The 2/28 Mortgage

Monday brought a nothing day to the stock market.  There was an up bias to the early part of the day but by the end of the day the Dow has lost 32, cents not dollars, big move.  With nothing in particular going on this Monday, the market managed to stay even.  We don’t see how the market continues to manage to hold on to these prices.  Interest rates are seemingly on the rise and the Fed seems bound to raise rates again at this month’s FOMC meeting.  Would it be possible for the Fed to keep raising rates and the Dow to stay flat for the rest of the year?  The answer must be that the market thinks that the Fed will Stop raising rates soon enough and therefore we can’t sell now because there will be a big rally when they stop.  Twisted logic, I agree.

Tonight we focus on the housing market one more time because interest rates have had a minor up tick over the past ten days or so.  The WSJ had an article entitled “At the Doorstep: Millions Are Facing Monthly Squeeze on House Payments”.  According to the online WSJ that I read, this is the top read story of the day.  We thought it fitting to mention it here and you may want to read it for yourself in the print version, if you can find it (page A1).  

The article points out that “many households took advantage of ‘affordability’ mortgage loans—heavily promoted by lenders—that hold down payments for an initial period.”  We would add that the ARM versions were heavily promoted by the former Fed Chairman, Greenspan, in case you forgot his name.  

The article says that about a quarter of all mortgage loans outstanding will come up for interest rate resets in 2006 and 2007, that’s 25%!!!  The article adds that property taxes and energy costs have gone up to squeeze the fragile homeowners as well.  

The article states that 1.4 million households face a jump of 50% or more in their monthly payments when these initial low payment periods run out.  Many homeowners are seeking help in order to find ways to deal with these heavy costs, with many more expected to be seeking help in the future.  

Some of these borrowers will refinance into new 2/28 loans that are set for 2 years and then for the last 28 years can be reset every six months.  “These loans generally limit the size of the first jump to around three percentage points… Monthly payments for a borrower with a loan of about $150,000 would rise to about $1315 from $1000.”  

The last paragraph states that “A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan. ‘But that goal is rarely realized’…As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms…”

Be careful out there…  


Dow Industrials:  11,076.02  -0.32
RYVNX:   19.33
RYAIX:  22.40
TLT:  88.21
BEGBX:  12.92