Pain relief for mortgage flare-ups
Those resets for adjustable rate mortgages may be a little easier to take as interest rates fall.
NEW YORK (CNNMoney.com) -- Lenders, foreclosure-prevention groups and the government are all working to ease the shock of upcoming subprime adjustable rate mortgage resets. But the recent plunge in interest rates will also help consumers. Even so, it won't be enough to save many at-risk ARM borrowers.
The Federal Reserve cut the Fed fund rate three-quarters of a percentage point on Tuesday, rallying the stock market and cheering the housing industry.
On January 17, mortgage interest rates stood at 5.69 percent for a 30-year fixed rate, their lowest level since June 2005, according to Freddie Mac's weekly mortgage rate survey. Rates dropped another tenth of a percent by Wednesday, according to Bankrate.com.
"Lower interest rates will make it easier for some borrowers to make payments for a longer time," said Keith Gumbinger of HSH Associates, a financial publisher that tracks mortgage rate information. "But [the resets are] not a dead issue. Subprime resets involve not just the indices but the mark-ups as well."
The indices used to calculate ARM resets have dropped. The six-month London Interbank Offered Rate (Libor) stood at 3.83 percent on Wednesday, down from 4.72 percent a month ago and 5.39 percent a year earlier. Six-month Treasuries are at 2.29 percent, down 1.11 points from 3.40 percent a month ago.
Reset rates are based on an index plus three, four, five - even six percentage points tacked on. A lower Libor rate will ease some pain, according to Gumbinger. "But if you're struggling at 6 percent, you're not going to make it when you reset to the mid-sevens, mid-eights or mid nines. It may as well be 2000 percent."
Still, the lower interest rates can save many borrowers a lot of money. Monthly mortgage payments for a resetting ARM on a $200,000 loan could come in at about $1,440 at 7.83 percent (3.83 percent plus four more percentage points) instead of $1,667 at 9.39 percent (4.39 percent plus a four point margin). That's a $227 saving.
The big margins, however, mean that interest rates for resetting ARMs will not go down - they just won't rise as fast, according to John Taylor, president of the National Community Reinvestment Coalition. "Rates defy the old adage that what goes up must come down. They just go up, in our experience," he said.
In fact, lower rates will benefit relatively few ARM borrowers, according to Doug Duncan, chief economist for the Mortgage Bankers Association (MBA). "Any increment downward helps, but it won't be a huge plus," he said.
The Center for Responsible Lending (CRL) has said 2.2 million subprime home loans are expected to end in foreclosure during the next few years. Interest rate drops could give some help to those numbers, according to Sharon Reuss, a spokeswoman for CRL, but not a lot. "There's a tiny bit of relief for consumers with the lower rates," she said.
For some of the worst housing markets, interest rate relief may be a moot point. "We're still seeing a big jump in foreclosures," said Dean Baker, an economist with the Economic Policy Institute, a progressive think tank. "A lot are going bad not because of the resets; they were defaulting before resets took effect."
Some home owners, including subprime ARM borrowers with good payment records, may have an easier time refinancing into a low-cost, fixed rate loan if they live in areas where home prices have held steady.
And now may be the best time to do it; prices have not fallen as far as they will and rates are at or near historic lows. Some borrowers may be expecting mortgage rates to drop further, following Fed rates down, but that's not necessarily the case.
According to Duncan, interest rates often all drift down together but mortgage rates sometimes do not. They're determined by the sales of mortgage-backed securities by Freddie Mac and Fannie Mae and - because mortgages have such long terms - securities investors can be sensitive to inflation threats, which would reduce the value of their investments.
As Fed rates fall and credit expands, inflation risk increases. That's one reason why some critics say Federal Reserve chairman Ben Bernanke had been cautious about lowering rates and increasing liquidity - he's afraid of ushering in a period of higher prices.
Inflation pressure has built lately with the consumer price index rising 0.3 percent in December following a 0.8 percent November jump. Right now, Bernanke appears to be more concerned about avoiding a steep recession. "He doesn't look like an inflation targeter now," Baker said.