TR EMERITUS

According to the Federal Reserve Bank of St. Louis, as of the end of 2021, the total outstanding residential mortgage debt in the United States was approximately $11.85 trillion. This includes both fixed-rate and adjustable-rate mortgages, as well as first-lien and junior-lien mortgages. (There is no breakdown).

The most common mortgage term in the United States is 30 years for fixed-rate mortgages. This means that the borrower makes regular payments for 30 years until the loan is fully paid off.

However, there are also other mortgage terms available, including 15-year and 20-year fixed-rate mortgages, as well as adjustable-rate mortgages with terms that can range from 5 to 30 years.

The interest rate on a 30 year mortgage increased from 3% to 7%.

The value of the mortgages will likely fall by 30%, due to the higher interest rate. This means a total loss of $3.5 trillion or $3,500 billion.

This loss will be borne by the mortgage lenders, i.e. banks and other lenders. Some of the mortgage lenders may have hedged the interest rate risks using swaps. This would transfer the loss to other parties. However, there will be a loss to the financial market.

Some mortgage lenders are not adequately hedged. They will have to suffer this loss over the next 30 years.

However, if the interest rate were to drop in the future, the value of the mortgages would rise, and the loss would drop sharply or even disappear (if long term interest rate return to 3%).

Tan Kin Lian

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