Mortgage Repayment Datapoint of the Day

The real-world consequences of an elevated Libor:

The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase of about 18 percent based on Libor rates as of Sept. 30, rather than the 10 percent that would have occurred based on the rates on Sept. 15, the analysts wrote. The payment would be $1,951, instead of $1,807, they said. Fannie Mae and Freddie Mac loans would be boosted to $1,021 on average, instead of $904.

Naturally, higher mortgage repayments mean more defaults. Not exactly what we need right now. On the other hand, the payment streams from those mortgages might well be higher than expected, which could at the margin help out the higher-rated tranches of subprime MBS.

In any event, I think it's pretty clear at this point that Libor has reached the end of its useful life, especially when it comes to semi-fictional constructs like 3-month and 6-month Libor. When was the last time that any bank got any significant funding in the six-month interbank market? And it's just plain silly, in a world where mortgages are securitized and sold off to non-bank investors, that repayment rates should be tied to interbank funding costs or any measure of financial-industry credit risk. Whatever happened to the Prime rate? That would be a much better benchmark.

(HT: Free Exchange)

Comments

[Smarty_Pants:]

"The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase .... [to] $1,951, instead of $1,807"

Left unsaid is the fact that the 'average subprime borrower' can barely afford the $800 interest-only payment during the pre-adjusted interim.

Increased LIBOR rates only put this person further under water. You will drown just as quickly 10 feet down as you do 20 feet down.

The fact that they are completely underwater is the core of the problem, not the depth of the pool.

2008 Oct 08 10:31 AM

[Jason Rines...:]

Government should directly set up a very large scale program of debt consolitation to Main St and offer a bundled 30 year loan package on a mortgage and other debts such as auto and credit cards lent at the Fed short-term rate. Those without 85% loan to total asset value between the home and the autos can't be saved and in all probability shouldn't be helped as these individuals likely acted irresponsibly. Not doing this is going to certainly accelerate far more defaults of the responsible with the intent to pay, especially on credit card debt.

2008 Oct 08 11:17 AM