SDR, you say that “rates are going up”, but as you point out elsewhere in your post, they are going up only for lower-grade mortgages. (Agreed, most mortgages written in 2006 and 2005 and 2004 were in this category, but there are other kinds of low-risk mortgages still available.)
Here’s my take on rates for mortgages. It’s based solely on looking at the investment side. I’ve never borrowed money, so I don’t have a clue what a real actual mortgage looks like.
Class 1: Mortgages that get sold to GNMA, FNMA.. Rate = Treasury + Extra 1
Class 2: Mortgages that are conservatively underwritten but are not sold to the agencies. Rate = Treasury + Extra 2
Class 3: Mortgages that are aggressively underwritten. Rate = Treasury + Extra 3.
Extra 1 won’t change much, because of the explicit or implicit full faith and credit guarantee against default provided by the taxpayers, thanks to Congress.
Extra 2 will increase by a decent but not ridiculous amount. (I don’t know, I’d need to think hard, but maybe 20bp for a 20% down, 30% DTI, fully doc’d loan, increasing to 50-100bp for weakening of any one of these conditions.)
Extra 3 will increase by hundreds of basis points. Some forms of these loans will go extinct because the price is so high it’s unattractive to even the most irresponsible buyers, but others will continue to be available, at the higher price.
