Personal income growth is expected, by and large, to exceed upward movement in both the per-capita cost of energy and adjustable-rate mortgage payments upon rate reset among non-agency borrowers, according to a recent report by Friedman Billings Ramsey. And, while consumers may be spending less in general expenditures when their mortgage rates do reset - causing a dampening in economic activity - the behavior "should support timely mortgage payments," FBR's Michael Youngblood wrote in a report released last week.
Using the June 2006 federal funds futures contract, Youngblood estimates a 100% probability that the federal funds rate will reach 4.75% at the time of the Federal Open Market Committee's expiration. Some $287.1 billion of subprime ARMs and hybrid ARMs, on average, will reset within the next 14 months, according to FBR, with $128.5 billion of prime and $103.8 billion of alt-A mortgages resetting in the next 54 and 35 months, respectively. Simultaneously, retail gasoline, natural gas and heating oil prices have climbed by 18.1%, 15.3% and 49.7%, respectively, since the Fed began its tightening campaign in June 2004.
But using a host of historical economic data and current market data, FBR found the nominal per-capita personal income exhibits persistent long-term growth in 331 metropolitan statistical areas. The income growth rates calculated by FBR were positive in 329 of the 331 MSAs. "It follows that the changes in average and median per capita personal incomes should increase with the length of the rest period of the [Hybrid] ARM," FBR wrote.
In order to prove this, FBR used those estimated per-capita income growth rates in each MSA - and divided that by the weighted-average number of months before either the Alt-A, prime or subprime hybrid ARM product is due to reset. In the Austin/San Marcos, Texas region, for example, hybrid ARMs are due to reset on an average 9.4 months. During that time period, personal income growth is anticipated to grow by an average $5,106, or 16.2% from the time the mortgage was initially originated. Income growth was generally found to exceed payment increase, although, incomes increased less with the 2/28 hybrid ARM than with the 7/1 hybrid ARM, for example.
FBR also used gasoline futures prices, as well as federal figures wielding the average daily vehicle miles traveled, and the average passenger car's mileage per gallon to come to the conclusion that gas prices should not adversely impact the ability to pay mortgage payments. According to FBR, the price of gas should rise on average $0.012, or 0.47% from November 2005 through November 2006. Using similar analytics for natural gas and heating expenditures, FBR found that aggregate average energy expenses per capita should actually fall for prime, Alt-A and subprime hybrid ARM borrowers between the time of mortgage origination and the reset date - except for subprime 2/28 hybrid ARM borrowers, where the cost of gas exceeds decreases in the cost of natural gas and heating oil by $13.44.
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