Another Reason The Fed Won't Raise Interest Rates

As Dwight Cass reports in a recent piece on breakingviews.com, Fitch Ratings is calling for a doubling in U.S. mortgage delinquencies from current levels. If they are right, that would likely mean continuing downward pressures on U.S. housing prices.

Defaults are scheduled to escalate because about $50 billion (U.S.) in option adjustable-rate mortgages [ARMs] will be resetting at higher rates in 2009 and 2010. Fitch Ratings “estimates payments will rise some 63% on these mortgages – increasing the average borrower’s outgoings by more than $1,000 a month.”

So here is another reason why the Federal Reserve is not likely to raise interest rates to fight inflation — in addition to other possible reasons cited. Rates are already being raised by financial institutions for a major portion of their customers, and by substantial increments. Why should the Fed pour fuel on the fire?

Institutions with big exposure to option ARMs are going to be pressured for some time, notes Cass on the breakingviews.com site. Two cases with high exposure are Wachovia (WB) and Washington Mutual (WM).

Comments

[Tom Armistead:]

Fitch ratings is in the process of making themselves irrelevant.

2008 Sep 04 06:03 PM

[HARM:]

<i>Why should the Fed pour fuel on the fire?</i>

I don't think this is an appropriate metaphor to use in this case. Greenspan lowering FF rate to 1% and holding it there nearly 3 years was certainly "pouring fuel on the fire" that became the housing bubble. So was actively encouraging people to jump into option-ARMs in 2004, refusing to burden lenders with "unreasonable" regulations such as requiring full income/asset documentation, uncoerced third-party appraisals, down-payments, etc.

Belatedly raising rates above the current (negative in real terms) 2% is hardly "pouring fuel on the fire". On the contrary, it would be pouring *water* on the raging fire that is commodities inflation --which the Fed itself is largely responsible for.

2008 Sep 04 07:58 PM

[Kinabalu:]

HARM is exactly right. But, that being said, this fed chairman has shown a real willingness to do the politically expedient thing rather than the right thing.

2008 Sep 07 02:10 AM

[wamuhomeowner:]

This horrible company paid taxes twice on the wrong house and refused to correct their books. Washington Mutual Bank allows non-accountants access to the loan histories and forced us into foreclosure and bankruptcy while refusing to modify the loan or even correct their books. None of their math adds up even to this day and their offices admitted multiple mistakes on their master loan history under oath before the bankruptcy judge.

2008 Sep 07 08:07 PM