CD Rates and Mortgage Payment
Today, as usual, I went to Sunnyvale Public Library to read magazines and books. On the way, I stopped at Washington Mutual to check out the latest CD rates. Compared to last November, all the rates dropped a lot. Interestingly, the interest rate for 8-month fixed CD is 5.08%, which is higher than the rates of other terms from 1-month to 5-year. The second highest rates are from 48 to 59 months. The situation is slightly different on citibank, which provides the highest interest rate on 6-month CD. E*trade provides the highest rate on 1-year, followed by 6-month.
5% interest rate for a 6-12 month period is far from a bad deal. The question that I have is why it happens like that? Obviously, a lot of people are getting loans within that range from banks so that banks could charging people 10% or even higher. Are these people house owners? Assume that 2.5 years ago, a house owner bought her/his current house with a 3% 5-year ARM. This year, s/he has to double the monthly mortgage payment given the current rate. If the person lives from paycheck to paycheck, s/he has to borrow short-term money from either bank or credit card company for about 6-12 months.
Brokerage companies were on the Congressional hotseat after 2000 stock market bust. Now, it is mortgage brokers’ turn, facing the rising national foreclosure rate. The article “Mortgage Bankers On The Defensive” cites the claims from the Mortgage Bankers’ Association, such as:
Three-fourths of loans that enter the foreclosure process do not wind up in foreclosure sales. Homeowners either cure the delinquency, work out a payment plan with the lender, or sell the home.
Delinquency rates tend to peak 3-5 years after origination. With more than half of all outstanding loans less than three years old, it’s reasonable that delinquency and foreclosure rates may rise.
Between $1.1 trillion and $1.5 trillion of ARMs could reset in 2007. Approximately $600 to $700 billion will refinance prior to or at reset, keeping those borrowers from facing a payment increase as their loans reset. The remaining $500 to $800 million will reset.
I do believe that short-term CD rates are associated with mortgage payment. We could enjoy the current rates for at least 2-3 years. The reasons are very simple. It is unlikely for fed to cut federal funds rate since the gas price is still high and inflation is really there if one checks out the price of bread. Economy starts to slow down and we are expecting higher foreclosure rate.
