Bogus Unemployment/Default Connection Is Bogusly Bogus
HousingWire.com finds an interesting point buried in recent testimony at the House Financial Services Committee by Laurie Goodman, senior managing director at Amherst Securities:
Goodman also took on the widespread, but mistaken notion that unemployment is the primary driver of delinquency, default and home loss. (Indeed, a committee member set her up for a dunk ball, by stating "there is no better foreclosure mitigation plan than a job." I should clarify, he was using his three minutes to grandstand against the Administration's stimulus, spending and tax programs as "job crushing" disincentives to job providers, not demonstrating his—or even his staff's—understanding of the dimensions of the foreclosure crisis.)
1. The total ratio of mortgage debt to home value (CLTV) is critical. In areas with low unemployment, defaults rates of Prime and Alt-A loans were at least 4 times greater for borrowers underwater by 20% than for borrowers with at least 20% equity in their homes.
2. Comparing loan performance and unemployment rates at the local level (as can be done with loan level data), Goodman found all borrowers with positive equity performed similarly regardless of the local rate of unemployment.
3. When borrowers have negative equity—as measured by CLTV, to include second mortgages—unemployment plays a role, but a minor one compared to negative equity. For example, borrowers with CLTV greater than 120%, default rates were 50% to 100% higher in a high unemployment area than in a low unemployment area.
Goodman's argument is not innocent. By cutting through the job-loss argument, she is trying to lay the groundwork for steep haircuts for mortgage deadbeats. But it's important to clear away the pettifoggery around what's actually causing—and continuing to cause—the collapse of the housing debt market. It's not unemployment. And of course, you read it here first.
Speaking of people who need to lose their jobs before the economy can recover, you may have heard about Ben Bernanke's exploding option ARM the other day. Calculated Risk turns up a wonderful fisking (do people still do fiskings?) of Bernanke's own mortgage:
Bernanke bought in May 2004 for $839,000. He had a 5/1 ARM for $671,200 at 4.125% that adjusted to 12 month Libor in June of each year after his fixed period ended. To calculate his rate you take 12 month Libor on that date and add 2.250%, it can't adjust more than 2% in any one year due to restrictions on the note. He also had a purchase money second $83,900 but for some reason I can't find the interest rate on that one, nor do I see an ARM rider for it so it could very well be fixed. Both notes indicate they are amortizing loans.
So what does this all mean? Well according to the terms I see for Bernanke's first and the little information on historic LIBOR I can find (here)… his rate actually went down. So if his rate went down on his first and his second is fixed (an assumption on my part since I see no ARM rider on the second) then ask yourself why refinance now? You would only do so if you expect rates to rise in the future or you don't think fixed rates will ever be this good again. Winter time is a low demand time for mortgages so rates drop to encourage activity, also the Fed is ending it's MBS purchases so rates are expected to rise.
Based on his actions I think Bernanke does not expect rates to get better than this at the very least. One can't read how much worse he might think rates might get based on his refinance but he clearly fixed his rates now so the risk for lower rates in the future based on his personal financial decision is low. I was a little doubtful that the Fed would actually end their MBS purchases since the housing market is only this "good" due to the artificially low rates caused by those purchases. But now I am much more convinced that the Fed will at least let the MBS portion of the market to stand on its own two feet in the near future. They could always jump back in if rates jump higher than they want.
I'm shocked that the Effective Demand blogger implies Bernanke is trading on his insider knowledge of Fed policy to lock in a good interest rate. This is Ben Bernanke for God's sake, Time's man of the year, a being motivated solely by sound judgment and selfless patriotism. But if you're making plans, keep in mind that even in Bernankeworld negative interest rates can't go on forever.