Mortgage Industry News

Ruth Lee

Months ago we posited the notion that the resets in pay option ARMS and interest only product would begin their resets in Q2 09 – swelling to a massive $1T in refinancing by 2011.   We argued that those resets could further exacerbate the foreclosure crisis.  In reality, most of these loans are low margin LIBOR product, which matters more because those rates are so very low right now.  Therefore resets aren’t going to be as dire in a market where rates are pretty darn low…. thanks Fed!  Because with the Fed’s wholesale underwriting of the secondary market, rates have remained astonishingly low – resets .  However:

The Federal Reserve’s Treasury Purchase Program is coming to an end. As a reminder, this program was initiated by the Federal Reserve at the March FOMC meeting. The Federal Reserve allocated $300 billion in funds to help support the debt markets. Remember this statement…

“Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

Those six months are now over. The interest rates market is now be left to operate without a liquidity backstop in place to ensure demand for US AAA rated debt remains high. Although demand is not expected to wain by much because the economic outlook remains so uncertain, the fact that the Fed is no longer in the market as a buyer is scary! So perhaps rising rates today is a function of psychology AND supply/demand technicals.

This could have a significant impact on the performance of billions of PO/IO loans – loans very popular among the commissioned and self-employed – people who have not fared very well in the recession.  Compounding that with a lack of general refinance demands when rates increase and the potential expiration of the first time homebuyer tax credit in one month?   The already soft gooey floor of the housing industry may be facing greater challenges in the months ahead.

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