LoanHounds Mortgage Loan Blog

Mortgage Credit News - January 27, 2006

2006-01-28T07:23:00.000-08:00

This has been a big week in the markets, and painful for mortgages. Next week will be bigger, and the odds favor additional discomfort. Mortgages are decisively out of the 6.00-6.125% range; now 6.25%, threatening 6.50% as early as next Friday. The headlines in the last 48 hours have been a maximum-volume garble, guaranteed to confuse clients. The bottom line beneath the noise: rates are rising because the economy is hotter than thought, the market is weary of Treasury borrowing, and the Fed is not as close to being done as hoped. The garble. 4th quarter 2005 GDP grew by a meager 1.1%, less than half the forecast. In what way is that “hotter than thought?” Sales of existing homes plunged 5.7% in December, roughly four times the forecast decline. Hot, huh? Mark Twain said of Wagner’s music: “It’s better than it sounds.” Thus, the economy. The GDP number was suppressed by a string of statistical curiosities: a vestige of Katrina, a decline in business investment not appearing in any other data (December orders for durable goods soared 1.5%), and a bookkeeping “decline” in government spending. The housing market’s overheated regions are slowing, but the link to consumer spending is more theoretical than in evidence; and, this morning’s report of sales of new homes gained 2.9% versus the 1.5% forecast decline. The soft news was suspect, but all the strong data looked real. The market gave great weight to a positive change in a job-market indicator. Each Thursday brings the count of people who filed new claims for unemployment insurance in the prior week. The series is wildly volatile and subject to calendar quirks: you can’t file a claim on a holiday, or during a hurricane, but the line is long afterwards. However, the four-week moving average is reliable, and in January has phase-shifted downward: new claims are running at the lowest level since 2000. If claims are down, layoffs are lower and hiring is stronger. In the bond market, the most-watched single economic datum is the first-Friday-of-the-month payroll report for the prior month. If these declining claims show up next Friday as a surge in January payrolls, we will have a modest explosion in all long-term interest rates. Even if the payroll number is tepid, the financing of the budget deficit will exert upward force. The Treasury does its borrowing in clumps during the year, and during the next two weeks will borrow $112 billion in new cash. Many Republicans are fond of repeating the slogan, “deficits don’t matter”, or advocate “starving the beast” of revenue, or pretend that a deficit-controlling plan is in place. I cannot describe the quiet rage at bond-trading desks (heavily populated with Republicans) when one of these official lines scrolls across screens. Then there’s the Fed. Whee. Inside the GDP report lies the definitive measure of inflation: the “core personal consumption expenditures deflator.” The 4th quarter PCE jumped from 1.4% to 2.2%, which $65 oil will do to you. Aside from all that eyewash about Mr. Bernanke having to prove how tough he is, the Fed must err on the side of fighting inflation. The only thing separating us from a very bad bout of oil flu has been globalized labor keeping wages under control. Hopes that the Fed would stop at 4.50% on Tuesday are gone, and 4.75% in March and 5.00% in May are better bets. Now the perverse part. In the traditional slowdown cycle, housing is early to fade, and employment is the last to let go. Tradition is shaping up nicely. The more resilient the economy, the tougher the Fed has to be, and the more likely and deep the slowdown ahead -- and a downward reversal in long-term rates. Later... later. There is a chance that the Treasury’s borrowing is the strongest force in play right now, and will abate during the concluding week, about February 8. In the meantime, duck.

© Boulder West Financial Services, Inc.

