Mortgage Rate News

One of the issues that is more likely to affect “regular folks” than $700 billion bailout plans for Wall Street and Very Large Drops in the stock market, is negative equity.

Negative equity is something that is affecting a great deal of homeowners right now. This is because as home values drop, then what is owed on second home mortgage loans, HELOCs and even first mortgage loans exceeds how much the house is worth. This is a problem that afflicts more than just subprime borrowers. The massive losses in home values affects a wide swath of society. And some of them will not be able to keep up with the payments and the negative equity will swamp them.

Happily, though, not everyone who has negative equity now is going to go under and foreclose. Many people are in a position where they can ride this out and keep up with their payments. In a few more years — in most cases — that means that the housing market will turn around and the equity will all be positive. But until then, the mortgage market is going to see some serious losses. Calculated Risk figures some of the possibilities for mortgage market losses due to this housing market problem:

Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders.

I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses. If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion.

You can see where this could mean continued problems for the mortgage market, companies and the stock market. It’s time to strap in (if you haven’t already) and get ready for a wild ride.

Tags: HELOC, negative equity, home mortgage loan, second home mortgage,
second mortgage, $700 billion bailout, mortgage market losses

Even as Congress continues to wrangle over the $700 billion bailout plan with the White House, mortgage interest rates are already being affected. While the details have yet to be worked out, it is very clear that sometime in the next two weeks to six months a very large amount of money is going to be entering the market. And this causes inflation.

This inflationary reality is explained by Behind the Mortgage:

In borrowing more, the government is (in effect) expanding the money supply; either by literally putting more dollars in circulation, or by creating a perception in world markets that they will, or will have to, in order to repay the debt.

And expanding the supply of dollars is inflationary - More dollars floating around means the dollars the Federal government uses to pay back these debts will be worth less (For evidence of this in action: Just yesterday the dollar recorded its largest ever one day drop.)

This is something that is important to remember, because mortgage interest rates are connected to long term (usually 10 year) Treasury notes. So as government debt, inflation and the money market makes the dollar worth less, investors *need* more greenbacks to recover their return and beat the rate of inflation. The Mortgage Reports Blog connects the dots to what this means for mortgage loan rates:

And lastly, the mortgage market got hit.   Because mortgage bonds are repaid in U.S. dollars, the value of those repayments dropped.  This forced mortgage rates higher because the only way to entice investors to buy devalued mortgage-backed bonds is to offer them with a higher interest rate.

If you’re wondering why conforming mortgage rates are up by 0.750 percent since last week, this is it — it’s because mortgage rates are responding to the expectations of a weaker dollar going forward.  This is the reverse of what happened in August.

So, even though many expect lending standards to loosen up a bit in the coming weeks, it still doesn’t equal a slam-dunk for the consumer. Because now borrowers will be able to get the home mortgage loan, but they will be paying more for it.

The time is the late eighties. A Republican administration was coming to an end of eight years in office. In the financial sector, destruction was reigning down as the fruits of gleeful greed from the previous years’ deregulation turned out to be less than sweet.

Fast forward 20 years. It’s like we’re in almost exactly the same place.

In the late eighties, the government formed the Resolution Trust Corporation in an effort to buy all the assets from the savings and loans mess and prop up the economy. Now, as one would expect — since history is repeating itself, the government is considering this option again. The news has many hopeful that the government will not leave them to languish in the depths of despair, reaping the rewards of their greed-inspired über-risks.

A new structure wouldn’t actually look just like the RTC, but the sentiment behind it is the same. The Wall Street Journal speculates on what a new structure could look like in these modern times:

Any eventual plan isn’t expected to mirror the Resolution Trust Corp., which was created during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market.

But will an incarnation of the Resolution Trust Corporation really be as helpful this time around?

Most of what was put into the RTC were actual properties. The government could then sell them off. Now, though, things are a little different. Instead of tangible real estate that might appreciate in value, many of the “assets” that the government is thinking about buying are actually bonds backed by foreclosed properties. This changes things.

Of course, chances are that the move will stabilize the U.S. (and world) financial markets. But it may not actually help in terms of addressing the root causes of the problem. Instead, investors and others are getting a very clear message that risk that they take on will be socialized and spread out for everyone to help absorb. The other problem is that current measures will do nothing to prevent this sort of thing from happening again.

What do you think? Do you think its a good idea for the government to buy bad assets?

Tags: Resolution Trust Corporation, stock market, home mortgage loan, mortgage lenders