Economic Commentary by Dave Hershman

Deflation. Once in a while it pops up as a threat to the economy. This happened most recently a few weeks ago when it was revealed that consumer prices fell 2.1 percent over the last 12 months, the largest drop in 59 years. The doomsayers took that message and ran with it. If deflation comes it will be the result of a collapse of the world economy. However, the mainstream recognized that this drop in inflation was really the result of a moderation of energy prices. Remember, last year when oil prices were spiking towards $150 per barrel? The bursting of the oil bubble saw prices plummet to just over $30 per barrel in a matter of months and subsequently moderate in the $60 to $75 range.

In fact, the lack of inflation can be seen as good news. The Federal Reserve Board has indicated that even though the worst is over for the economy, a slow recovery is forecast and that means they need to keep rates very low for the immediate future. With no threat of inflation, there is no pressure on the Fed to reverse course too early. Low rates are absolutely essential to keep the economy moving. This means that great deals for consumers on cars and houses will continue for at least the next few months. Speaking of bargains, don't look now but the tax credit for first time homebuyers is set to expire in a few months. Bargains do not last forever and we cannot expect rates to stay this low in the long-term. The government is borrowing hundreds of billions to finance the deficit and when consumers start borrowing in an economic recovery, the good news regarding rates could end quite dramatically. We just hope that the economy is on firm footing if and when that happens.

The Markets

Rates fell in the past week. Freddie Mac announced that for the week ending August 20, 30-year fixed rates averaged 5.12%, down from 5.29% the week before. The average for 15-year fell to 4.56%. Adjustables also fell with the average for one-year adjustables falling slightly to 4.69% and five-year adjustables decreasing to 4.57%. A year ago 30-year fixed rates were at 6.47%. "U.S. Treasury bond yields fell nearly a quarter of a percentage point over the week, and other long-term yields followed suit," said Frank Nothaft, Freddie Mac vice president and chief economist. "30-year and 15-year fixed-rates fell to the lowest level since the end of May, while initial rates on 5/1 hybrid ARMs declined to levels not seen since January 2005. Low rates are helping to reinforce the housing market. New construction on one-family homes rose for the fifth consecutive month in July to an annualized pace of almost 500,000 homes, the most since October 2008." Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Loan Modification News

Nearly half the people going through the foreclosure process reported symptoms of depression and 37 percent met screening criteria for major depression, according to a study at the University of Pennsylvania School of Medicine. “The foreclosure crisis is also a health crisis,” says lead author Dr. Craig E. Pollack, an internist at Penn. “We need to do more to ensure that if people lose their homes, they don’t also lose their health.” Authors of the study say that losing a house is equivalent to losing a piece of the American dream. “When this happens, there is reason to worry not only about the health of the home owner but also that of family members and the broader community they live in,” says co-author Julia Lynch, assistant professor of social sciences. Source: University of Pennsylvania School of Medicine

The number of Americans who have fallen at least 30 days behind on their home loan payments inched up slightly between the first and second quarters of 2009, but jumped 44% compared on an annual basis, according to an industry report. That puts delinquencies at a record 9.24% of mortgages, according to the National Delinquency Report from the Mortgage Bankers Association (MBA) That represents more than 4 million of the 45 million borrowers covered by the report. What the rate does not include, however, are loans already in foreclosure. Some 4.3% of all the mortgages are in that stage, up from 3.85% three months earlier and 1.55 percentage points from one year ago. The combined percentage of loans past due and those already in foreclosure hit 13.16% during the quarter, the highest ever recorded by the MBA survey "There was a major drop in foreclosures on subprime ARM loans," said Jay Brinkmann, chief economist for the MBA, in a prepared statement. "The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase."Source: CNN/Money.

About 30% of payment option adjustable rate mortgages are already seriously delinquent and a congressional watchdog agency expects defaults and foreclosures will only get worse next year. "We are particularly concerned about payment-option ARMs because so many are recasting and becoming less affordable to those homeowners," said William Shear, a director at the General Accountability Office. Mr. Shear testified before the Joint Economic Committee on a just-released GAO report that shows that 44% of the 837,000 POAs originated from 2000 and 2007 have prepaid and only 30% or 250,000 loans are current. The terms of POAs generally recast after five years but the recast can be moved up because of negative amortization. Louisiana State University finance professor Joseph Mason warned the committee defaults on POA could cause foreclosures to peak in 2010 and keep the foreclosure rate elevated into 2011. Meanwhile, option ARMs are difficult to modify because the borrowers already enjoy very low payments (due to the minimum payment option). However, the re-default rate on option ARMs is "much lower" than modifications on other alt-A mortgages, according to a Bank of America/Merrill Lynch Research report. Source: National Mortgage News