Fed Rate Cut May Help With Adjustable Rates
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Ben Bernanke is turning out to be a better friend to American homeowners with subprime adjustable-rate mortgages than Henry Paulson, according to analysts at banks including Wachovia Corp. and Bank of America Corp.
The Federal Reserve under Mr. Bernanke yesterday cut its benchmark interest-rate target by 50 basis points to 3%, the lowest since June 2005. For ARM borrowers, the cut may further reduce the extent to which their mortgage payments will rise. Borrowers with poor credit or high debt who took out loans in recent years may avoid “payment shock” entirely if the central bank meets some futures traders’ expectations for more cuts in the next two months, the analysts said.
“It turns out the Fed still has some influence over outcomes after all,” Wachovia analysts led by Glenn Schultz wrote in a January 28 report. About $200 billion of subprime ARMs face their first payment adjustments this year, they say.
The potential for foreclosure rates to further exceed the highest levels on record as subprime ARMs hit first-time adjustments has fueled concern that the decline in home prices may accelerate, boosting losses for banks and bond investors and potentially pushing America into a recession.
In December, Mr. Paulson announced an agreement intended to encourage extensions of the initial rates on certain subprime mortgages between representatives of lenders, bond investors, and regulators.
The effect of resets by subprime ARMs has been reduced as the six-month London interbank offered rate declined following Fed cuts over the past five months, according to the analysts at Wachovia and Bank of America, both based in Charlotte, N.C. Most ARM rates are pegged to six-month dollar Libor. Analysts at New York-based JPMorgan Chase & Co. and Zurich-based Credit Suisse Group have also noted interest-rate cuts are reducing the dangers of subprime-ARM resets.
Assuming that the Fed would add 50 basis points of cuts yesterday to its 175 basis points in reductions to rate targets since September, the Wachovia analysts said six-month Libor would probably fall from its current level of 3.18%.
