Marc's Mortgage Matter's

Earl and Bubba are quietly sitting in a boat fishing, chewing tobacco and drinking beer when suddenly Bubba says, "Think I'm gonna divorce the wife - she ain't spoke to me in over two months." Earl spits overboard, takes a long, slow sip of beer and says, "Better think it over Bubba, women like that are hard to find."

The economy seems to be doing fine, commodities, including gas, are going up, there is little foreign news on debt problems, and the Fed believes that things are stable enough to end their purchase program. Is anyone really predicting lower rates? (Conversely, should people be paying various services to hear the seemingly obvious prediction of higher rates ahead?) Economic indicators last week suggested continued economic growth, including job growth, factory orders, and the Institute for Supply Management manufacturing index. But wait! Construction spending, including residential building, is disappointing. And who is going to solve the budget shortfalls in many states or at the national level?

For mortgage investments, the waters get ever muddier. At one time, an investor who wanted to buy a mortgage expected three possible outcomes: 1) the loan would be paid off over the term; 2) the loan would be paid off early (i.e., refinanced or closed) or 3) the loan would fail, and the recovery of the committed monies would occur through the process of foreclosure and disposal of the property. All three outcomes could be hedged and insured, and losses mitigated or prevented altogether, and a reasonably knowable or predictable return on the investment could be proscribed.

Not so anymore. Loan modification programs, like the HAMP program (which saw a slew of brand-new changes this week, have created a murky limbo for investors. A loan might fail, with the investor receiving no payments -- but now, a known recovery process no longer exists. A loan might fail, have its terms lengthened, or changed altogether; the loan's interest rate might be reduced on a partial or permanent basis to some new level; even the amount of the loan which was extended might be subject to a 'haircut' -- industry speak for "reduced with no hope of recovery." What sort of return might be expected for this investment, and how can one consider, hedge and insure against loss? You can be sure that investors will want answers before risking their money. If they don't like the answers, the outcome might well be detrimental to the economic recovery.


No, it's not good news that mortgage rates are firming up a bit; rather, it's good economic news that is fostering the mild rise in rates. As the worst of the recession ever-so-slowly begins to fade behind us, and the technical recovery starts to include wider facets of the economy, borrowers and mortgage-watchers should become more accustomed to hearing of firmer rates in the marketplace.  Its worth remembering that the rock-bottom interest rates seen at times over the past year were both the result of, and corresponding responses to, extreme economic conditions which no longer fully exist.

If the economy really is getting better, though, Treasury yields -- and especially mortgage rates -- are the first to reflect this (just as they reflect impending weakness when the economy is declining). We are moving back toward an investment and mortgage market with less overt government distortion, and such signals -- collective expressions of millions of investors -- should be paid at least some heed.

For the moment, mortgage rates have mildly risen. If we get more clues next week that the economy is gaining its footing, we'll probably see more upward pressure on interest rates. However, there are considerable headwinds for the economy at the moment, and these should have a tempering effect on interest-rate increases. Last week average rates rose to 5.50%.

A man and his wife walked into a dentist's office.
The man said to the dentist, "Doc, I'm in one heckuva hurry. I have two buddies sitting out in my car waiting for us to go play golf, so forget about the anesthetic and just pull the tooth and be done with it.

We have a 10:00 AM tee time at the best golf course in town and its 9:30 already. I don't have time to wait for the anesthetic to work!"
The dentist thought to himself, "My goodness, this is surely a very brave man asking to have his tooth pulled without using anything to kill the pain."
So the dentist asks him, "Which tooth is it sir?"
The man turned to his wife and said, "Open your mouth, Honey, and show him."