Nov. 26, 2007: Mortgage chatter: more ARM re-set information to chew on, and some Scottish humor

Nov. 26, 2007: Mortgage chatter: more ARM re-set information to chew on, and some Scottish humor Rob Chrisman

Walking down the hall the other day I over heard someone say, “I don’t mind coming to work. But that eight hour wait to go home is a real problem.”

According to a news story carried by Reuters, mortgage lenders Countrywide, GMAC, Litton and HomeEq have agreed to let many potentially distressed borrowers in California keep the initial low rates of their home loans, a spokeswoman for Gov. Arnold Schwarzenegger announced last week. The four lenders service more than a quarter of issued subprime mortgages, and the “governator” negotiated an agreement with these servicers that will allow their mortgage borrowers in California (by some estimates 500,000) to continue paying loans at initial rates if they live in their homes and make payments on time but are unlikely to afford higher payments when their mortgage interest rates reset in the next two years.

The Organization for Economic Cooperation and Development (a Paris-based international organization that helps governments with economic, social and governance issues) said losses in the mortgage sector in the US could reach $300 billion. So far major financial institutions have estimated losses of about $50 billion, but the O.E.C.D. cautioned that a rougher period may yet await financial markets as traders try to calculate the impact of mortgage-sector losses on the overall economy. The group estimated the losses based on a 14% default rate on subprime mortgages, high by historical standards but entirely plausible under the current circumstances, economists say. Losses on subprime loans would cost lenders $125 billion, the organization said, with Alt-A losses (which include the total cost to lenders) adding another $175 billion.

Here is something to think about for ARM resets. A good chunk of them were originated in the middle of 2003 through mid-2004 (the lowest interest rates in decades), but because short-term interest rates today are well above those levels, those mortgages with adjustable rates have/will reset to much higher rates even if the Fed decides to lower rates by a quarter of a point or even more. As a consequence analysts believe that there will likely be more delinquencies and foreclosures, which will result in more homes on the market, thereby depressing their prices, and in turn, this will affect other homeowners – even those with fixed rate mortgages and who and are current with their payments. This is not a good scenario, to say the least, since homeowner’s equity has slid in many areas and they can’t turn to savings, either, since, collectively, the nation’s homeowners have been spending more than they have been earning for the past two years.

With all of that in mind, now that our heads are “back in the game”, what lies ahead this week? No news today (the 10-yr is hovering around 4.0% and mortgage prices are roughly unchanged), but Tuesday is November’s Consumer Confidence Index, expected to drop significantly from last month’s 95.6 to 91.5. (If consumer confidence is rising, analysts believe that consumers are more apt to make larger purchases, essentially fueling economic growth. This raises inflation concerns and usually pushes mortgage rates higher.) On Wednesday we have October’s Durable Goods Orders, expected unchanged, October’s Existing Home Sales data, and the Fed’s “Beige” Book which details economic activity throughout the U.S. by region. Thursday morning brings us the first revision to the 3rd Quarter Gross Domestic Product (GDP) reading, expected to show an upward change from last month’s preliminary reading of 3.9%. Current forecasts call for a reading of approximately 4.8%, meaning that there was more economic growth during the third quarter than previously thought. Friday’s only important data is October’s Personal Income and Outlays data, a measure of consumers’ ability to spend and their current spending habits. It is expected to show that income rose 0.4% and that spending rose 0.3%. Smaller than expected readings would be good news for bonds and could lead to improvements in mortgage rates.

A Scotsman was arguing with a conductor as to whether the fare was 75 or 85 cents. Finally the disgusted conductor picked up the Scotsman’s suitcase and tossed it off the train, just as they passed over a bridge.

The suitcase landed with a splash.

“Mon!” screamed the Scotsman, “isn’t it enough that you try to overcharge me, but now you are trying to drown my little boy!”