Zero Equity

Here's a little snippet I received this morning.
It starts out with a recap of Friday's activity, then a little about the upcoming week, and then a paragraph about the Fed's.

What caught my eye was the statement that 1/4 of all borrowers have ZERO or LESS equity in their homes. I cannot confirm this figure, and it sounds like he can't either but this is a very scary figure. Combine that with the fact that 3 trillion in ARMS are set to adjust in the next 24 months. What that means is that the fixed period of their ARM is going to end and now their monthly payment is going to adjust (that means they are going to go up). These borrowers who may have refi'd a couple of years ago and in doing so paid off all their credit card debt. Flash forward to today and many of them have added a new car loan and run their cards back up to the limits.

They'll have a very hard time qualifying for a refinance now. No equity, the same income, and this time around they cannot pay off the debt in the process to make the qualifying ratios work.

Short answer, they will be stuck in their loans, struggling to make the increasing payments. It'll be sink or swim. That's the scary part.


"Remember Friday? The headline number of a 0.4% drop in Retail Sales was worse than the forecast, which should have helped us, but the drop was dues to a 9.3% decline in gas sales that is a result of dropping prices at the pump. If gas sales were excluded, sales rose 0.6% last month! On top of that, the University of Michigan said that their Index of Consumer Sentiment rose to 92.3, much higher than the 86.5 that was expected and indicating that consumers were more optimistic about their own financial situations than last month and what was expected this month. This is bad news for the bond market because rising confidence suggests that consumers are more apt to make large purchases in the immediate future, which translates to higher levels of economic activity.


What's on tap for this week? First, we'll see a rush of quarterly earnings releases for companies, which could cause significant movement in the stock markets, which may impact bond & mortgage prices. Tomorrow we haveSeptember's Producer Price Index (PPI), measuring inflationary pressures at the producer level of the economy and is closely watched by investors. Analysts are expecting to see a drop of 0.8% in the overall index and a 0.2% rise in the core data reading. September's Industrial Production report will also be released tomorrow giving us an indication of manufacturing strength by tracking orders at U.S. factories, mines and utilities. More economic releases are listed below, but currently A-paper prices are almost .125 better than Friday afternoon.



What is the latest thinking of the Fed? If the Fed raises interest rates, as some have come to believe lately, that would crush bonds and stocks, and the Fed can't afford to do that in an over-leveraged economy. With $3 trillion in ARMs that are going to reset in the next 24 months, and if it is true that 25% of borrowers have zero or negative equity in their homes, raising rates may drive the economy toward a recession. It appears that consumers have been trained to spend and are using their houses like an ATM machine, so if/when home prices stop rising, home owners can't take any more money out of their houses. An interesting place for the economy."