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- Mortgage Rates Shoot Lower After Housing Data
This downbeat data helps interest rates today in two ways. In the most traditional sense, negative economic data should always be a net positive for interest rates because a weaker economy supports lower growth, which in turn implies a decreased ability to sustain a rise in rates, all things being equal.
The more direct reason is the data's relationship to the current hot button for financial markets: the Fed's impending reduction in bond buying. The current consensus is that the reduction or 'tapering' will inevitably happen, but the timing is still debatable. Most think September, but many believe it will or should be later. If it is, then interest rates might catch their breath for a few weeks or months.
The Fed will not jeopardize the economic recovery simply for the sake of reducing its balance sheet. They've learned way too much to make such a fundamental error. If they start to taper and the economy starts to tank, they'll start buying more bonds, reversing the taper. Hyper-fear is needless.
Read the source article ... https://www.mortgagenewsdaily.com/consumer_rates/321982.aspx
- Fed warned of global risks to tapering - Aug. 24, 2013
This is a longer section because this issue is so important.
While the Fed was trying to save the U.S. economy over the last four years by pushing interest rates down to historic lows and going on a bond-buying spree, the value of the U.S. dollar fell, prompting investors to seek higher returns in riskier markets.
Emerging economies like India, Brazil, Indonesia and countries in Eastern Europe all benefited from large influxes in U.S. dollar-based loans over those years.
Real estate prices rose in China, Korea and Thailand. Stock prices increased in China, Mexico and Russia, and credit became far more available to borrowers in Brazil, China, Korea and Turkey.
But now, as the Fed prepares to slow and then eventually end its stimulative policies, the U.S. dollar is already rising versus foreign currencies like the Brazilian real and the Indian rupee. Investors are pulling their money out of these countries, triggering fears of a panic.
Here's how a crisis could play out: As emerging market currencies fall, the fear is that borrowers in these countries may not be able to pay back their dollar-denominated loans. Should they default en masse, their domestic banks could suffer or even fail.
Meanwhile, just because their own currencies are falling, doesn't mean prices will be going down too. In countries that import food and oil from abroad -- often priced in U.S. dollars -- basic necessities will become more expensive to the average person.
... "People in emerging markets spend 40% to 70% of their income on food and energy alone. Where an American can grumble about their grocery bill going up, it's marginal for most Americans, whereas for emerging markets, it's life and death."
... Christine Lagarde, ma naging director of the International Monetary Fund, also delivered a speech calling for more international cooperation.
"No country is an island," she said. "In today's interconnected world, the spillovers from domestic policies ... may well feed back to where they began. Looking at the wider effect is in your self-interest. It is in all of our interests."
The discussion remains controversial because it conflicts directly with U.S. law. Congress has charged the Federal Reserve to form its policies around maximizing American jobs and keeping American prices stable. It says nothing about say, food prices or wages in India.
We think Christine Lagarde is correct that selfishness can ripple, and has, around the world hurting the overall global economy.
Read the source article ... https://money.cnn.com/2013/08/24/news/economy/fed-global-risks/index.html
- Did ARMs Keep the Housing Crisis From Being Even Worse? - Bloomberg
A new paper from Andreas Fuster and Paul S. Willen notes that during the housing crisis, people with ARMs saw their payments fall by about half, on average, because interest rates fell so far. And here's what that meant:
Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate reductions dramatically affect repayment behavior, even for borrowers who are significantly underwater on their mortgages. Our estimates imply that cutting a borrower's payment in half reduces his hazard of becoming delinquent by about 55 percent, an effect approximately equivalent to lowering the borrower's combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on the driving forces behind default behavior and have important implications for public policy.
The reason that they feel so risky and irresponsible is that we're used to 30-year fixed rate loans. That meant that at the very height of the bubble, people used ARMs to get into houses that they couldn't really afford -- they could afford the teaser rate, but not the expected payment after the loan reset. The idea, crazy as it now seems, was to build some equity and sell if you really had to. Or something -- it's not always clear what people who took these loans were thinking.
But this was really a problem with the banks, which made irresponsible loans, not with ARMs per se. If ARMs had been more normal, both people and banks would have paid closer attention to their ability to pay over the long term. In other words, the fau lt is not in our ARMs, but in ourselves.
That's all fine; however, buying into an ARM right before inflation kicks in and without leaving a sizable income cushion could spell disaster. It should also be noted that the ARM products have changed since before the crash/Great Recession. They are now more regulated to help prevent them from clobbering a borrower. The watch words remain though: do the math and factor for a worst-case scenario.
Read the source article ... https://www.bloomberg.com/news/2013-08-21/did-arms-keep-the-housing-crisis-from-being-even-worse-.html