0 Millions Of Luxury Homeowners Gambling With Their Jumbo Loan

Ten's of millions of luxury homeowners have adjusted from an ARM with a fixed rate period into a fully adjustable jumbo loan. Following the large drop in LIBOR rates since 2007, floating with the 6-month or 1 year LIBOR index has been an excellent risk homeowners took the last few years. Even if they were not aware of the relationship of their mortgage payment and the workings of the global short-term money market.

In the last few weeks it has become crystal clear that Europe is having a massive government debt crisis which started in Greece and is spreading throughout the European Union. This crisis is causing major moves in all the various LIBOR indexes and the action in Europe will translate into higher mortgage payments in the US whenever someone reaches their semi-annual adjustment period.


The underlying rate trend in these indexes in the last few weeks is a steady march higher as governments, banks and corporations are going to market to borrow hundred of billions of Euros. This is pushing LIBOR rates up for the 6- month and 1 year about .25% within the last two weeks. All the LIBOR indexes are at the highest levels in over a year despite massive liquidity being pumped into the system by the EU Central Bank and the FED.

Now we aren’t in the danger zone yet for US based jumbo mortgage loans that are floating considering that the average margin to the 1Y LIBOR is 2.50% arriving at a current floating rate of 3.25%. But a plausible scenario of a consistent flow of gov/corp borrowers, an improving global economy over the next year could push LIBOR rates consistently higher. Any real growth in the economy will be meet with higher interest rates and this will be reflected on the hundreds of billions of dollars worth of jumbo loan mortgages that are sitting with rates of about 3.25-4% now.

We think homeowners that are floating against the LIBOR indexes without a plan to sell soon or get another ARM this year or a fixed jumbo mortgage are gambling with their mortgage payment. Not having a solid plan is a very dangerous proposition given the huge debt crisis that continues to unfold around the world. I am a firm believer in having full coverage auto insurance given the cost of coverage vs the financial risk of an accident. Millions of American’s are just waiting for a financial accident when they get their new rate increase notice. Most ARMs adjust every six months with a 30-60 day notice of the new interest rate and payment. The jumbo loan trend has only been down for the last few years as the world almost fell into a financial black hole during the 07-08 meltdown.

I think with the economic recovery gaining speed that it is only prudent to lock in another ARM or a fixed jumbo mortgage while we are at the lowest rates in history. Avoiding an interest rate increase that for millions would come as a nasty surprise. If you need to refinance your jumbo mortgage within the next few years it’s prudent to explore your jumbo loan options now. As always, have a prosperous day.

Detail: Millions Of Luxury Homeowners Gambling With Their Jumbo Loan

0 LIBOR: The Driver of Jumbo Rates.

With the London Interbank Offered Rate (Libor) at record levels, thus hurting short-term borrowing, as well as blowing up many jumbo mortgages linked to the floating rate that have begun to adjust, it's useful to remind yourself how exactly Libor works. Click image to enlarge.

Detail: LIBOR: The Driver of Jumbo Rates.

0 Confusion reigns as to FEDs Impact on Mortgage Rates.

Contrary to the conviction of deeply confused clients and reports by lazy news media, mortgage rates are unchanged, about 6.50 percent for the lowest-fee 30-year jumbo loan.

Yet, the media refer constantly to "dramatically lower mortgage rates." They are better, but ... drama? Freddie's average for the whole of 2007 was 6.74 percent. A quarter-percent drop is nice for buyers, and a help to a few jumbo loan refinancers, but no fire sale.

"How can it be the same ... !?!" says the client, after a cumulative 1.25 percent cut at the Fed in only eight days? Answers follow.

Brand-new January economic data are not that bad. They're not bad enough to justify the Fed's panic, let alone to anticipate more cuts. Payroll growth slipped to flat in January (negative 17,000 is within the huge range of error and revision), unemployment down to 4.9 percent in a workforce statistical quirk -- soft, but hardly a recession. The purchasing managers reported their first gain in six months, likewise soft, but with persistent strength in foreign orders. Fourth-quarter GDP grew by a mere 0.6 percent; however, aside from a temporary drawdown of business, inventories grew at 2 percent.

