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Friday, September 30, 2005

Mortgage Credit News - September 30, 2005

Interest rates at all maturities rose this week and are crossing important divides this morning, pushed by the prospect of more Fed tightening ahead, perhaps a lot more.
Low-fee mortgages are still below 6%, but a deteriorating 10-year T-note suggests six-plus shortly.

Current and forward-looking economic data are garbled into uselessness by Katrina/Rita. In an economy as large as ours, there is no way to isolate the storms’ impact from the baseline of national economic activity. Pre-storm reports still trickling in contradict expectations for a late-summer slowdown: August orders for durable goods rebounded strongly from July. However, next week’s employment data for September and purchasing managers’ indices -- the most important data in any month -- won’t tell us a thing.
In the vacuum, markets are trading on suppositions about the impact of energy cost, and consequences for the Fed.
The near-dominant forecast holds that energy prices will inevitably knock consumers flat, the coup de grace to be delivered by doubled costs to heat homes this winter. Believers point to collapsing confidence numbers, and the additional drag from cumulative Fed tightening.
The alternate forecast says the economy is still growing briskly and is resilient. Certainly high energy prices will cause suffering among lower-income consumers, but also rather a lot of conservation among us all; consumer confidence surveys have little or no predictive power. Although the Fed has raised its rate for a year, it is not remotely “tight.”
The energy-slowdown group thinks the economy will slow before inflation becomes a problem; the alternate theorizers think that inflation is already a problem and the Fed has work to do.
I’m with the alternates, and I think Mr. Greenspan is, too. On Monday he released a housing study (much of it his own work); among his conclusions: as of mid-2005, less than 5% of mortgage borrowers had current loan-to-value ratios exceeding 90%. Makes sense: given 10%-plus appreciation in hot coastal markets, it only takes a year for a 100%-financed buyer to fall to 90% LTV.
The Chairman’s concluding paragraph is an oblique warning: “Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.”
That’s not just some academic reassurance about withstanding an unpleasant conclusion to a frothy interval for housing. Implicit in the remark: the Fed need not be timid about tough measures to control inflation for fear of damage from declining home prices.
Mr. Greenspan’s study emphasizes the magnitude of consumption stimulus from a hot housing market, and increases the likelihood that the Fed will tighten until housing cracks, no matter how high its rate may have to go.
The 10-year T-note blew through 4.30% this week, trading 4.34% today. However, the overall bond market shows Fed fear, not a long-rate runaway. The tipoff: short-term rates are in a heap: 2-, 3- and 5-year T-notes are respectively 4.16%, 4.17%, and 4.19%.
The Fed is simply bulldozing the whole rate structure. Stick with the heart of the matter: the Fed must pre-empt an energy-caused inflation spike, and the only way it can do so is to slow the economy. Rates moved this week in preparation for the next .25% on November 1st, and will do so in November in preparation for December 13th, and so on until the economy slows.

© Boulder West Financial Services, Inc.

Tuesday, September 20, 2005

Fed Raises Rates 25 Basis Points to 3 3/4 Percent

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-3/4 percent.

Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.

While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Anthony M. Santomero; and Gary H. Stern. Voting against was Mark W. Olson, who preferred no change in the federal funds rate target at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Chicago, Minneapolis, and Kansas City.

Friday, September 16, 2005

Mortgage Credit News - September 16, 2005

Bond market conditions changed abruptly for the worse, the 10-year rising from 4.12% to 4.27% overnight, mortgages moving toward 6.00%.
The shift is not yet a total breakdown: in the last year the 10-year has been in a wide, sloppy range from 4.00% to 4.40%; having tested the bottom for the last 45 days, a move back to the middle is routine. However, bonds reacted to news in unusual ways, suggesting that something bigger than range-wandering is going on.

There were two out-of-pattern reactions to news. The largest bond move immediately followed release of a Philadelphia Fed survey on Thursday: economic activity in Mid-Atlantic states had crashed in August, while prices for materials doubled. For most of the summer, bonds have liked news like this, ignoring the inflation component in favor of enjoying the pre-recessionary aspects. Not yesterday.
This morning, the second oddity: the University of Michigan’s consumer confidence reading for early-September arrived at 76.9, the lowest reading in more than a decade. These confidence surveys are not the best economic predictors, and Katrina dragged this one down, but bonds always improve on a bad one. Not today.
The trading pattern says that the inflation/Fed calculus has changed. Long-term rates broke lower in August on conviction that the Fed’s anti-inflation campaign would produce a slower economy next year, and maybe a recession. The signature then: a closing spread between the Fed-sensitive 2-year T-note and the 10-year. As the 10-year dropped from 4.40% to 4.10%, the 2-year rose to 4.00%, predictive of an “inversion” (the Fed rate, now 3.50% to rise above bonds) not far above 4.00%.
In the deterioration underway now, both 2s and 10s have risen in anticipation of a tighter/higher Fed, but the 10s have pulled away from 2s, the spread tripled at .36%. The move says (shouts) that inflation is a bigger problem, will be harder for the Fed to contain, and a slower economy is less likely and/or farther away. Any recession-precursor inversion will be higher in the fours.
Also, the President’s speech was a double whammy for bonds: the $62 billion gushed from Congress last week for New Orleans was only the first installment of a reconstruction cost now likely to exceed $200 billion. That means economic stimulus frustrating the Fed’s slowdown efforts, and also a hell of a lot of new bonds for sale.
Inflation has probably crossed an unhappy threshold. The first waves of energy-price increases were absorbed in healthy gross margins at business, and adaptation and fuel substitution. The increases now are so big that they are washing through to the cost of everything: natural gas is up 40% and will stay up (partly Katrina, mostly Green and super-safety-freak objection to LNG terminals for imports).
Three-buck gasoline seems to have been a tipping point. Good news: forced conservation, though it will take a while to move prices and supply. Bad news: rising costs for everything. My firewood guy of 25 years, gravel-voiced, straight-shootin’ Nick, this week: “Lou, it takes gas to cut it, gas to move it, gas to split it, and gas to deliver it. Two-twenty last year is two-ninety-five... if you stack it.”
In the last 48 hours, gold reached a 17-year high, breaking $460.

The Fed has no choice, now. Its rate will go 3.75% to on Tuesday, then two more .25%-ers before year-end, and another at Mr. Greenspan’s last meeting on January 31. Why Mr. Bush has not nominated a replacement -- choosing a person likely to reassure markets -- is beyond me.
A rate-suppressing weakness in consumer confidence has been overwhelmed by a different confidence issue. The newest polling data says the country thinks the Bush administration is in over its head from New Orleans to Iraq, and a failure of confidence in the bond market makes rates go up, not down.

© Boulder West Financial Services, Inc.

Wednesday, September 14, 2005

A Blog is Born

Our goal is to offer insight into the complex world of mortgages, credit and personal loan products for consumers. In doing so we hope to get closer to our customers which will help us offer more products that help consumers save money and simplify their lives.

Jeff


 

   

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