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Friday, October 28, 2005

Mortgage Credit News - October 28, 2005

Rates rose this week, the 10-year T-note reaching 4.60% at one point, taking low-fee mortgages to 6.25%. (Today’s newspaper headlines, “Mortgages To New High”, refer to Freddie Mac’s lagged-survey discovery of 6.15% last week.)
I assume that mortgages will continue to rise during the Fed’s coming progression: another .25% on Tuesday (to a 4.00% overnight cost of money, 7.00% prime), another .25% on December 13, and another on February 1 -- unless the economy croaks in the meantime.
Economic data are still hurricane-garbled, except for home sales which seem authentically strong. Third quarter GDP gained a terrific 3.8%, but the September one-third of the quarter is just a pleasant guess. Durable goods orders fell hard in September, but there is no way to know if the decline was real or storm-distorted.
Core inflation numbers in the GDP report were benign, but nobody knows if the Fed should be watching core numbers or the vastly higher nominal ones. Core makes sense if you expect a cyclical decline in energy prices ahead; however, if energy prices have taken a one-time ramp-up, no downside volatility coming, then a core inflation rate is a useless abstraction and the Fed has catching-up to do.

Ben Bernanke.
We may have Harriet Miers to thank for the Bernanke era. Only three weeks ago, the White House said that it was “broadening its search” for a new Fed Chairman, looking for someone in agreement with the Administration’s economic policies, and someone with whom the President would have “personal rapport.” Then, suddenly, we got one of the four mainstream guys.
The bond market gave its highest praise: it did nothing -- although the only nasty line about Bernanke came out of the bond market (of course). “Greenspan was a maestro; this guy is a music teacher.” Stocks soared 160 Dow points, indicating relief of fear of a Bush crony, but temporarily forgetting that any non-crony is going to whack the economy.
Bernanke’s first words as nominee were to emphasize the need for continuity, exactly the right thing to have said. Too bad he won’t be able to deliver.
Mr. Bernanke has been a life-long academic, studying monetary policy and building econometric models. He writes very well, and we will enjoy relief from Mr. Greenspan’s worst-anywhere-ever bureaucratic murk. Bernanke is at all accounts a good man, thoughtful, who knows the limits of his knowledge and economic theory.
That’s the good news. Mr. Greenspan’s hands-on experience when he ascended the throne included energy and housing markets, general business as consultant, and the one crucial component toughest for Mr. Bernanke to replace: Mr. Greenspan’s native political skill, sharpened by service in several administrations.
Mr. Greenspan conducted his 18 years as the Wizard of Oz (pay no attention to the fallible man behind the curtain!), and the act has been calming to markets world-wide. I suspect markets will tend toward volatility as they adjust to a different style.
However, Mr. Greenspan’s substance should not be confused with his stage play. Within months of his appointment he won the deep faith of markets by his deft handling of the ’87 stock market crash, followed by correct and courageous resumption of inflation-fighting. After that performance, he could have worn a monk’s habit and chanted in Latin, and still have held the markets’ confidence.
Mr. Bernanke will soon have a similar opportunity to win or dash market confidence: he must contain an inflation problem without crushing the economy. Complicating his life: structural Federal deficits, an unprecedented trade deficit, and no prospect of help from an irresponsible Congress and Administration.
Speaking for the class, good luck to you, Mr. Music Teacher.

Friday, October 21, 2005

Mortgage Credit News - October 21, 2005

It’s not enough to move low-fee mortgage rates below 6.00%, but the 10-year T-note flinched at 4.50% all week long, and this morning has retraced to 4.38%.
No data showing economic weakness caused the rate decline: the newest information says the national economy came through Katrina/Rita unimpaired.
Two things have helped long-term rates to find a top: the painful understanding that if the Fed is not yet tight enough to hurt, it soon will be; and second, unstable weakness in the stock market.

In the perverse world of bonds, inflation-scare stories help. It goes this way: if inflation is really worse than we think -- under-measured, misunderstood -- then the Fed will have to play catch-up, tightening longer-higher-faster. If the Fed is behind, then catch-up raises the chance of a recession to probable, and in a recession those who own bonds make a ton of money.
For the time being, I wouldn’t pay much attention to the hobgoblin in ketchup on the front porch. People who should know better quarrel all the time with inflation-measurement methodology; this time the quibble is with the housing fraction of the core rate, measured near zero in a time of double-digit home-price increases. Housing inflation is measured by rental equivalence, and as rents everywhere are flat, housing cost is not inflating. This approach is correct, as changes in the capital cost of homes have little to do with consumption prices and the value of currency.
Authentic concern for inflation is flashing amber, not red. We are in an energy-cost-pushed moment, and energy costs are likely to reverse in well-established cyclical pattern. So long as the energy-cost pressure does not move into consumer prices in general, or into wages, then the Fed is on track.
That track, probably 4.50% by the February 1st meeting, is by itself enough to raise recession chances. Fed Gov Donald Kohn (long-time Fed staffer, Friend Of Alan’s, and one very tough cookie who might just get the job): “We are not yet at a point where we can stop and watch the economy evolve for a while.”