Mortgage Credit News - January 20, 2006

2006-01-23T13:32:00.000-08:00

Mortgage rates are still in the same narrow band they’ve been in since the holidays: 6.125%, plus or minus a debate about closing costs, but no points and no origination fee. This narrow range should not be confused with stability. In the last two days, concerns about Iran have overwhelmed everything; but, before laying out the market implications of that one, everything else first. At the top of the list of standard economics is the standoff between the bet on economic slowdown and the one that all is well. In late December, bond yields fell in growing belief that that a slowdown was inevitable, the Fed was not merely going to stop its campaign but would have to reverse, and the only question for 2006 would be how steep the slowdown. Everybody else -- economists, stock-market heroes, small-business execs -- disagrees. The bond (and hence, mortgage) market is stuck, waiting for data to show who is right. On the good news side, December industrial production rose .6%, on target, and capacity in use rose to 80.7%, the best figure since 2000. New claims for unemployment insurance fell a surprise 36,000 to 271,000, also the best number since 2000. The slowdown side expects an abrupt cooling in the housing market, and the newest data supports a cool-off: December housing starts fell twice as far as the already-weak forecast, down 8.9%, and new permits fell 4.4%. On net, the week’s good-news, bad-news data were a standoff. The next economic item adding to the appearance of stability is the trading-desk toe-tapping, knuckle-drumming, pencil-rolling, spitball-shooting wait for Ben Bernanke. The Fed’s next meeting is his deal, and nobody wants to place a big bet in advance of his first post-meeting statement, to be released after lunch on Feb 1. The Friday following brings a ton of January data, and then more anxious waiting: no sooner does Bernanke take the chair than he has to show up in Congress on February 15th to describe monetary policy for the coming year. Be on the lookout for perverse outcomes! If Bernanke signals inflation concern, the economy running unsustainably hot, more rate-hikes to come -- that’s the bond market’s dream of Christmas, because it increases the chance of a tough-side Fed error, a recession in which bond owners would make a ton of money. On the other hand, if Mr. Bernanke gives us a benign lot of stuff -- inflation okay, no more rate hikes -- the bond market will lose its hope of Fed-overdoing and recession, and move to it’s standard opinion of Fed chiefs: timid until proven otherwise. Iran. How can you tell that a geopolitical flyer like that has taken charge of markets? There isn’t any new economic data today. However, oil has spiked above $66, some buying clearly self-protective in case of supply interruption. A game of boycott chicken is at hand: whether the West took action to choke Iran’s oil exports, or Iran cut off the West in counter-‘cott response to sanctions, the world would be short about 3.5myn/bbl/day. Hello, three-digit oil. How close could such an event be? Pretty good quality information today has Iran pulling financial assets out of Europe, to prevent their being frozen by sanctions. Fridays tend to see action like this, as nobody wants to be exposed over a weekend. Part of gold’s pop above $550 is Iran-related. The Dow is in a 150-point crater today, partly earnings worries, mostly Iran and oil. The last tip-off is the trade that is not happening. Any geopolitical crisis pushes money to safety in bonds... except one. We have managed to tolerate sixty-buck oil without going into inflation; a hundred bucks plus, and there is no stopping it. Frightened money today went to plain, old, cash.

© Boulder West Financial Services, Inc.

Mortgage Credit News - January 13, 2006

2006-01-23T13:27:00.000-08:00

After a mid-week pop-up in long-term rates, they are back down, mortgages again approaching 6.00%. The pop-up was a form of boredom: after three weeks near 4.35%, unable to move lower, the 10-year T-note wandered upward. The threat of breaking out of the top of a sub-4.50% range reversed today on three forces, in approximate order of importance: good inflation news, suspiciously weak-side economic data, and money moving to Treasurys for safety (Iran...). This morning’s producer price data were terrific: the December core rate rose only .1%, year-over-year only 1.7%, and in a declining trend. There are some healthy data: new claims for unemployment insurance are holding low, the job market overall in its best shape since 2000. And, mortgage applications have recovered from a holiday slowdown. However, the preponderance of other data is moving toward the slowdown side. December retail sales came in slightly below the .9% overall forecast at .7%, but ex-auto sales (inflated by desperate Detroit giveaways) the remainder was a slim .2% gain. Many analysts point to energy costs -- the first hit from spectacular heating bills -- but the huge cumulative rate hike from the Fed may be more important. Two more indications of slowdown ahead are lagging reports from last fall -- some stuff takes forever to gather and collate. To a bond trader, “last fall” is as important as the French Revolution; however, the significance of consumer credit and home-equity-line-of-credit (HELOC) usage trump delay. We learned this week that consumer credit contracted in October and November in the first back-to-back decline since 1992 (a recession then-about). We also learned that new HELOC volume dropped in the July-September quarter, and the only significant increase was in the “finance company” category, the typical provider to lower-credit borrowers. It’s early, and the slip in consumer credit demand last year may be Hurricane-related, gasoline-related, or some other transient event. However, it was also the interval in which Fed hikes began to bite, taking HELOCs above 7%. The slowdown-indicating “inversion” over the holidays dissolved last week, but is back in different form this week. In order, 2-, 3-, 5-, and 10-year T-note yields today are: 4.34%, 4.29%, 4.29%, and 4.36%. A “dish” like that in the middle of the yield curve is just as indicative of slowdown ahead as 10s under 2s. Iraq has been a slow-motion corrosive, not moving markets since the invasion in ’03. Developments around Iran before this long weekend are pushing some money to Treasurys for safety. Iran is coiling to jump the nuclear fence, and several long-term unknowns are now short-term. Will Russia and China join the US and Europe to bring pressure to bear? If so, will it work? If not, might Israel pre-empt (with or without new leadership)? What if the US and Europe are on their own? Two weeks ago Russia choked-off Europe’s gas tap, a point lost on no one. China was last active in world affairs 500 years ago; though it does appear to have put the kibosh on North Korea, next door, it seems to see the rest of the world as no more than unruly customers and suppliers (Iran!). Mutual trade is the route to mutual riches, as Holland, England, Spain and Portugal discovered at the same time that China withdrew inward. Global trade cannot be conducted without security, the absolute pre-requisite, and I hope that Mr. Putin and the collective in Beijing are giving that concept a thought. Taking pleasure by flexing muscles of empires past, and at the sight of Europe in decline, and at America bogged down and over-extended... that is one thing. The stability of a trading system, and the world, is another.

