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Guest Post: Mortgage Rates - Only One Way to Go
Submitted By Michael Panzner
Mortgage Rates: Only One Way to Go
There's been plenty of speculation about what will happen to mortgage rates if and when the Federal Reserve wraps up the last of its planned purchases under the $1.25 trillion Mortgage-Backed Security (MBS) purchase program, first announced in November 2008.
While there have been some suggestions that the Fed may extend and expand the program beyond the end of next month, nothing has been said officially. Assuming it ends on March 31st as planned, the laws of supply-and-demand would seem to indicate that the MBS market is headed for a heap of trouble. Why? The Fed has been the biggest buyer of residential mortgage-backed securities by far over the past year or so.
That means yields and/or spreads on mortgage-related borrowings have only one way to go. As it happens, a quick read of the chart of the 30-year fixed-rate mortgage yield less its government bond market counterpart lends further weight to that view. That is, it looks rather bullish -- which is bad for borrowers.
In fact, based on what happened following the similar technical pattern that developed in the early 1990s, we may well be on the cusp of a secular rise in the cost of mortgage-related financing costs. Another reason, perhaps, to bet against a near-term recovery in house prices.
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Your logic makes sense assuming the FED doesn't embark on a new QE 2 rampage. The problem is, they very well might, with the full faith and credit of the US Taxpayer behind them. One cynically wonders whether the horrific double barreled New Home and Existing Home reports this week were "tweaked" to scare the bejesus out of a rather naive WH occupant who may decide, with the urging of Rubin, Summers, Bernanke etal, that we MUST keep bailing out a banking system which will no doubt change its spots this time and actually LEND the money we the sheeple proffer to them. Dow 18,000 here we come.
+1.
QE2 or Steal their 401K's and buy bonds with them or a combination thereof.
much of the 401k complex is already in bonds. split on allocation already in bonds across the complex? believe there is something like $6T in retirement accounts...
How about we just come to Jesus and let HOUSING PRICES fall back to reality!??
They are going to go much lower, no matter how much money we throw at the problem. Let's just get this over with!
"How about we just come to Jesus and let HOUSING PRICES fall back to reality!??"
That would hurt the banksters most, thus it will not be allowed
If housing prices fall to reality --- we would have a major deflation ----and you say because this will hurt the banksters most this will not happen.
The alternative is to inflate inflate inflate to keep housing prices up
But inflation depreciates the value of the only thing the FED has to sell ---- the dollar. So the Big Bankster, the FED may want the deflation ---- even in home values
Historically the FED has brought on at least 1 major depression --- but has never brought on a runaway inflation
they don't HAVE to.. what is forcing people to sell at lower prices if the banks can store as many foreclosed homes on their books for as long as they want??
with all these safety nets in play you really think they are going to let it nose dive like alot of you folks think?
why do any of you think rational math is going to affect this market when everything else is manipulated??
they didn't stop the market from hitting 666, or home prices from plummeting over the last 3 years. what makes you think they can stop it now?
always bet against the effectiveness of government intervention in the long run, and with it in the short run.
The FED will announce within a month that they will extend the MBS purchasing program. I'm 99% certain of it.
This post is about as helpful as those signs at bank branches saying, "FDIC guaranteed up to $250,000"
Yes - and now to make matters even worse -- no more IO Mortgages. Just when the housing recovery was starting to gain traction
http://market-ticker.org/
Bernanke's path dependent now. Can't stop the momentum of what he's doing because housing and the economy havent' recovered like he'd anticipated. Therefore, dumbass just made the biggest nominal bet in human history with the future savings of Americans and lost. Now he has to martingale his ass to infinity and pray to Jesus, Allah, Buddha and William Shatner that things will turn his way.
Old chinese saying, "Man who ride the Tiger cannot dismount"
LMAO!
Now that is the quote of the DAY!! Love it!!
Awesome!!!
You may be right. Bernanke is a fuckwit.
He has to martingale his ass only until term expires, a la the maestro who preceded him. After that it's someone else's problem.
what does it cost to get a mortgage in Japan? totally BS article based on voodoo technicals only. dumb.
Japan mortgage is 2%....and all you need is a job and your in. The trouble is nobody wants one. They can live with parents for free. Even after getting married and having kids. I have my house up for sale right now.....sloowwwwwww. In fact im selling and moving back to the US. They are finished over here. We may be finished as well in the US too....but we still got a 36oz Big gulp for 99 cents!
This article begs the question; "what happens to the Fed's balance sheet of Fannie and Freddie securitized paper when the Fed stops its venture into being the buyer of last resort of agency debt and almost the only buyer of such debt?" The second question is how will the Fed handle that problem, what happens to an already weak housing market and how will that impact the overall economy.
