Friday, June 12, 2009

WSJ: Mortgage Rate Rise Clouds Recovery

It was a pleasure to see the Wall Street Journal put a story above the fold on the front page yesterday that Fund My Mutual Fund readers have been aware of for at least the past month [Jun 10: Second Week of Mortgage Application Discussion] [Jun 6: Free Market Frowning at Federal Reserve & Uncle Ben] [May 29, 2009: Bernanke Bid to Lift Housing Scuttled by Rising Rates]; the impact of rising rates in the "green shoot recovery", especially of the US consumer type (70% of our economy). Again, I will say in the very near term I think bonds have risen too far too fast, and are subject to a shorter term retraction (which of course will wipe away all these fears), before we reverse back into the longer term trend we are on now. Also the dilemma this poses to the Federal Reserve is on many levels - they claim to say they "like it"... (sort of like that kid in the cereal commercial some of us remember in the early 80s) "Ben Likes it! He really likes it!" [May 14, 2009: Bloomberg - Fed Views Jump in Yields as Signs of Better Outlook]

In fact Ben likes it so much he is going to face the stern test of the market during his next moves late in June at the Fed meetings. He can upgrade from B52 bomber (he ditched the helicopter long ago) and go Stealth Bomber on us.... and try to put a temporary stop to rising rates with new money drops. (but then again why would he do that if he "likes it! he really likes it!") By doing this I anticipate the market to react similarly to how it did during the first intervention in the winter, although perhaps not quite so violently this time around since it would be less of a surprise. But then he opens the can of worms... if after the initial suppression - whether it be days, weeks or a month or two... the market lashes back despite the Fed raising the stakes by wasting even MORE US treasure on manipulating rates, then you open a Pandora's box. The market will have finally said to the Federal Reserve "You are not bigger than us".

Do you risk that Ben? The other choice is to sit calmly by, eating your Life Cereal and nodding how much you like it as mortgage rates eventually hit 6%... while fantastic for our oligarchs as you keep the low end at 0-0.25% so they can borrow for near nothing and lend to the consumer at ever higher rates, it would put a Hulk Hogan like drop kick on the "we need easy money" US consumer. So what do you choose Ben? I'll see you in late June to see what sort of aircraft you decide to fly over us with.

In the meantime, let's see if the "breaking news" story via the WSJ adds anything to our discussion... I always like to read the anecdotal stories of Americans who cannot fathom the burden of interest rates their parents would dream of.... but this is what happens when you try to squeeze blood from a stone. The stone eventually has no blood left.
  • Rising interest rates threaten to dim prospects for a housing recovery and choke off a refinance wave that was a major plank of the Obama administration's economic-stimulus efforts. On Wednesday, rates on 30-year fixed-rate mortgages climbed to 5.79%, up from 5% two weeks ago, according to HSH Associates. That jump will cut roughly in half the number of borrowers with an incentive to refinance, according to FTN Financial.
  • Refinance activity at J.P. Morgan Chase & Co. is already "really down" since rates began rising, a spokesman says. A rate of 4.75% "seemed to be the switch" that turned on refinance activity, he says. Now, rates are a full percentage point higher.
  • Investors have been anxiously watching bond yields climb over the past few weeks, pushing up mortgage rates, which normally track 10-year Treasury notes. The yield on the those briefly hit 4% on Wednesday afternoon for the first time since mid-October before ending the day at 3.937%.
  • Many policy makers see the rise in Treasury yields as a sign that investors are optimistic that the economy is on the mend. (i.e. Mikey... err, Ben) But many market participants say higher long-term bond yields indicate investors are increasingly worried about inflation.
  • The Federal Reserve stepped into the market Wednesday to buy Treasurys and announced it will make another round of purchases in a week or so. But the moves seemed to have little effect on rates.
  • Higher mortgage rates are a blow to borrowers who were looking to refinance and reduce their monthly mortgage payments. Earlier this spring, mortgage rates had fallen below 5%, the lowest in 50 years, unleashing a wave of refinancing activity and spurring housing sales.
I bathe in acronyms nowadays - did you know there was a HARP program? Sort of like TARP but for us peasants?
  • The rise in rates represents a setback for the Obama administration's program to help borrowers refinance their mortgages. In March, the government rolled out the Home Affordable Refinance Program, or HARP, to allow certain homeowners who owe between 80% and 105% of their home's current value to take advantage of the low rates.
Before I continue, sharp eyed readers will see 105% of home value. Of course, I don't have to tell you what happens when you refinance for something you are already underwater 5% on, and housing prices continue to fall another 5, 10, 15%. Well, put another loss on the backs of little Jenny and Joey to be born 2018.
  • The HARP program is limited to loans owned or guaranteed by Fannie Mae or Freddie Mac, the housing-finance giants now controlled by the federal government. So far, some 12,710 refinancings have been completed through the program, according to the Treasury Department.
  • Those figures don't include refinancings that have been completed by banks but not yet delivered to Fannie or Freddie. Bank of America Corp., for instance, says that it has completed 17,000 refinancings. By refinancing, borrowers on average have been able to reduce their mortgage rates by 1.3 to 1.5 percentage points, saving around $2,500 annually on a $200,000 loan, according to Freddie Mac.
Anecdotal examples?
  • Jill Richardson, a mortgage broker in Atlanta, says her office has tried to put at least 30 loans through the program, but hasn't been able to refinance a single one. Among the reasons, she says, are appraisals that have come in too low, (appraisals clearly are unfair, inflate values - worked wonder mid decade) second mortgages on the properties (exclude those for inclusion in the program - it's only fair to exclude 2nd liens; probably the borrower did not understand the document and was duped to borrow with a second mortgage so that not only did they not need to put 20% down they could put 0% down), and extra charges levied by Fannie Mae on borrowers who have little equity, low credit scores, or who live in markets where home prices have been falling. (low credit scores should not be part of the decision on if people can make their payments, exclude those. These people deserve grandkids money)
Gosh what an unfair list of requirements - what kind of government is this? But light is on the horizon... (insert rays of heavenly light here with light sounding music played on harps)

And here is all you need to know about what is coming to the future. Remember our example about the 105% LTV? You ain't (sic) seen nothing kids...
  • A Treasury Department official said the administration is considering a range of tweaks to the program, including extending the program to borrowers with loan-to-value ratios as high as 125%.
You are all welcome under the protective future tax dollars of Jenny & Joey (born 9 years from now, but already owning countless hundreds of thousands of dollars of obligations). Bring me your tired, your poor, and most importantly bring me your "I put $4000 down on this 2900 sq foot $325,000 house since my 900 sq foot rental was below me and am upside down - how could this happen? Help me!"

I thought this stone had no blood in it, but now that I see not only do I not need to have equity in my house to qualify for largess, I can soon have NEGATIVE 25% equity, I see the stone bleeding again. Hope is here. Thanks Jenny and Joey, you are doing your country proud ... I'll tell you that when you can speak and understand words circa 2020. And please don't mind me taking that cute piggy bank you have... that's not technically going to be your money. It's Fred's in Miami, and Janice's in Phoenix.

p.s. when you lose your first few teeth, and put them under the pillow .... umm... can you shoot me a text on your mom's cell?


Umm... don't worry about it. I just need to be around for uhhh, collection purposes... it's complicated.

Thanks someone's unborn grandkids!

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