Mortgage Credit News - November 18, 2005

2005-11-18T13:40:00.000-08:00

Big doings this week. The tentative signs last week of a top in long-term rates this week turned into a brass band blaring the news.
The 10-year T-note fell as low as 4.45% yesterday, down from the scary top just short of 4.70% only ten business days ago. Yes, mortgage rates are supposed to follow the 10-year, but this time for technical reasons involving hedging of rate risk, fixed-rate mortgages are stuck just north of 6.25%. And, don’t confuse a top with the prospects for a decline, the latter not good.

The change at hand is the shift from fear that the Fed would continue to raise the cost of money from its current 4.00% up to 5.00% or more, open-ended into 2006, to the belief that the Fed is very close to being done. The bond market is telling the Fed that neutral is nigh.
The Fed meets next on December 13, and all still expect 4.25% at that meeting, and most expect 4.50% at Mr. Bernanke’s first meeting on February 1st. This week’s trading has removed thought of the Fed going beyond 4.50%, and has called into question the wisdom of going any further at all; the pattern of rates across all maturities suggests that if the Fed does go to 4.50% it will not be able to stay so high for long.
Pay no attention to prognosticators in this situation because few have done well. Instead, pay attention to the market, the cumulative vote by $30 trillion invested in bonds. Pay attention to two changes in the market: the drop in the ten-year is a big deal, but two other things are bigger. First, the crucial, Fed-predicting 2-year to 10-year spread; and second, the behavior of the 2-year T-note itself.
The 2s-to-10s spread last week broke inside .20% for the first time in this tightening cycle (except for that misbegotten Katrina scare), and this week inside .10% -- at the narrowest, .07%. Mr. Greenspan obscured the importance of a narrow spread with his “conundrum” fog, but traditional analysis is winning out over the Chairman’s this-time-it’s-different: a narrow spread reflects a tough Fed and portends a slower economy. Narrow spreads have always done so, and still do.
The key data this week causing the spread to narrow was cumulative testimony that the housing market is slowing, perhaps abruptly. October housing starts and permits for new construction fell 5.6% and 6.7% respectively; a survey of home builders sank in November to levels of two years ago; surveys of real estate brokers show a sharp decline in contracts written; and several regions report deterioration in the listings-to-sales ratio. Throw in some benign inflation numbers and a visible topping in energy prices, and the-Fed-is-going-to-the-moon psychology has broken for the first time this year.
Really broken. The most extraordinary market move has been the outright decline in the 2-year, down .10% to 4.36%. The 2-year T-note must pay a yield higher than the Fed funds rate because it has two years of risk; the only time the 2-year pays less than the Fed is when rates are on the way down. Specifically, when it’s clear that the Fed has overdone a tightening episode and will have to retreat. The 4.36% 2-year is the brass band: it says the Fed will not go to 4.50%, and if it does will soon wish that it had not.

