Growth in Non-fixed Rate Notes — Implications for Mortgage Markets? (ARMs vs FRMs)

Confounded Interest ^ | 06/06/2013 | Anthony B. Sanders

[whitedog57]

According to Bloomberg Briefs, there has been a jump in non-fixed rate notes. And this occurs whenever Treasury yields rise.

But if we look at The Fed, Fannie Mae and Freddie Mac, they are currently invested primarily in fixed-rate products.

The ARM (adjustable rate mortgage) share of mortgage applications has risen to 6.4% in recent months, but is well below historic highs.

As we argued in a Mercatus research paper, “Do We Need the 30 Year Fixed-rate Mortgage?“, Mike Lea and I say no. In fact, ARMs have decided advantages over their fixed-rate cousin such as risk-sharing with the lender and generally lower rates.

Here is a chart of Bankrate’s 5/1 ARM rate (white) and their 30 year fixed-rate average (yellow). Note the recent spike in the 30 year fixed-rate but not the adjustable-rate. But in general, ARM rates are less expensive than FRM rates.

Will Dodd-Frank and the Consumer Financial Protection Bureau kill-off an ARM recovery? There is a decided bias against ARMs by the regulatory community and affordable lending activists. Their argument is that banks and the GSEs are better able to hedge interest rates than consumers. Hence, some argue that we need to keep Fannie Mae and Freddie Mac to do the risk management for consumers by buying fixed-rate mortgages EVEN IF IT IS NOT IN THE BORROWER’S BEST INTEREST.

Stay tuned. I am in New York participating in a what to do with the GSEs conference.

[whitedog57]

Get RID of Fannie and Freddie!!!!!!!!!!!!

[IncPen]

With all of the money-printing at the Fed, and the chicanery in world markets, the best thing to do right now is lock in cheap money.

The minute the markets get a whiff of recovery (a real one, not an Obama ‘recovery’) the lid will blow off the pot.

People holding fixed assets and cheap debt with be well-placed, if there’s anything left when it’s over.