Taking Stock of Bonds

November 13, 2007

The Big Bounce

Much has been made of the upcoming wave of resets within adjustable rate mortgages. ARMs - developed for a high interest rate market in the 1980s - have grown in popularity since 2001, and even former Fed chief Alan Greenspan tacitly advocated ARM loans. They allowed consumers to qualify for larger homes and this, in turn, helped propel prices higher.

Now that teaser rates - that low introductory rate - are expiring, consumers will see their monthly loan payments jump. The Federal Reserve started raising rates in June 2004 and maintained a tight rate policy until this summer's credit problems. Even though the Fed cut rates recently some consumers will see their monthly loan payments jump.

While talk of the impending uptick in rates has spooked already jittery markets, investors - those holding securities backed by home loans and those with finance company shares - ought take a close look at weekly data compiled by the Mortgage Bankers Association of America, an industry trade group. The MBA has a series of gauges that track demand for loans to purchase homes and applications for mortgage refinances. If demand rises for refinance applications it would suggest the consumers have figured out they need to do something about that rise in their monthly loan payment and they are being proactive by shifting out of that loan with higher monthly payments.

But a rise in applications does not automatically mean that all is well. After all, anybody can ask for a loan refinancing, but it does not mean they'll get it.