Sunday, November 23, 2008

Cycling on Empty

For those who keep asking about a market bottom, Paul Kedrosky wonders aloud about whether the worst is past.

The lack of systematic, government-mandated and collected statistics on the structure of the mortgage loan market appears to be a running theme in how the uncertainty keeps going, and going, and going. (There may be some that I just do not know about).

Among the things I haven't seen systematically outlined:

  • How many sub-primes have been re-financed into primes, and who were the companies that originated those loans
  • How many loans, of all types, have pre-payment penalties, and who were the companies that originated those loans
  • How many ARMs, by class/type, are pay-option arms, and who were the companies that originated those loans
  • How many loans had mortgage insurance paid for by financing and who were the companies that originated those loans
  • How many IO's have terms greater than 30 years, and who were the companies that originated those loans
  • For a variety of cross-sections, what are the summary statistics for the "margin" required? How many have a margin so high, on re-set or otherwise, that the "normal economics" of the loan are "gotcha", i.e. as time passes, the chances are great that indebtedness (total due) will increase, perhaps even if rates fall?
I'm sure the list could go longer, right? Some of these are policy-oriented questions, but still ...

For those reading comments to PK's post, without knowing the array of mortgage market products (I certainly do not), here are some jargon qualifiers:

5/1 ARM, 7/1 ARM, 10/1 ARM - these refer to mortgages that are fixed at an initial rate, for a period of 5, 7, or 10 years, and then reset every year after that. These are sometimes called "hybrid arms". They are to be compared with ARMs that do not have the initial fixed rate, but just re-set periodically from the outset. [I believe, but i'm not certain at all, that there were also ARM mortgages, at one time, in which there was a low initial rate, either floating or fixed, and then you moved into a fixed rate for the remainder of the term.]

ARM 5/2/5 - refers to the limits on how the interest payment reset is done. "First, subsequent, life" is the memory aid: how much the first re-set is limited to, how much each subsequent re-set is limited to, and how much all cumulative re-sets (up or down) are limited to.

IO - loans can be "fully amortizing" or "interest only" (IO)

CMT - is constant maturity treasury (most popular is 1- year maturity for ARMs).
MTA - is not anything related to a transit authority. It is "monthly treasury average" rate. It's just a month average of the CMT values, not a new maturity/duration. As an average, it smooths out the month-to-month volatility.

The last/current 1-yr MTA is 2.256% (although most mortgage contracts round to the nearest 1/8th or something at re-set).

The current 1-yr CMT is 0.96% [!!!].

On the other hand, the 1-yr ARMs rates for new mortgages are surveyed at over 5% and 5/1 ARMs higher still. It looks like 1-yrs bottomed out at 4% when Greenspan took policy rates as low as they are today.

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