Home » Foreclosure Resource Center » Are Fixed-Rate Loans About To Vanish
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The Quadruple Whammy International investors during the past few years have been hit with four central problems when it comes to U.S. mortgage-backed securities: First, loss rates are higher than most analysts predicted. You can see this every day in the headlines and news reports. Second, more foreclosures mean less interest income, thus devaluing securities. Fourth, the dollar has taken a beating relative to most major currencies. This is one reason the price of oil has soared in the past year — it’s not that oil costs more to produce, it's that dollars buy less and less on overseas markets. In June 2005, one Euro was worth $1.22 according to the Federal Reserve Bank of St. Louis. By June of this year that same Euro cost $1.56 — a 28 percent drop in the buying power of the U.S. dollar. Seen another way, if you go to Italy now it will cost 28 percent more than three years ago, but when Italians come here their costs have fallen by that same 28 percent. What does it all mean? It would not be unreasonable to see mortgage investors shift their preferences. Some investors will simply exit the mortgage marketplace, meaning that mortgage financing and refinancing will be more difficult to get in the U.S. and that rates will be higher. You can already see this with subprime and Alt-A loans because many lenders do not want to buy securities backed by such loans. Another possibility is that investors will begin to shy away from fixed-rate prime loans. Not all prime loans, but fixed-rate mortgages to the best borrowers. Adjustable-rate prime mortgages are an excellent hedge for lenders against both inflation and declining dollar values. If you’re an investor you want to finance prime ARM borrowers so that you have the fewest number of defaults plus you get the benefit of changing rates. Alternatively, as an investor the borrower you don't want is the person with great credit and a fixed-rate loan — somewhat like me and my passbook mortgage, borrowers who are good about making loan payments and therefore have loans which stay outstanding for a long time. That's a problem to investors if inflation is growing, rates are rising, flexibility is needed and better returns can be obtained elsewhere. Is inflation a real worry, something that should concern investors? You bet. As Federal Reserve Chairman Ben Bernanke just cautiously told Congress, the “upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation.” |
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