June 14, 2007

Cheap Money Era May Be Ending

Biggest mortgage spike in 4 years

Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), expects mortgage rates to top out near 7 percent by the end of the year.

Rising rates, among other factors, have caused the MBA and the National Association of Realtors to push back their forecasts for a home price recovery. Both groups are now looking to early 2008, compared with a previous outlook for mid-2007.
An era of cheap money - gone

For years, the world has enjoyed historically low interest rates. This has helped fuel a boom in corporate mergers and private equity buyouts and a rally in stock prices and in other assets, such as real estate. But with economic growth outside the United States picking up and fanning inflation, central bankers around the world are pushing rates higher in a bid to cool growth and avoid bigger problems later on.

"There's been too much global liquidity and now we are seeing a shift away from multi-decades of declining rates and declining inflation," said Josh Stiles, managing director of research firm IDEAglobal in New York.

"This is the end of the cheap money cycle," Marc Pado, U.S. market strategist at Cantor Fitzgerald in New York, said.
Adjustable-rate mortgages going sour

he mortgage bankers came out with their latest survey on mortgage delinquencies and foreclosures on Thursday, showing a small rise in the percentage of homeowners who are in the process of losing their homes because they aren't paying the mortgage. At the end of the quarter, 1.28% of all loans were in the foreclosure process, up from 1.19% in the fourth quarter. See full story.
For those who have fixed-rate loans, or who passed the strict criteria to get a loan from the FHA or VA, foreclosure and delinquency rates actually fell. But those who took out adjustable-rate loans fell further behind.
Foreclosure rates for adjustable-rate mortgages, or ARMs, have doubled over the past two years. This is not just the subprime borrowers, those with less than stellar credit. Even prime borrowers who opted for ARMs are in trouble.

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