Here’s one reason the Fed might not raise rates anytime soon. As long as they’re holding them near zero, they can keep kicking the OptionARM timebomb down the road. At least that’s what RBS analyst Arohan Kohli hints at in a new note. (Via Alphaville and John Jansen)
“Turning now to an announcement that caught our eye yesterday, the St. Louis Fed stated that they were concerned about Option Arm and Alt-A loan delinquency rates. I am too. Attached is a chart of delinquencies in the Option ARM universe. The key takeaway from this chart is that low rates have allowed some borrowers in this type of loan to make the minimum payment and still cover at least a part of their principal or delay the time till they reach their negative amortization cap. Despite that fact, delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms. If our economists are right about the size and timing of the Fed Funds rate hike (approx. 1% per quarter starting in Q2 next year), the impact on borrowers of these types of loans could be very significant. Those who are slightly delinquent or barely holding on could see their payments move substantially higher with the impact possible late next year.”
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.