Wednesday, June 3, 2009

Weekly Mortgage Applications Of Interest Today; Fed Already Loses $5 Billion on Mortgages

As the bringer of doom, gloom and potential yellow shoots, I eagerly await an economic report for the first time in ages. The last 3 months of reports have been meaningless - all I know is when it's bad news ignore it (it's backwards looking anyway), buy stocks. And when it's better than expected it is no longer backwards looking... and you should buy stocks. As gas prices surge higher, I buy consumer discretionary stocks. When interest rates jump, I buy consumer discretionary stocks. Notice the theme? Just buy stocks.

But today I wave a potential yellow shoot - the weekly MBA mortgage report.

We've spoken at length in multiple posts about the Ben Bernanke manipulation... err, assistance to interest rates and summarized late last week in [May 29: Bloomberg - Bernanke Bid to Lift Housing Scuttled by Housing Rates] As we've discussed in the charter for the Federal Reserve it clearly states their job is to push rates to a level that makes no sense so an indebted nation can continue bad behavior and we can keep home prices at incorrect levels with easy money policies. You think I am being facetious - it is right there in Article X Section 4.2 with this picture just above it. Easy to find...

Before I get to the meat of this post let me share a chuckle with you. Yesterday green shoots were seen all over the stock based internets (and financial entertainment TeeVee) based on a "better than expected" housing number. So let me give you a backdrop so we can put our situation in perspective
  1. Billions upon billions have been thrown at the mortgage market by the Federal Reserve to surpress the mortgage rate to a level below 5%.
  2. Billions upon billions have been thrown at the housing market by the federal government; with such proposals as offering $8000 not just as a tax credit to first time home buyers but indeed now as a handout to buyers to use as their down payment... i.e. opening the housing market to just about anyone who can make a monthly payment. [May 13, 2008: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
  3. After denying that home prices could EVER fall nationally, the same pundits who showed their face on TV month after month now speak of green shoots as home prices in many regions have fallen 30-40% versus a year ago time frame. And we're down to 2002 pricing in many markets.
  4. 50% of all sales nationally are now foreclosures... most of which are much heavier discounted than the 30-40% "natural" price drop listed in point 3.
  5. We are in the heart of home selling season - late spring/early summer
  6. Home affordability measures (some convuleted measure of median income v prices v mortgage rates) are at the 2nd highest EVER after only January of 2009.
With all 6 of those points combined... and with literally hundreds of billions thrown at the problem - what growth did we see in pending home sales versus a year ago when prices were much higher, foreclosures were a fraction of sales, interest rates were somewhat normal and tax credits...err down payments were not being handed out like candy? Wait for it... a 3.2% year over year increase. Wow.... overwhelming.

Exhale. This is where you say "green shoots!". I gave you never seen levels of mortgage rates courtesy of billions of new obligations to your grandchildren, a $8000 handout (courtesy of those same grandchildren) so first time buyers can walk into a home with nothing down, 30-40% drops in prices in many of the largest markets in America, 2002-2003 pricing in many markets, 50%+ price discounts in foreclosed homes... and you give me 3.3% year over year increase. Kool Aid.

Wow, just imagine a world without $8000 handouts, interest rates at still historically low 6%, and 'stable' home prices. Fuchsia shoots.

Folks this is not to say home sales will never rise, in fact I'm posting the stories that show some "positive" signs ... I am just making a point. Obviously lower prices = more demand. [May 7, 2009: Where Home Prices Crashed Early, Signs of Rebound & More Homes Get Multiple Bids] [Mar 28, 2009: Some Real Estate Markets Warming Up] That's economics 101 - but why are we wasting money to stop us from going where we are going to go anyhow. [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble] We literally are stealing from the future to subsidize now, and yes it will work to some degree on the margin. As we've been saying we only look at the benefit (today) and no one cares about the costs (tomorrow) - that's for another generation to bear. It's all good... look what's under shell A, not under shell B.

