The ball’s in your court, Ben
Interest rates on US$400 billion of adjustable rate subprime mortgages will reset upwards in 2008, threatening to exacerbate an already nasty-looking wave of defaults and foreclosures. With a Democratic Congress breathing hard down its neck, the White House on Thursday unveiled its latest plan for dealing with what is fast becoming a defining issue of the 2008 electoral campaign.
An earlier plan released in August made it easier for a limited number of mortgage borrowers facing rate resets to refinance by broadening the eligibility requirements for Federal Housing Administration loan guarantees. That would have helped only about 80,000 out of nearly 2 million subprime borrowers who face increases in their mortgage carrying costs through late 2009.
Thursday’s initiative is in keeping with the Administration’s emphasis on voluntary “targeted” measures, as opposed to the broad compulsory rate freeze favoured by some Democrats. It would specifically apply only to those who took out mortgages between Jan. 1, 2005, and July 31, 2007, and would face a payment increase of 10% or more on their first rate reset. To focus aid on those unable to tap alternate funding sources, borrowers must have a FICO credit score below 660, which has not improved by over 10% since the mortgage was granted. Existing borrowers meeting these criteria would be eligible for a five-year freeze on their introductory “teaser” rate. Estimates of how many families might benefit vary, with the Administration predicting 1.2 million, others considerably less.
While much of the focus has been on what the latest plan will do, it’s useful, particularly from the viewpoint of interest rates and financial markets, to look at what the plan will not achieve. In the near-term, it’s unlikely to materially lessen still-strong economic headwinds from the housing sector. A 10-month backlog of unsold homes, the highest level in 22 years, gives builders a continuing strong incentive to reduce their activity. Nor is a prospective decline in cash flows good news for CDOs and other mortgage backed securities—even if the reduction is the result of a “voluntary” pact with the lending industry, as opposed to rising defaults by individual mortgagors.
All of this means that the Fed’s work is not as yet done. Reflecting the recent deterioration in spreads, officials like Bernanke have been putting even more emphasis on eroding credit market conditions than the economy recently. While this morning’s 94K payroll gain probably rules out a “50”, next week, we expect another 25-bp cut and 1-2 matching moves beyond that. A decline in the funds rate to four-year lows, along with a peaking of mortgage rate resets, should pave the way for a re-acceleration in the economy beyond the next two quite soft-looking quarters.
Interest rates on US$400 billion of adjustable rate subprime mortgages will reset upwards in 2008, threatening to exacerbate an already nasty-looking wave of defaults and foreclosures. With a Democratic Congress breathing hard down its neck, the White House on Thursday unveiled its latest plan for dealing with what is fast becoming a defining issue of the 2008 electoral campaign.
An earlier plan released in August made it easier for a limited number of mortgage borrowers facing rate resets to refinance by broadening the eligibility requirements for Federal Housing Administration loan guarantees. That would have helped only about 80,000 out of nearly 2 million subprime borrowers who face increases in their mortgage carrying costs through late 2009.
Thursday’s initiative is in keeping with the Administration’s emphasis on voluntary “targeted” measures, as opposed to the broad compulsory rate freeze favoured by some Democrats. It would specifically apply only to those who took out mortgages between Jan. 1, 2005, and July 31, 2007, and would face a payment increase of 10% or more on their first rate reset. To focus aid on those unable to tap alternate funding sources, borrowers must have a FICO credit score below 660, which has not improved by over 10% since the mortgage was granted. Existing borrowers meeting these criteria would be eligible for a five-year freeze on their introductory “teaser” rate. Estimates of how many families might benefit vary, with the Administration predicting 1.2 million, others considerably less.
While much of the focus has been on what the latest plan will do, it’s useful, particularly from the viewpoint of interest rates and financial markets, to look at what the plan will not achieve. In the near-term, it’s unlikely to materially lessen still-strong economic headwinds from the housing sector. A 10-month backlog of unsold homes, the highest level in 22 years, gives builders a continuing strong incentive to reduce their activity. Nor is a prospective decline in cash flows good news for CDOs and other mortgage backed securities—even if the reduction is the result of a “voluntary” pact with the lending industry, as opposed to rising defaults by individual mortgagors.
All of this means that the Fed’s work is not as yet done. Reflecting the recent deterioration in spreads, officials like Bernanke have been putting even more emphasis on eroding credit market conditions than the economy recently. While this morning’s 94K payroll gain probably rules out a “50”, next week, we expect another 25-bp cut and 1-2 matching moves beyond that. A decline in the funds rate to four-year lows, along with a peaking of mortgage rate resets, should pave the way for a re-acceleration in the economy beyond the next two quite soft-looking quarters.