The Fed's form is disturbing to long-term investors. Central banking is not figure skating, but Fed Chairman Ben Bernanke has departed his predecessor's 17 years of gradualism for lurching on the rink. A Fed that will lurch down will lurch up. This causes 10Y jumbo loans and 30Y fixed jumbo mortgage rates to stay elevated as who knows when the cuts will be taken back.

Investors bought long Treasurys and mortgages at these levels 2002-2004 because former Fed Chairman Alan Greenspan said after every meeting into 2006: Excessive monetary stimulus most likely will be "removed at a measured pace." Translation: You're safe for now, and we'll give you time to get out before we kill you.

In those late Greenspan years, deflation was the problem. Today, inflation is rising all over the world: Australia at a 16-year-high of 3.8 percent core; Europe at a 14-year-high of 3.2 percent; U.K. at 2.6 percent core; China at 6 percent-plus; and an economy completely out of control beginning to export inflation to us. Each time the Fed has lurched to a catch-up ease, all the way back to August, it has rescued stocks, commodities, oil, gold, and tanked the dollar.
I have chewed on the Fed for its inaction and credit-wreck oblivion. However, this situation is NOT a monetary problem: It is a banking-system near-insolvency that may morph into a recession, each making the other worse. The crying need for six months has been transparency of credit loss and bad-asset firewall. Cuts in the overnight cost of money may intercept recession, but inflation means that these cuts cannot be maintained or removed at a measured pace.

Two non-Fed forces holding up mortgage rates: Credit fear about Fannie and Freddie has the spread between mortgages and the all-defining 10-year Treasury (3.57 percent today) over 2 percent for the first time ever. Second, somebody by accident may arrive at an effective credit-wreck bailout: The giant bond insurers, Ambac and MBIA, may be resolved in days. If no collapse, then credit fear will give way to inflation fear.
The Fed's cuts have had a dramatic effect on ARM adjustments, and should revise estimates of housing doom to the better -- also reducing bond-market fear. This month, common one-year Libor-floating loans will adjust DOWN to 5.125 percent.

Detail: Confusion reigns as to FEDs Impact on Mortgage Rates.

0 LIBOR: London's calling and your rates will be higher.

It's that time of year -- the news media is unleashing a horde of year end/year ahead stories on the public in an attempt to digest recent history and put it into a context that sheds some light on the road ahead. These stories can provide an opportunity to step back and look at the big picture, but they're also a newsroom staple because there's usually a dearth of news over the holdidays.
That's not the case this year, where the forces tearing apart credit markets aren't taking time off for the holidays. Bear Stearns Companies Inc. this week reported its first quarterly loss ever, thanks to $1.9 billion in writedowns on securities tied to subprime loans.
But stocks were up sharply today, in part because consumers weren't afraid to go Christmas shopping in November. While Americans were getting out their credit cards to buy gas and cheap imported goods, countries that have been making a good living exporting oil and manufactured goods to the U.S. have been busy buying stakes in Bear Stearns and other investment banks that are in dire need of capital because of their exposure to bad mortgage loans.

Back in October, Bear Stearns announced that an investment bank controlled by the Chinese government, Citic Securities, was buying a 6 percent stake in the company, with rights to increase its ownership to nearly 10 percent.
Another government-controlled investment fund, China Investment Corp. is putting up $5 billion fro a 10 percent stake in Morgan Stanley, which just reported $9.4 billion in writedowns on investments linked to bad mortgages. Citigroup said in November it would sell the Abu Dhabi Investment Authority a 4.9 percent stake in the company for $7.5 billion.
The Wall Street Journal reports Merrill Lynch is looking to sell a $5 billion stake in the company to Singapore's state-run investment fund, Temasek Holdings Ltd. Singapore has already taken a $10 billion stake in Swiss bank UBS through Singapore Investment Corporation.
All this foreign investment in Western banks is not necessarily a bad thing, by the way, at least if you believe the Financial Times, whose editors say it wouldn't be happening if these banks didn't look like profitable investments. They may also be looking after their own interests and trying to assist the Fed and European Central Bank in preventing a total collapse of credit markets.

