of an adjustment to the interest rate as shown in Paragraph 5(a) of the model adjusted rate note form.)

Note: Existing model notes and security instruments currently reflect only the 1 Year CMT Index. Therefore, when LIBOR rates are chosen, the adjustable rate notes and other related documents must reflect the applicable LIBOR index.

4155.1 6.B.4.c Section 203.49 (c) Regulation on Setting Interest Rates

Section 203.49 (c) of the regulations provides a method for setting the new interest rate as an alternative to using the margin to set the new rate.

Section 203.49 (c) states that “to set the new interest rate, the lender will

•	determine the change between the initial or base index figure, and the current index figure, or

•	add a specified margin to the current index figure.”

Ginnie Mae will only purchase ARMs that use the margin method for establishing the new interest rate. HUD requests that the lender contact the FHA Single Family Program Development Office for guidance, if he/she wishes to use the other method for establishing the new interest rate.

4155.1 6.B.4.d Frequency of Interest Rate Changes

Interest rate adjustments must occur on an annual basis.

The table below describes exceptions for the first adjustment rate changes.

If the ARM is for ...	Then the first adjustment rate change may occur no sooner than ...	And no later than ...
one year	12 months	18 months.
three years	36 months	42 months.
five years	60 months	66 months.
seven years	84 months	90 months.
10 years	120 months	126 months.