BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow...

BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Five states represented 48% of all foreclosures in the country. Those five states represent 31% of the nation’s total households. Florida was the second highest contributor of foreclosures in the country in May (9.6%), while California (9.4%), Illinois(6.9%) and Georgia (6.2%) rounded out the top five. Starting in 2006 and accelerating into 2007, as much as $2.5 trillion worth of the fancy mortgages called 'hybrids' are coming to the end of the free-lunch part of the deal. Economists are still trying to put numbers on this reset factor, particularly when it comes to the riskiest home loans, referred to as 'sub-prime.' 'We don't have enough data to know how big a problem this will be,' said David Berson, chief economist at Fannie Mae, the nation's largest mortgage packager. Making matters worse, it is the the sub-prime lenders issuing the most adjustable-rate mortgages. With those who participate in the survey, 80 percent of their loans were ARMs compared to 55 percent in the broader market. Surprisingly, there is little data that is publicly available on that subject. The best resource is a study conducted in the spring [Spring 2005] by Fannie Mae, a federally chartered corporation that buys mortgages after lenders have issued them. Fannie Mae looked at 2002-2004 loan data to determine what portion of the existing loan pool would be 'adjusted,' and when. Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist. The rising foreclosure rate no doubt reflects some of those rate resets but it is going to become progressively worse as the year progresses. Also consider the fact that home prices are now starting to fall. Foreclosure that were avoidable in rising markets by selling one's home can not be avoided as soon as someone is underwater. The average rate on a 30-year, fixed-rate loan in May was 6.60 percent compared with 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate. This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the bankers association. Monthly payments will leap too, many beyond what homeowners can afford. The average rate on a 30-year, fixed-rate loan in May was 6.60 percent compared with 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate. This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the bankers association. Monthly payments will leap too, many beyond what homeowners can afford. Last year, foreclosures hit a historical low nationwide at about 50,000. But that number has more than doubled since then, according to Foreclosure. com. And delinquency rates appear to be rising as well. While delinquency rates fell for most types of loans from the fourth quarter of 2005 because of a stronger economy, delinquencies for both prime and subprime ARM loans increased year-over-year in the first quarter, according to statistics from the Mortgage Bankers Association. But as the housing market slows, experts expect foreclosures to skyrocket in those areas that have experienced the highest appreciation rate — like California, Florida, Virginia and Washington, D. C. 'There is a direct correlation between foreclosure sales and market activity,' said James Gaines, a research economist at The Real Estate Center at Texas A&M University. 'If the rate of appreciation is not there, then there is an increase in foreclosure sales.' Gaines pointed out that although California's default notices are rising by the thousands, actual foreclosure sales remain in the hundreds. Because of California's still-active housing market, homeowners there can sell their properties before going into foreclosure. On the flip side, in less active markets like Texas and Georgia, homeowners can't find a buyer in time and are forced into foreclosure. But as the housing cools in these once hot markets at the same time that ARMs reset, many homeowners may be unable to dump their properties before going into foreclosure, Gaines predicts. The above article is the second one that I read today citing $1 trillion in rate resets by 2007. Both articles attributed the number to the Mortgage Bankers Association. I do not know where the $2.5 trillion cited by the Herald Tribune comes from. The difference between those numbers is huge but regardless we are already seeing the expected rise in foreclosures. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate. Do the math. Someone on a three year ARM from 2003 or 2004 on 3.76 rate that adjusts for the first time in 2006-2007 is going to see their mortgage interest payments jump by 74%. For some, even a 20% hike is going to be a disaster. One must use caution in interpreting the above sales data. The data does not include cancellations yet cancellations have been skyrocketing at many homebuilders lately. In addition we have been seeing housing inventory numbers go up month after month. More and more people “want out”. It simply is not possible at these prices. This will just add to price pressures down the line. For now, local economies are still being supported by all this construction activity but when it ends, the jobs will go with it. Add it all up and talk of a 'soft landing' is pure nonsense. Let's see where we land first, and then we can talk about how soft it was. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. 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