Morning Report: Adjustable rate mortgages becoming less attractive

Vital Statistics:


Last Change
S&P futures 2875 19.5
Oil (WTI) 55.05 0.84
10 year government bond yield 1.53%
30 year fixed rate mortgage 3.84%


Stocks are higher after Trump toned down the rhetoric with China at the G7. Bonds and MBS are flat.


Both the US and China made statements intended to de-escalate the trade war, which is adding a spring in the step of the S&P futures. China supposedly wants to get back to “calm” negotiations, while Trump has mused over canceling the recent new tariffs. On Friday, Trump ordered US companies to start looking for alternatives to China, which he doesn’t really have the power to do. S&P futures sold off on Friday afternoon, and bond yields fell. That said, the market do seem to be adjusting to Trump thinking aloud on Twitter.

Durable Goods orders increased 2.1% in July, which was way more than expectations. Nondefense capital spending ex aircraft (which is a proxy for corporate capital expenditures) rose 0.4%, much higher than the decrease the Street was looking for. For all the handwringing in the business press over the state of the economy and trade, it isn’t showing up in the numbers, at least not yet.


The upcoming week looks to be relatively non-eventful, with only some meaningful data late in the week – the second revision to Q2 GDP on Thursday, and personal income / spending data on Friday. Another rate cut seems baked into the cake for September, so a strong number probably won’t have that big of an impact on markets.


The spread between adjustable-rate mortgages and fixed rate mortgages has been contracting as the yield curve has flattened. This is because the difference in long term rates and short term rates has fallen. Currently the difference between a 30 year fixed and a 5/1 ARM is about 55 basis points, whereas it was closer to 100 basis points during the post-bubble era. If you only plan on living in your home for 5 years or so, ARMs generally make sense, however if you can lock in your rate for 30 years at a similar rate to an ARM, it doesn’t make sense to go adjustable.


adjustable vs fixed.


Regulators are thinking about raising the threshold where homes require an appraisal, from 250,000 to 400,000. This would be the first increase in the threshold since 1994. About a year ago, the FDIC, OCC and Fed released a proposal which would make the change, and the FDIC just published the final rule.


SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are adopting a final rule to amend the agencies’ regulations requiring appraisals of real estate for certain transactions. The final rule increases the threshold level at or below which appraisals are not required for residential real estate transactions from $250,000 to $400,000. The final rule defines a residential real estate transaction as a real estate-related financial transaction that is secured by a single 1-to-4 family residential property. For residential real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.



12 Responses

  1. Vonnegut was prescient with his story Harrison Bergeron:

    “HARRISON BERGERON by Kurt Vonnegut, Jr.

    THE YEAR WAS 2081, and everybody was finally equal. They weren’t only equal
    before God and the law. They were equal every which way. Nobody was smarter
    than anybody else. Nobody was better looking than anybody else. Nobody was
    stronger or quicker than anybody else. All this equality was due to the
    211th, 212th, and 213 th Amendments to the Constitution, and to the unceasing
    vigilance of agents of the United States Handicapper General.”


    • I wonder how that’s being received within the school system. And also at the state. And also at the Federal level, as they track how many minorities participate in gifted programs and advanced classes. I would imagine they have a school board who would have to vote on such a thing. I suppose I should read the article. 😉


    • A group of selective schools and programs geared to students labeled gifted and talented is filled mostly with white and Asian children. The rest of the system is open to all students and is predominantly black and Hispanic.

      Gotta love the NYT. How can we phrase the fact that mostly white and Asian children perform well enough to get into certain schools with advanced programs as racist? Let’s just imply that the gifted and talented programs aren’t open to minorities (other than Asians).

      Also, what do you want to bet the gifted and talented programs are dominated by more asians than white people? Not a guarantee, but I’d definitely take that bet.

      the decision would fundamentally reshape a largely segregated school system

      A: probably not that much. Most schools are made up of kids local to the neighborhood. B: Most of the reshaping will be downwards, and gifted and talented kids (or their parents) look for other options–including lower-cost online schools that are great for self-starting kids, private schools, and moving outside the city.

      Still, the plan could resonate with black and Hispanic families who believe that these selective programs unfairly divert money and attention from neighborhood schools.

      Because they feel these schools divert money and attention. Not that they do, but some people feel like they do. Answer: they rarely do. State and federal funding tends to follow the poorer schools, and they generally get the most money. Not always, but mostly.

      The panel’s report, obtained by The New York Times, amounts to a repudiation of former Mayor Michael R. Bloomberg’s education agenda, which reoriented the system toward school choice for families, including more gifted and screened schools, to combat decades of low performance.

      Which means, if implemented, New York City’s performance as a school district will tank. You will either bring down high-performers or chase them out of the system entirely.

      Still, the so-called School Diversity Advisory Group acknowledged that the city would have to take pains to prevent middle-class families from fleeing the system.

      How? Punishing them somehow if they leave?

      and should not consider lateness or attendance in evaluating prospective students.

      Good lord.

      Still, the report said, a system that relies heavily on sorting students according to academic ability “is not equitable, even if it is effective for some.”

      New York is doomed. At least the school system is.


  2. Goddamn


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