Marc's Mortgage Matter's

So all is not rosy for originators, or borrowers looking for mortgages, in spite of the current (and expected for a long time) low rates. Home sales in many areas are down in general, and a segment of the population who owned more than one place a few years ago has been jettisoning houses. As everyone knows, often times the equity is not there in the property, and/or potential borrowers continue to want to sit on cash if they think that property values are going to sink more. The HARP (program) has helped hundreds of thousands of borrowers lower their payments, since it allows for 125% on a refi. But anyone with a 2nd mortgage has a problem in that many lenders either won't subordinate, drag their feet, or charge unusual fees to do so - not exactly conducive to the lending process.

You can talk about the global economic news until the cows come home (although I've never had a cow come home), but few out there will disagree that the US economy is slow, is expected to be slow for quite some time, and that rates are benefitting from it. Following the Fed's Tuesday announcement, economists scaled down their forecasts for GDP, talked about how unemployment will be with us well into the future, and wrung their hands over the housing market. Last Wednesday's trade figures did nothing to change that, nor did Jobless Claims, and in fact reconfirmed the "slow economy" outlook to the point of pushing the DOW down for four days last week.

Below is a good analysis on last weeks epic Tuesday Fed meeting.

The Federal Reserve undertook steps to help long-term interest rates to be more stable and lower than they would otherwise have been when they initiated programs to purchase both MBS and Treasury obligations in 2008, 2009 and 2010. Those programs came to a close at varying intervals over the past year and generally had the desired effect on rates and credit availability.

Since the end of the MBS program, the Fed has spent considerable time talking about how it would reduce the size of its balance sheet over time -- and do so without disturbing the markets for fixed-income investments. On Tuesday they unveiled a new wrinkle, and mortgage rates reacted with another downward shift. This decline was probably related more toward a loss of optimism about the economy and reduction in concerns over inflation than any anticipated support for mortgage markets.

The Fed announced on Tuesday that instead of shrinking its balance sheet from over $2 trillion, it will instead change the composition of its holdings and keep their books at present levels for some time. As the mortgages it holds are paid off -- through refinancings or by borrowers moving -- the Fed will take those monies and purchase more Treasury obligations. It was expected that these mortgage holdings would run off at about a $200 billion annual rate, but with low mortgage rates in the market and high levels of refinancing, that run rate may be picking up. If the Fed simply retired those funds and shrank its holdings of debt it would represent a kind of tightening of economic policy as the global economy's capacity for debt would have been reduced measurably.

In general, it is a small, symbolic move -- but one which could produce great value to the Fed as time progresses. With this program operating again, the Fed would find it easier to expand its holdings if need be; it can change its mix of purchases to influence rates of differing maturities for the benefit of different audiences... and even re-include MBS purchases down the road should it become necessary. With outstanding rates already in the market, that probably won't need to occur anytime soon; in fact, the Fed's move to snap up Treasury debt may serve to increase interest and private investment in higher-yielding MBS, and so indirectly help keep mortgage rates low. Purchases are slated to begin next week.

Whatever boost to the economy accrues to this program will surely be welcome. None of the economic news has been particularly good over the past ten to twelve weeks and there was certainly little to cheer in the latest batch.

Retail Sales for July were lackluster at best. The 0.4% gain failed to meet expectations, and was half the headline amount once auto sales were excluded. The back-to-school shopping season seems to be off to a very sluggish start as weak job markets and income gains make substantial new spending a challenge for many parents this year. 


The weekly ABC News/Washington Post poll of Consumer Comfort rose from 2010 lows by three ticks during the week ending August 8, and the preliminary August Consumer Sentiment figure from the University of Michigan managed a 1.9 point gain, too. Falling though much of July, perhaps the receipt of "extended" unemployment benefits in the last week or two has served to stabilize moods, now that some money is again coming into households.

Mortgage rates continue their slow grind down into record territory. Since mid May, the total cumulative decline now amounts to only a half-percentage point, but the decline has been more or less regular since that time. Low rates are certainly enjoyable, but come as a result of a terribly weak recovery, and we'd gladly see a half-percentage-point increase in rates (back to mid-May levels) in exchange for a one percentage point drop in the unemployment rate -- or a couple hundred thousand fewer layoffs each week. 

For our part, we'll be most interested in the trend in credit tightening (or loosening) revealed in the coming Senior Loan Officer opinion survey from the Fed. At last count, tightening had all but stopped in the residential sector and we'll be keen to see if we've yet nudged over to the easier credit side of the line. It probably did, and this would be an expression of modestly better times to come for homebuyers and refinancers. More next week.

Marc Preger started the day early having set his alarm clock (MADE IN JAPAN) for 6 am. While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA) After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE IN TAIWAN) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) filled it with gas (from SAUDI ARABIA) and continued his search for a good paying AMERICAN JOB. At the end of yet another discouraging and fruitless day checking his Computer (made in MALAYSIA), John decided to relax for a while. He put on his sandals (MADE IN BRAZIL), poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in AMERICA AND NOW HE'S HOPING HE CAN GET HELP FROM THE PRESIDENT.