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Friday, March 07, 2008


are rate resets still an issue?

larry sumners in outlining the ever-growing dimensions of the credit crisis notes a fact about the nature of the mortgage problem.

the focus on adjustable rate mortgages which are resetting is misplaced; lower interest rates ameliorate that.

this is broadly true -- the impact of rate resets has diminished somewhat as LIBOR rates, variants of which most adjustable rate mortgages are tied to, have come down with central bank policies. negatively amortizing loans, however, will become fully amortizing and be impacted heavily even without radical rate hikes.

but will it stay that way? i think it's too soon to say. while central banks are unlikely to raise rates in the near term and therefore existing resets may be more managable, it is probable that the risk premium on new mortgages will expand in coming months and years as considerable default risk is priced back into the market. this will be particularly so during periods where the market demonstrates any significant doubt over the future of fannie mae and freddie mac. just a thought to keep in mind -- 10% mortgages are not unthinkable as the credit spigot to the mortgage market is shut.

as such, even though existing variable-rate mortgages may be helped, the key quandary of the upside-down homeowner stands to be aggravated as credit becomes harder to get and more expensive (at least vis-a-vis trasuries) when one can get it. thus the recent emphasis on cramdowns.

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