There's a ticking time bomb in the mortgage market. One-quarter of all outstanding home mortgages are adjustable - and about half of those are about to feel the pain of rising interest rates, warns Douglas Duncan, chief economist of the Mortgage Bankers Association.
The other half, judges Duncan, are outside of the 3- to 5-year danger zone when most defaults happen.
Adjustable-rate mortgages are tied to shorter-term rates, which have moved up more than long-term rates in recent months. They also have a period of fixed payments that vary depending on the mortgage. For example, the most common adjustable mortgages are "5/1" ARMs, which are fixed for five years and adjust every year after that.
Increasing numbers of homeowners chose ARMs because their lower initial rate allowed the borrower to afford more house for the money as home prices skyrocketed in the past few years. Now however, as interest rates rise, borrowers are getting stuck trying to pay for houses that are more expensive than they can really afford.
Warns Duncan, "As long as the economy continues to grow, we expect the vast majority will be able to meet their higher payment. But if the economy takes a nosedive, there will be job loss. Or if an economic shock led to a dramatic rise in interest rates, certainly that could change the trend."
Mortgage delinquencies are already on the rise. The MBA reported Thursday that the number of borrowers delinquent on their mortgages increased in the fourth quarter of 2005 to 4.7% from 4.38% a year ago. Nearly 1% of home loans are in the foreclosure process, according to the MBA.
"We have been expecting an up-tick in delinquencies due to a number of factors: the seasoning of the loan portfolio, the increased shares of the portfolio that are ARMs and subprime mortgages, as well as the elevated level of energy prices and rising interest rates," said Duncan.
The Federal Reserve reported today that capacity utilization at U.S. factories is at its highest level since September 2000. Industries churned at 81.2% capacity in February, up from 80.8% in January.
The nation increased production in computers and furniture as well as utility output. Overall, industrial production increased 0.7% in February, that's an improvement over a 0.3% decrease in January. The only weakness in manufacturing was in autos and auto parts.
Bloomberg News quotes Joseph Abate, senior economist at Lehman Brothers as saying, "The increase in capacity utilization is another sign of an economy approaching full employment of resources. This keeps the Fed on high alert for inflation."
As factories reach capacity, there is more reason to believe that they can pass on higher costs. The manufacturing sector has added 41,000 workers in the past 5 months, and workers are putting in an average workweek of 41 hours, according to the Fed stats.
Clearly, manufacturing is rebounding this year. However, it also shows that there are building inflationary pressures in the pipeline. If these companies aren't able to pass on their higher production costs, they will suffer lower profit margins in the coming months.
If they are able to pass on higher prices, consumers will feel the pinch in everything from computers and clothing to cars and furniture.
And, Americans may feel the pinch in rising interest rates. If the Fed senses that inflation is picking up, it could prompt it to raise rates even more than the forecast 50-basis point lift expected in the next three months.
Wall Street seems to have its holidays mixed up.
Instead of St. Patrick's Day, with green beer and NCAA basketball games galore, March 17 looks more like Halloween and gore.
That's because financial professionals feel uneasy about Friday's quadruple witching - a day that occurs once a quarter when contracts expire on stock index futures, stock index options, stock options and single stock options.
A year ago, the New York Stock Exchange recorded its second-highest trading volume ever at the time, with the value trading setting a record.
Jim Huller, principal of Maximum Wealth Advisors of Roanoke, Ind., says the fact that nearly all of the indicators he tracks are trending downward, makes the potential for market mayhem even greater today. "Investors are going to be adjusting their portfolios, which will drive trading volume," Huller says. "Any whiff of bad news could send the market careening."
If nothing else, the market for green brew will be booming if Huller is right.
It was certainly a horror show over at General Motors yesterday, as the crippled auto giant announced that its 2005 losses were $2 billion higher than first reported.
The automaker says the additional red ink is primarily the result of manufacturing job losses, operation costs related to GMAC (the company's financing arm), and the bankruptcy of former subsidiary Delphi Corp., which has provided GM with mobile electronics and transportation components, as well as systems technology.
Reuters is reporting that GM has missed the deadline to file its annual report with securities regulators because it mistakenly accounted for cash flows from a mortgage subsidiary of GMAC called ResCap. It will also restate results from 2000 to 2004 due to ResCap.
Analysts say the delay of the annual report couldn't come at a worse time.
"First, it undermines management's credibility with investors given the recent accounting issues at GM and the company's emphatic statement last week that it would file its 10-K on time," Morgan Stanley analyst Jonathan Steinmetz tells MarketWatch. "This credibility is important as GM strives to sell part of GMAC or ResCap and restructure."
The added $2 billion will bring GM's total 2005 losses to a whopping $10.6 billion. That comprises 85% of GM's market value right now, Reuters adds.
"At $18.69 per share, the loss was also just shy of GM's closing price at end December after a year-long slide that cut the stock's value by more than half," the news service said.
But it appears that investors at least appreciate both the fact that GM is being open, candidly discussing its financial woes, and that the company seems to have a plan of action to stop the bleeding.
Based on news that the company was working to right the ship and expecting improvements, GM shares closed at $22.22 on Thursday after having gained about 16% over the past few weeks.
As we have recently reported here in MoneyNews, GM is flirting with the biggest corporate default in history.
A number of factors have aligned to put the longtime auto giant in grave danger. Those include escalating production costs, the successful invasion of Asian car manufacturers on U.S. soil and the fight to unload its mammoth pension and health-care responsibilities.
After the major credit-rating agencies reduced the company to junk-bond status last year, Bloomberg reported that investors were eagerly adding GM to their high-yield portfolios.
"About 93%, or 38 of 41 high-yield portfolios surveyed, own some GM debt," said Peter Acciavatti, JPMorgan's head of global high-yield strategy, in a Jan. 27 report issued by the investment-banking firm.
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