Credit markets could be the canary in the coal mine indicator of a U.S. recession in 2008, according to one of the more insightful year-end/year-ahead stories out so far, "Seven economic warning signs" by MarketWatch's Rex Nutting.
"The biggest unknown in the economy right now is the condition of short-term credit markets that big businesses rely on for their immediate funding needs. Some of those markets are functioning well, but others are clogged up," Nutting writes. "Some firms, especially those in the mortgage business, can't sell commercial paper at any price. Other companies can't get funding from banks because banks are hoarding their reserves."

Nutting says to watch what happens to the spread between the London Interbank Overnight Rate(LIBOR) and the 3-month Treasury bill, which used to be comfortable right around 10 basis points but has been more like 75 lately (indicating just how tight credit has become).
"The Federal Reserve and other central banks have been trying to Roto-Rooter the system, flushing it with cash too cheap to pass up," Nutting says. "The Libor rate should show how successful they are."

This is an extremely important matter as almost 90% of the adjustable mortgages are based on either the 6-month or 1Y LIBOR. The majority of adjustables were done when the LIBOR rates were in the 1-2% range. LIBOR as of today is trading around 4.45%. So client's looking at adjustables are finding that it makes more sense to go with a fixed jumbo loan. The fixed mortgage products are more closely tied to the movement of the 10Y US Treasury rate which is hovering around 4.28% today. In general, I advise clients to carefully consider the numerous benefits of using a fixed rate loan structure for their jumbo loans. The new year brings a lot of hope and opportunity for the credit markets to sort out the mess. I expect "money good" clients to have easy access to the jumbo loan structures they need and would expect LIBOR to settle down given the orchestrated action of the major central banks to ease the credit pressures. Have a wonderful holiday shortened week.

Detail: LIBOR: London's calling and your rates will be higher.

0 Investors love resetting ARM rates, who knew people couldn't afford the rate jump?

National Mortgage News will run an interview Monday with Countrywide CEO Angelo Mozilo. In the interview, conducted Thursday, Mozilo tries to "clarify misconceptions in the media about why consumers are going delinquent on their mortgages. He blames a majority of the problem on job losses and sagging home prices -- not ARM resets," says NMN editor Paul Muolo."Resets are not the issue," Mozilo told NMN.
Well, yeah... resets weren't an issue as long as home prices kept going up -- you just refinanced into another loan. Hopefully, NMN asked Mozilo why Countrywide cutback ARM production from $19.3 billion in August 2006 to $8.3 billion last month. (Turn sarcasm on.) The resets can't possibly be a problem. Investors love a solid reset from 5% to 7% on their loan portfolio, nothing lines the pockets better. The real problem is these borrowers. They can't pay the higher rates. In the 2-3 years their loan was fixed, all was well. Then property started to decline and many of these folks can't refinance or haven't boosted their 'stated income' the 20-40k to handle the payment increase.(Sarcasm off) If they can the rates are between 6-8% depending on FICO, loan to value, document type, their preference in music, etc To break it down in real terms, clients resetting are moving from 4-5% for prime clients to 6-7%. The annual cap on increases is 2%. Most folks mortgages are based on a 2 or 2.5% spread against LIBOR. LIBOR stands at 5.275% today. On a 500k mortgage loan amount the payment increase is about $800 a month in interest. Here is a chart of LIBOR the last few years:

As you can see global markets are demanding higher rates. All major financing is based against LIBOR. As an example the First Data Corporation private equity buyout deal is pricing $5B worth of loans at LIBOR plus 2.75%. Bloomberg piece here. Client's should carefully evaluate whether they want to keep their loan till the reset or look at a fixed rate. For prime conforming loans they are right at 6% for a 30Y fixed and jumbo mortgage rates are right about 7%. I think these rates are very attractive relative to the prospect of floating against an index that may take years to drop as the global economy slows down.

Detail: Investors love resetting ARM rates, who knew people couldn't afford the rate jump?