4401.5: ARM Note Rate change requirements (07/25/18)
- Marsha Freeman
Owned by Marsha Freeman
Nov 19, 2018
3 min read
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© Freddie Mac Single-Family Seller Servicer Guide
ARMs eligible for purchase by Freddie Mac must comply with the requirements of this Section 4401.5 regarding the timing of, and Periodic Caps for, Interest Change Dates and how adjustments to the Note Rate are made. In all cases, Note Rate adjustments must comply with the terms of the Note and with applicable law.
(a)Â Interest Change Date
Each Interest Change Date, stated in the Note, must occur on the first day of the month.The following chart shows the time frame within which the first Interest Change Date must occur, and the number of months between all subsequent Interest Change Dates:
| Eligible ARM Product | 1st Interest Change Date Period Between 1st Payment Due Date and 1st Interest Change Date | Subsequent Interest Change Dates Period Between Interest Change Dates After 1st Interest Change Date |
| 1/1 ARM | 6-18 months | 12 months |
| 3/3 ARM | 30-42 months | 36 months |
| 5/5 ARM | 54-66 months | 60 months |
| 3/1 ARM | 30-42 months | 12 months |
| 5/1 ARM | 54-66 months | 12 months |
| 7/1 ARM | 78-90 months | 12 months |
| 10/1 ARM | 114-126 months | 12 months |
(b)Â Calculation of adjustments
The new Note Rate must be calculated in accordance with the terms of the Note. Additionally, the following requirements must be met:
- The sum of the current Index value plus the Margin must be rounded to the nearest one-eighth of 1% (0.125%)
- Due to the fractional nature of the LIBOR Index, the Index value must be truncated to the third decimal place before adding the Margin
- For LIBOR-Indexed ARMs, the Seller must inform the Borrower in writing on or before the Note Date and in each Note Rate adjustment notice that the LIBOR Index value used to calculate the new Note Rate for each Interest Change Date is the average LIBOR values for six-month or one-year US dollar denominated deposits, as applicable, as published in the print edition of The Wall Street Journal
(c)Â Limits on Note Rate adjustments
Each ARM Note must specify limits on the periodic adjustments (the Lifetime Ceiling, the Lifetime Floor and the Periodic Cap) to the Note.
1. The Note Rate may not exceed the Lifetime Ceiling or be less than the Lifetime Floor, which must equal the Margin as required by Section 4401.4(f)
2. The Note Rate at the first Interest Change Date may not exceed the value of the Note Rate at origination plus the Initial Cap or be less than the value of the Note Rate at origination minus the Initial Cap
3. Adjustments on subsequent Interest Change Dates are subject to the Periodic Cap
For information on underwriting requirements for ARMs and permissible "teaser rates," see Section 4401.8.
(d)Â Applicable caps for eligible ARM products
The following chart shows (in percentage points) the applicable Initial Cap, Periodic Cap and Life Cap for ARM products eligible under WAC ARM Cash:
| Eligible ARM Product | Index | Initial Cap | Periodic Cap | Life Cap |
| 1/1 ARM | 1-Yr Weekly CMT* | 1% | 1% | 6% |
| 1-Yr Weekly CMT | 2% | 2% | 6% | |
| 1-Yr LIBOR** | 2% | 2% | 6% | |
| 3/1 ARM | 1-Yr Weekly CMT | 2% | 2% | 6% |
| 1-Yr LIBOR | 2% | 2% | 5 or 6% | |
| 5/1 ARM | 1-Yr Weekly CMT | 2% | 2% | 5% |
| 1-Yr LIBOR | 2% | 2% | 5 or 6% | |
| 7/1 ARM | 1-Yr Weekly CMT | 5% | 2% | 5% |
| 1-Yr LIBOR | 5% | 2% | 5% | |
| 10/1 ARM | 1-Yr Weekly CMT | 5% | 2% | 5% |
| 1-Yr LIBOR | 5% | 2% | 5% |
*Â CMT = Constant Maturity Treasury
**Â LIBOR = London Interbank Offered Rate
The following chart shows (in percentage points) the applicable Initial Cap, Periodic Cap and Life Cap for ARM products eligible under the WAC ARM Guarantor program:
| Eligible ARM Product | Index | Initial Cap | Periodic Cap | Life Cap |
| 1/1 ARM | 1-Yr Weekly CMT* | 1% | 1% | Less than or equal to 6% |
| 1-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% | |
| 1-Yr LIBOR** | 2% | 2% | Less than or equal to 6% | |
| 3/3 ARM | 3-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% |
| 5/5 ARM | 5-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% |
| 3/1 ARM | 1-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% |
| 1-Yr LIBOR | 2% | 2% | Less than or equal to 6% | |
| 5/1 ARM | 1-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% |
| 1-Yr LIBOR | 2% | 2% | Less than or equal to 6% | |
| 7/1 ARM | 1-Yr Weekly CMT | Same as Life Cap | 2% | Less than or equal to 6% |
| 1-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% | |
| 1-Yr Weekly CMT | 3% | 2% | Less than or equal to 6% | |
| 1-Yr Weekly CMT | 5% | 2% | Less than or equal to 6% | |
| 1-Yr LIBOR | 2% | 2% | Less than or equal to 6% | |
| 1-Yr LIBOR | 5% | 2% | Less than or equal to 6% | |
| 10/1 ARM | 1-Yr Weekly CMT | Same as Life Cap | 2% | Less than or equal to 6% |
| 1-Yr Weekly CMT | 2% | 2% | Less than or equal to 6% | |
| 1-Yr Weekly CMT | 3% | 2% | Less than or equal to 6% | |
| 1-Yr Weekly CMT | 5% | 2% | Less than or equal to 6% | |
| 1-Yr LIBOR | 2% | 2% | Less than or equal to 6% | |
| 1-Yr LIBOR | 5% | 2% | Less than or equal to 6% |
*Â CMT = Constant Maturity Treasury
**Â LIBOR = London Interbank Offered Rate