Credit Stress

As discussed in several notes this year and mentioned in the FOMC preview, the plethora of new liquidity programs that the Fed has put into place are creating balance sheet issues. The $30 billion that the Fed may be lending to JPM, plus whatever else it lends through the PDCF can be added to the list laid out on Friday.

The Fed has already liquidated over $100 billion of Treasury bills since last summer, and it feels like there is at least $100 billion more to go in the next month or two. Market participants need to be prepared for some potentially radical results.

While the mortgage credit losses still don’t look huge relative to the size of the economy or the financial markets — the baseline assumption in the paper is $400 billion in losses, which is about 2-1/2% of total equity market cap or “just one bad day in the market” — they are nevertheless responsible for much of the financial and economic turmoil of the past 6 months. It is estimated that roughly half of the total losses are likely to be borne by leveraged US financial institutions, which aggressively mark to market and closely monitor their leverage and value at risk.

How the Interest Rate on an ARM is Determined: There are two phases in the life of an ARM. During the first phase, the interest rate is fixed, just as it is on an FRM. The difference is that on an FRM the rate is fixed for the term of the loan, whereas on an ARM it is fixed for a shorter period. The period ranges from one month to 10 years.

Can I have a mortgage on my house and still get a reverse mortgage?

Only if your mortgage is small enough to be paid off by the reverse mortgage.

A man is 62, but his wife is 58. Can they still get a reverse mortgage?

Only the person aged 62 can – if his spouse is no longer a co-owner and her name is removed form the title to the house. But in that case, if the older person died, the loan would become due and the house might have to be sold – perhaps something that the spouse wouldn’t want.