Oct. 8, 2007: Happy Columbus Day – why does an investor pay 101 or 102 for a loan?

Oct. 8, 2007: Happy Columbus Day – why does an investor pay 101 or 102 for a loan? Rob Chrisman

There are several reasons why an investor pays a premium for a loan. Basically, they expect to receive a higher interest rate (hence higher payments) for a predictable amount of time. (If I tell you that I am going to pay you $10 per month for 24 months that is worth more to you than me paying you $8 per month for 12 months.) The idea is being kicked around, most recently by the chairman of the FDIC, to freeze rates on subprime ARM loans. “Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it.” one official said. According to some estimates roughly 1.3 million “subprime” ARMs are due for a rate reset between now and the end of 2008, but according to a recent Moody’s survey less than 1% of problem subprime ARMs were being restructured. Loans taken out by speculators who don’t live in the homes they bought would not qualify for the automatic conversion. ACORN agrees with the suggestion, but mortgage servicers are usually restricted by their contracts with the investors who own the loans being serviced, especially regarding when and how many loans may be modified. But the servicer typically does have discretion when a loan has become or is likely to become delinquent. And given the choice between foreclosure or accepting a little less every month, most believe that investors will tighten their belt a little.

Friday was a tough day for rates. As expected, employment growth rebounded in September with net job gains of 110,000, as expected. But the August report underwent a large revision with the decline of 4,000 turning into a gain of 89,000, mostly due to a revision in government employment. Government employment was also revised up for last month, as well as gains in service industries. Treasury and mortgage prices got worse, moving rates up, the yield curve flattened, and it increases the focus on the next Fed meeting for Oct 31st. The Fed might be done cutting rates for the time-being.

This week is an “interesting” week, as it might be pretty quiet until the end. There is no news today (it’s a holiday), but late tomorrow morning the Fed will release the minutes to the last FOMC meeting. These may be a major mover of the markets or could be a non-factor, depending on what they say. The key will be concerns over inflation and the Fed’s next move. There is no news on Wednesday, but Thursday we have Jobless Claims, the Trade Balance, and the Import Price Index, and then Friday we’ll have the Producer Price Index, Retail Sales, and the University of Michigan Consumer Confidence numbers.

A mortgage broker was stopped by a game warden in Eastern Oklahoma recently with two ice chests full of fish. He was leavin’ a cove well-known for its fishing. The game warden asked the man, “Do you have a license to catch those fish?” “Naw, sir”, replied the mortgage hack. “I ain’t got none of them there licenses. You must understand, these here are my pet fish.” “Pet fish?” “Yeah. Every night, I take these here fish down to the lake and let ’em swim ’round for awhile. Then, when I whistle, they jump right back into these here ice chests and I take ’em home.” “That’s a bunch of hooey! Fish can’t do that.” The agent looked at the warden for a moment and then said, “It’s the truth Mr. Government Man. I’ll show ya. It really works.” “O. K.”, said the warden. “I’ve got to see this!” The mortgage broker poured the fish into the lake and stood and waited. After several minutes, the warden says, “Well?” “Well, what?”, says the broker. The warden says, “When are you going to call them back?” “Call who back?” “The FISH”, replied the warden! “What fish?”, replied the broker.