So while most of these day to day reports are just knee jerk reactions for lemming nation I actually will be interested in this week's report out in a few hours. It might not capture all of the jump in mortgage rates from upper 4%s to lower 5%s since much of it happened late in the week but let's indeed see how much of this magic in the refinance market gets stifled, and if there is any effect on new home mortgage applications. Just remember, if the news is bad - summarily dismiss it and get busy buying stock - because higher energy prices and higher interest rates can be easily absorbed by this roaring US consumer. Even though those were the 2 main tenants of why we were going to recover (but that was last quarter's thesis, we're onto a new thesis - China will save us)

A few fun stories.

Remember how we've been saying for nearly a year now the master plan is to move the losses from the private sector, esp. banking and onto the public's balance sheet? We've been saying that since Bear Stearns, through Fannie, Freddie and that was just the beginning. The losses can be suffered there in dark closets... quietly, instead of on public corporation's balance sheets. Since only geeks look at the Federal Reserve it's a great place to hide it. Well folks, your grandchildren already took a $5 Billion hit (on paper) in just a few months on the Federal Reserve's waste of money to suppress interest rates in the mortgage market. And we're just truly getting started. Thankfully the Federal Reserve is doing the same 'magic' as our banks - they are not marking to market. (that's how we "fixed" a good portion of our banking problems... lying about what we are holding) The laughable excuse is if you never sell the bond than the losses don't need to be marked. Or to put it in parallel terms it's as if you bought Citigroup at $30 and now its $5 or whatever it is... as long as you don't sell, it's not a loss! Still worth $30 on your balance sheet. That's our current 'accounting' for losses - because as we have seen already and in the years to come, people who walk away from mortgages defaulting, usually come back to pay them say 15 years later... Yep.

  • The U.S. Federal Reserve's program to keep mortgage rates low by buying securities and Treasury bonds so far has been costly and seems to be having a fleeting impact. An analysis of the timing of the Fed's purchases of mortgage-backed securities by J.P. Morgan Chase & Co. shows the Fed is "under water" on its portfolio by about 1%, and it would have to take about $5 billion in losses if it were to mark its portfolio to the market. (nice work! that was quick!)
  • Since last autumn, the Fed has purchased more than $480 billion, out of an allowance of $1.25 trillion, in mortgage-backed securities and more than $130 billion, of $300 billion, in Treasury bonds to help keep mortgage rates low. (let's focus on the mortgage backed securities because clearly the Treasury bonds are "AAA" rated - backed by full faith and credit of an empty storehouse that is the US national savings - so we've wasted... err, invested half a trillion on MBS - why again?)
  • Keeping rates low lets people refinance their mortgages to reduce payments and stay in their homes. It also encourages them to consider snapping up bargains in the still-ailing housing market. (aha! as the Federal Reserve charter says is the central bank's job - inflating assets to create prosperity and encourage the American consumer to 'shop')
  • Many analysts believe the Fed plans to hold these securities until they mature in 10 years or so, with no plans to sell them into the market, so the losses will probably never be realized. (remember, if you don't sell AIG for 10 years, you did not lose a penny on the stock - just use bank [central or otherwise] accounting and whatever price you bought AIG for is still what it is today - so forget about the $5 billion in losses suffered in short order)
  • The central bank owns the majority of securities sold in 2009, with interest payments of 4%, 4.5% and 5%, according to J.P. Morgan's research. As interest rates rise, the value of these securities falls because new bonds are backed with higher-interest mortgage loans and thus pay higher coupons. (so if you are a long term bear on bonds, which I know many of my readers are... you can imagine the losses to come as interest rates 'normalize' to 6%+ in the years to come. But again, as long as you never sell a bond apparently you never suffer a real loss. Hmm, why am I bothering with equities when I can buy bonds and never lose? What's that? Oh, it's a fantasy? Hmmm...)
  • The Fed has spent about $2,500 per borrower, by J.P. Morgan's analysis -- more than it costs a typical mortgage borrower to refinance their debt. ($2500 here, $8000 there - it's ok, the grandkids are good for it. Subsidzing people to stay in homes, many of which they overpaid for, and borrowed from through serial refinancing - instead of being renters is the right thing and our grandchildren will understand this. Once they are born)
  • The Fed's purchases have enabled about two million borrowers to refinance who otherwise wouldn't have been able to, J.P. Morgan estimates. ("creating a permanent house ATM so people don't have to actually save money via old fashioned methods", bylaw 14.2 of Fed charter)
But in the end all we are doing is buying time. And folks, time is mighty expensive... in this case it's already cost $620 trillion. But the Fed's balance sheet is theoretically unlimited, as are your grandchildren's obligations. So we can play this game for a long time if we wish - just stalling what will happen one way or the other.
  • "The Fed's purchases have had only a transitory impact," said Thomas Atteberry, a partner and portfolio manager at First Pacific Advisors LLC.
  • Last week, the average 30-year mortgage rate rose from about 5% to at least 5.25%, by most estimates, reaching as high as 5.5% for some lenders late in the week. Earlier this year, it was steady around 4.8%. Its recent peak was 6.5% last autumn.
  • "If mortgage rates remain at this level, refinancing activity will have dropped by half within two weeks," said Mahesh Swaminathan, an analyst at Credit Suisse. (gasp!)
  • Some prospective buyers may have qualified for a certain loan at 5%, but won’t qualify at 5.5% because the higher mortgage payments may push their debt-to-income ratios above qualifying levels.
  • Rates at 5.5% would normally be considered quite low. (They stood at 6.5% last October.) But consumers have grown used to rates being at or below 5% over the past few months. “The rug has been pulled out from people,” says Michael Menatian, a mortgage banker in West Hartford, Conn.
The horror of it all... mortgage rates at 5.25%. How will this country go on?

