Suppose you have a mortgage re-setting in October.
Suppose your reset rate is tied to short-term Treasury rates (many are).
Suppose that 1-year treasuries have dropped by a full percentage point since July (they have), in anticipation of a FED rate cut.
If the Fed follows through (as the market anticipates), short-term treasuries are likely to stay roughly where they are now.
This would result in your reset rate at less than 7% (assuming a 2.5 -2.75% margin) instead of the nearly 8% you were facing a mere 2-3 months ago. This translates to 12.5% less of a payment than you would have had to make had your loan re-set a few months back.
Would a 12.5% break in your monthly housing expenses help ?
For some folks with liar loans and much higher margins (e.g. sub-prime borrowers) and barely enough income on the original teaser rate, it won’t matter. But for many others it will. I think this would help a large chunk of borrowers (maybe 30% … maybe 60%, I don;t know) , at least temporarily, and will smooth out the problem somewhat, perhaps spreading out the pain over a longer time-frame.
If the Fed does not cut, short-term rates will likely be negatively affected, thus hastening the demise.
