Sunday, June 10, 2007

Long-Term Rates Rise, and Stocks Fall - NYT - 6-10-07

Published: June 10, 2007

While the markets shifted to a happier note on Friday, the week was a troubling one for many investors, as stock and bond prices fell sharply and long-term interest rates soared.

A stock market rebound on Friday made up for a small portion of the week’s losses, which appeared to have been set off by the remarks of Ben S. Bernanke, the Federal Reserve chairman. He said that inflation remains a threat, echoing language that he and other Fed officials have been using in recent weeks, but nevertheless worrying many traders.

Longer-term interest rates rose, with the yield on the benchmark 10-year Treasury bond breaching the 5 percent level for the first time in nine months, and ending the week at 5.10 percent, up from 4.95 percent the previous week. That rate affects the cost of borrowing for homeowners and corporations alike, and it could slow down the brisk pace of mergers and acquisitions.

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Beware of Exploding Mortgages - NYT 6-10-07

Beware of Exploding Mortgages
By Gretchen Morgenson Published: June 10, 2007

A tsunami of interest rate increases on adjustable-rate mortgages is coming, meaning that the worst of the subprime lending fiasco is far from over.

During the next 5 years more than $1 Trillion in ARM's will reset. From June to October of 2007 10% of that amount or $1oo Billion will reset and all of it is in the sub prime category! Many resets are based upon LIBOR + 6 Points resulting in a new rate of 11% more than 4% higher than current conventional home loan rates. Five years ago Fannie Mae estimated that 50% of sub prime borrowers could have qualified for a prime rate loan.

Last year, there were 1.2 million foreclosures in the U.S. (realtytrac)

Morgan Stanley reported that the delinquency rate for the ABX-HE index [markit] of 20 loan pools originated in the second half of 2005 and 2006 had climbed from 4% to 8% of the loans outstanding with payments 60 days or more past due, respectively. The highest credit risk tranche, ABX-HE-BBB-07-1, has lost about one third of its value. Many hedge funds have shorted either the BBB or BBB- tranche and made profits of more than 90% given leverage. The index is currently at 65.45.

Interest Rate Chart


On the Auction Block in Californina - NYT - 6-10-07

Foreclosures have surged in Southern California in the last year, particularly in outlying areas.

In seven counties, lending institutions foreclosed on 6,007 properties in the first quarter of 2007, up from 721 properties in the first quarter of 2006, according to DataQuick Information Systems, a research company based in San Diego.

In Riverside and San Bernardino Counties, lenders foreclosed on 255 homes in the first quarter of 2006. That number grew to 2,369 in the first quarter of 2007, according to DataQuick.

After completing legal default proceedings, banks typically auction properties on the steps of county courthouses. Buyers have no opportunity to inspect the properties and must pay in full, in cash. The sellers do not have to guarantee that the title is clear of liens and additional mortgages.

The company presented every property for public inspection for three days, and it guaranteed title insurance as well. In addition, the company arranged for a lender to finance the deals, so that buyers did not have to pay cash for the full price.

Buyers paid the auction company a fee of 5 percent of the sale price for the first house, and 15 percent of the sale price on additional houses.