Even as we waste hundreds of billions of money we don't actually have, people are still going delinquent at maddening rates... I reinforce for newer readers that what we've just exited is not the normal housing bust. That is the next phase - people losing homes due to job losses and recession. What we've experienced thus far is the new phase of a housing cycle: the "ridiculous mortgage" housing bust.
  • Credit-report provider said the number of borrowers at least two months behind on their mortgage rose for the ninth quarter in a row, hitting 5.22%. (keep in mind we have $75 Billion in yet another program to refinance people helping to keep this number lower than it would be - kids, we've got programs out the wazoo... and bankers laughing on beaches across the globe they got away with this) [May 3: What the Fed (WTF)? I Want by 1% Mortgage]
  • The first-quarter national average is 14% higher than the fourth-quarter average and is up 62% from a year earlier, when the average was 3.23%. senior consultant Keith Carson called the sequential increase "troubling." The current downturn's quarterly delinquency-growth rate is nearly double that seen during 2001's recession. (because that was a just a "recession" housing bust, not a "bad loan" housing bust)
And to finish I want to reinforce one more point... if you buy a home now you are buying an asset inflated (our national ethos) by historically low rates. So when rates return to "non manipulated" levels, home prices will have another leg down. As affordability will take a step backward. But that's behind shell Z so don't worry about it.
  • Lower mortgage rates had made homes even more affordable at a time when prices have been falling, but higher rates could offset some of that affordability. Each 0.10 percentage point increase in mortgage rates is equivalent to a 1% rise in home prices, according to estimates from Credit Suisse. That means if higher rates stick, they could push down demand and send prices even lower.
So let's see if just one HALF week of increases in mortgage rates have any sort of strong sway on the weekly applications or if I'm just trying to create a semi glossy yellow shoot.

In conclusion: Ignore everything above except for the "better than expected pending sales". Green shoots. Buy stocks. The American consumer is back. Grandchildren are cool to steal from.

[May 16, 2009: WSJ - Housing Rescue Plan Now Includes Short Sales]
[Apr 23, 2009: As More Homes Fall Underwater Trapped Americans Cannot Migrate]
[Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]
[Dec 8, 2007: Analysis - What Should Housing Prices Be Today?]

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