The following are excerpts from the newletter from HSH Associates for the week ending December 14, 2007:
The bond markets, after weeks of fretting that the economy would continue to sink, now seem to think that the economy might skirt a significant downturn after all. Of course, a more-firm economy brings potential for higher inflation pressures, and that in turn presses interest rates higher — and higher they are.
The pain was spread all around: fixed-rate conforming loans moved 19 basis points higher to 6.18%, while jumbos moved a full 21 basis points higher, climbing back over 7% for the first time since mid-October.
The Federal Reserve, in conjunction with 4 other European Central Banks have created a new credit facility for banks to borrow money. This move is important for mortgage borrowers since it’s directly aimed at lowering the rates being charged between banks on the London Exchange, called LIBOR. LIBOR rates have been mostly rising as banks have become concerned about keeping enough cash on hand to meet their needs and suspicious of the quality of assets being pledged as collateral for loans.
As we wrote last week, a borrower with a Treasury-based ARM is seeing interest rates reset to favorable levels. Presently, a borrower with a 3/1 TCM-based ARM has been enjoying an initial interest rate of about 4.75%, and six months ago would have faced a reset into the low 7% range. Fast forward through more troubled economic times, and add in cuts in short-term interest rates of 100 basis points (1%), and that borrower now may face a reset to only the upper 5% range for their ARM, with about a 12% rise in payment. That same borrower with a LIBOR-based ARM would see a reset rate at or about 7% or more today, with a corresponding 22% rise in payment, making a LIBOR-based ARM more likely to experience default. Since most subprime ARMs and many Jumbo ARMs are keyed to LIBOR, the central bank’s move to break the lending logjam should help to press those index rates downward. This in turn could make resetting mortgages more manageable for borrowers, and should help to ease the mortgage crisis a little.
With an economy holding on, concerns about inflation renewed, and potential ‘solutions’ to mortgage and liquidity issues hitting the market, mortgage rates really don’t have much room to fall, absent any especially bad news.