So far, so good, but we’re a long way from the economic weakness that would cause a Fed reversal, or mortgages back in the fives. Industrial production, capacity utilization, and the job market are all doing fine.
There is a better than 50-50 chance that Mr. Greenspan’s final circus act will be to deliver a reasonably stable economy and rate structure to his successor, inflation risks waning, and housing cooling. He hasn’t been called Maestro for nothing.

© Boulder West Financial Services, Inc.

Mortgage Credit News - November 4, 2005

2005-11-04T13:38:00.000-08:00

Long-term rates have risen in a straight line since Labor Day, now more than one-half percent. The 10-year T-note, 4.67% today, has taken out several technical stops without pause, and 30-year low-fee mortgages are at the doorstep of 6.50%.
Bonds were hurt by some fairly strong economic data, and by inflation discussions shifting to a how-bad-is-it competition, but the real damage to rates is coming from the Fed. The light has dawned that wherever neutral was before oil hit sixty bucks, it is higher now. Further, the location of neutral is passing into historical curiosity as the Fed will likely have to tighten past neutral, going as far as necessary to intercept inflation pressure... going until the economy visibly slows.
The Fed’s fingerprints are on the crucial Treasury 2-year to 10-year spread: it’s been steady at a very narrow .20% for four months. Long-term rates are rising because the Fed is bulldozing the whole rate structure upward from underneath; if the bond market thought the Fed wasn’t tough enough, 10s would be pulling away from 2s. However, this .20% 2s-to-10s spread says nothing about high the Fed will ultimately go. The stop signal would be 2s converging on 10s, or rising above.
The first data from October show an economy if anything accelerating from the pre-Katrina pace. The twin reports from the purchasing managers association show manufacturing running hot, above the 59 level, and the service sector in a strong October rebound, to 60 from 53 in September. Same-store retail sales (the measure removes distortion from new openings) soared 4.4% in October.
There is no sign whatever that consumers have been hurt by high energy prices, rising interest rates, or by anything else.
In modest good news for inflation, labor productivity in the third quarter increased at double the forecast pace. However, news this morning that price pressure is moving into wages overwhelmed everything else, including weak growth in the big-company payroll survey.

The fingerprints may be the Fed’s, but mortgages are doing the heavy lifting. The big selling in the bond market this week was mortgage-related: the proud owners of $5.5 trillion-worth of fixed-rate mortgages have to go short bonds to hedge their positions. As one result, this was one of the rare weeks in which mortgage rates rose more than long Treasurys’.
Fixed mortgage rates are now about even with the highs in each year since 2001. How high they will have to go to cut into home purchases... we won’t know until we are there. Classically, a 2.50% rise is necessary to clamp the housing market: in recent examples, from 9.00% to 11.50% in 1989, and 7.00% to 9.50% in 1994. In the Fed’s last cycle, ’99-’00, mortgages went from 7.00% to 8.50%, but the technology bubble-burst collapsed the economy before housing broke.
So far, mortgages are only 1.25% percent above the cycle low, and on theory might have to rise to 7.75%. I doubt it. The anomaly in this cycle (among many) is the role of the adjustable-rate mortgage. In recent real estate expansion phases, ARMs were not important housing-market propellants: short-to-long rate spreads were narrow, and ARMs were no great advantage over fixed loans.
Contrariwise, in the four-year super-cycle now concluded, short-to-long spreads were the widest in a half-century, and ARMs for home buyers bordered on free money. No longer. Rates on five-year hybrid ARMs have almost doubled in eighteen months. Construction money has doubled. Piggy-back seconds, essential to the low-down payment market, have gone from five-something to eight-something.
Especially in the hottest housing markets, these adjustable and innovative products have accounted for more than half of all purchases, and suddenly have no utility at all.

Mortgage Credit News - October 28, 2005

2005-10-28T13:35:00.000-07:00

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.

Mortgage Credit News - October 21, 2005

2005-10-21T13:23:00.000-07:00

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.

Mortgage Credit News - October 14, 2005

2005-10-14T16:42:00.000-07:00

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.

Mortgage Credit News - September 30, 2005

2005-09-30T11:57:00.000-07:00

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.

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

2005-09-20T14:58:00.000-07:00

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.

Mortgage Credit News - September 16, 2005

2005-09-16T12:43:00.000-07:00

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.

A Blog is Born

2005-09-14T10:52:00.000-07:00

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