Historically, as the Fed proceeds upward in these cycles, there has been a race to handicap. Who breaks first? Housing? Stocks? Consumers, or inventory-holding merchants and manufacturers? Way back, ‘50s and ‘60s, it was the inventory holders, dumping to escape high financing costs. Today, just-in-time management means that inventories hardly settle on pallets, and there’s not much to liquidate.
In the 70s and 80s, high rates chewed up housing first. Then, at the end of the ’99-’00 rate-hike, the stock market was the first to collapse (I admit my considerable personal relief).
Stocks are fading now despite pretty good earnings, a still-strong economy, and actually paying dividends (only 2% across the S&P 500, but better than the sub-1% prior to 2000). The Fed is part of the reason: the cost of buying on margin has more than doubled in a year; the rate of discount of future earnings has tripled, and the Fed is going to slow the economy sooner or later. Stocks are also heavy at the sight of GM and Ford slowly going out of business, and by the newest episode of Wall Street piracy. (They go on and on, I know, but half a billion dollars in fraud bankrupting Refco ninety days after it went public... really quite an achievement. Our national moral leadership is, of course, silent on the matter.)
Aggregate housing stats are still strong, but good testimony has some hot markets flipping from seller to buyer, and more poised to do so. Except for long interest-only loans, the whole universe of adjustable-rate mortgages is now useless; construction money has doubled; and a trillion-worth of home equity lines has gone from 4.00% 2002-2004 to 7.00%, and going higher. We’ll see the impact soon

© Boulder West Financial Services, Inc.

Friday, October 14, 2005

Mortgage Credit News - October 14, 2005

A coulda-been-worse inflation report today gave us a morning-only breather, rates rising again now, as they will continue to do.
Bonds and mortgages on Wednesday broke through crucial levels: the 10-year T-note through 4.42% to 4.49% (higher today), lowest-fee mortgages through 6.00% to 6.125% (a move which Freddie Mac’s survey won’t “discover” until next week).
The overall September Consumer Price Index rose 1.2%, the largest single-month gain in fourteen years, now a 4.7% year-over-year increase. However, the “core” rate, excluding volatile food and energy prices, rose only .1% -- just 2.0% YOY, down from 2.4% YOY in July.
Some have misunderstood the Fed, seeing it in a jawbone offensive against inflation, but not intending to raise its rate much farther because core inflation is under some control. Many others have mistakenly assumed that high energy prices would do the Fed’s work, slowing the economy. Give that up: September retail sales rose 1.1% excluding the collapse in SUV sales, and despite Katrina/Rita. There is some word of accumulating inventory of homes for sale, but no decline in aggregate sales, nor a decline in purchase mortgage applications.
Bonds and mortgages have not adjusted to the very great likelihood that the Fed will go .25% at each of the next three months’ meetings, putting Fed funds at 4.50% by February 1st. At that point, a lot of heavy lifting will have been done for the new Chairman (hope -- pray -- for Ben Bernanke or Donald Kohn), but any new Chairman faces market doubt about toughness, and the only way to demonstrate fortitude is to raise rates. Any flinch by the new Chairman will be interpreted as timidity, or execution of election-year instructions from the White House.
Fed politics aside, I don’t for the life of me know what is different about our economy now compared to 1994-1998, when the baseline for Fed funds was 5.00%-plus (mortgages 8.00%) and I don’t see any reason for the Fed to stop short of 5.00% unless and until the economy slows markedly. Inherent economic strength aside, the grotesque budget irresponsibility in Congress and at the White House is working to stimulate the economy, not slow it.
There are some signs of an energy top: oil is falling toward $60/bbl, wholesale gasoline is down fourteen cents to $1.68/gal, natural gas off almost two bucks to $12.85/hcf, and gold’s retreat from the $470s confirms the pattern. A sudden drop in oil to maybe $45/bbl would remove some inflation heat, but would also stimulate the economy, and a hot-running economy is the Fed’s fundamental problem.

Lagging behavior in mortgage rates is delaying the full effect of the Fed’s tightening. Fixed-rate mortgages are still below the 6.50% highs of the last three years, but the next .75% coming from the Fed is certain to push mortgages up toward 7.00% by spring. However, 7.00% was the low of the 1990s. Nobody knows or can know the level at which housing will crump.
Consumers are calling us, disturbed by the rate increases on their HELOCs, but are reacting to changes at least 45 days old. It seems to take a month-and-a-half for a rise in prime to make it all the way into payments, and consumers don’t have a clue that prime is already 6.75%, going to 7.50% by Presidents’ Day.
ARM indices are rising, T-bill and LIBOR-based ARMs going to the high sixes right now. However, the lagging indices, MTA and COFI, will take a year to eighteen months to fully reflect the Fed. If the Fed stops as low as 4.50%, the whole ARM universe will adjust above 7.00%.
This lagging mortgage action is one of many reasons that the Fed tends to overshoot its proper stopping point, and likely will this time, too.

© Boulder West Financial Services, Inc.



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