The following is an excerpt from the newsletter from HSH associates for the week ending March 15, 2007:
Concerns about the availability of financing for impaired-credit borrowers continued to roil the subprime mortgage markets this week. We’re also seeing expanding worries about wider-ranging fallout from the combination of tighter mortgage credit and rising foreclosures and delinquencies. Pricing for good-credit quality applicants remains comfortable, though, and the average 30-year fixed rate mortgage (FRM) eased a single basis point this week, closing the nation’s deepest survey of mortgage rates and terms at an average 6.26%. Hybrid five-one ARMs rose by three basis points to 6.03% for the week in the HSH survey.
While the issues in subprime are significant and undoubtedly have the potential to cause trouble in better-credit loans, we think that any effect will likely be limited. Estimates peg approximately 80% of the mortgage market as “A” credit, leaving about 20% of the market as “subprime” of all types and terms. Of that 20% slice, the Mortgage Bankers Association reported this week that some 13% of those loans were in some stage of delinquency, a number which has steadily risen over recent quarters. While discomfiting, the flip side is that some 87% of subprime loans are performing fine (at least so far), but that number does seem likely to deteriorate some more as 2007 rolls along. For “A” paper, the delinquency rate is in a comfortable 2.5% range.
The troubles in credit markets, slow economic growth, and soft housing markets, have renewed expectations that the Fed would soon be cutting rates. While there can be no doubt that collectively things are slow, there is very little chance that the Fed will slash rates until inflation cools further — perhaps much further — irrespective of what happens to economic growth. A period of subpar growth is what’s needed to correct imbalances in prices; since we still have those, the Fed will watch from the sidelines. The next Fed meeting is next week, and the latest measurements of prices are such that the Fed would probably be more likely to consider raising rates rather than lowering them.
Fixed Rate Variable
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These interest rate levels are very similar to those of mid-January 2007, and are down from increases which had occured in mid-February.