I speculate that the Fed will continue to engage in QE both in the agency and treasury markets either through stealth QE or by stating the Japanese case for very long term QE as non-inflationary but at least being preventative of steep deflation. I think Bernanke's best bet is to avoid stealth and just site the Japanese case as being inflation neutral and develop concensus for long term QE. The stealth approach could provide some very negative chaos if found out in my opinion. Yeah, its a really really lousy catch 22 that the so called "market economy" proponents of the Rubin, Paulson, Geithner, Summers, Greenspan, Bernanke, Clinton, Bush teams put together when they decided to kill Glass Stegal and the put down of Brooksley Born, former head of the CTFC, who tried to bring regulation to the financial derivatives market in the late 1990s. For a little background on this subject Google "Larry Summers, Tim Geithner and Wall Street's ownership of government" and find the Salon article on ths subject of "Brooksley Born," and the whole set up that led this mess.
I see no other way out of the mess that years of borrowing money we couldn't possibly repay at current dollar values can be gracefully wound down without a very long term comittment to QE followed by backing away from massive military industrial complex expenditures, manufactured wars and massive pork barrel spendign and special interest driven politics.
No easy solutions. Perhaps a fight? But what kind?
Exactly..the Fed has to be choking on the garbage they took in, nowhere to offload it, value uncertain but certainly not par and quality deteriorating every day. If they want to shrink the balance sheet - it theoretically has already shrunk. Maybe the Fed inflated the US debt to offset the cents on the dollar the MBS are worth. Do the tax payers get stuck covering junk at 100 cents on the dollar like was pushed throught the AIG pipe to make the bigs whole? Haircuts are way overdue.
If I had a mortgage (which I don't) I would simply not pay it, under the assumption that the Fed now holds my mortgage. Considering I'm a taxpayer, I would simply consider my taxes used for bailouts, the stealth-theft of currency printing, the lies and fraud that I have tolerated as just payment for my mortgage.
It's all yours Ben.
As everyone knows you can't cut off welfare without losing votes.
And if we did, nothing would change, except we'd be in a deeper mess, and be screwing people over for the same banksters you hate. Smart plan.
Look.....Let's simplify this....
The govt. will continue to try to spur the economy......growing larger because of political forces....
Thus ever increasing their proportion of the economy....
Whereas the private sector will continue to deleverage....
The end result....A ZOMBIE economy....
Deleveraging......debt destruction has to happen first.....before the economy can move ahead....
The govt, will continue to move in the wrong direction....
MAKE NO MISTAKE....
Man, everybody and their cousin wants to display their brilliance by boldly betting on an imminent collapse in the value of US 20yr + bonds as the interest rates SKYROCKET (tomorrow)!
Well, go ahead and join Mr Taleb and put your money where your MOUTH HOLE is.
Let's circle back to this in 1 year and see how you did!
Trillions of dollars balancing in the form of IR derivatives. Trillions. Now go do your little trade.
Corrected, everyone and their Chinese Uncle is harping about the imminent collapse. Worst case scenario, MBS prices go up but treasury yields can tank with foreign sovereign risk. Mortgage rates ain't going anywhere folks.
Could you elaborate, please
Do you think IR derivatives prevent the collapse of housing prices or not?
Types from wiki
These are the basic building blocks for most interest rate derivatives and can be described as vanilla (simple, basic derivative structures, usually most liquid) products :
The next intermediate level is a quasi-vanilla class of (fairly liquid) derivatives, examples of which are:
Building off these structures are the exotic interest rate derivatives (least liquid, traded over the counter), such as:
Most of the exotic interest rate derivatives can be classified as having two payment legs: a funding leg and an exotic coupon leg.(citation needed) A funding leg usually consists of series of fixed coupons or floating coupons (LIBOR) plus fixed spread. An exotic coupon leg typically consists of a functional dependence on the past and current underlying indices (LIBOR, CMS rate, FX rate) and sometimes on its own past levels, as in Snowballs and TARNs. The payer of the exotic coupon leg usually has a right to cancel the deal on any of the coupon payment dates, resulting in the so-called Bermudan exercise feature. There may also be some range-accrual and knock-out features inherent in the exotic coupon definition.
It's real simple...and yes, lots of pain is involved, but this is where we are----
HOUSING PRICES HAVE TO CRASH HARD...I am talking way overshoot the median on the downside relating to wages and rents.
We cannot continue to think the solution to the housing crisis is to keep these artificially-run up prices, artificially PROPPED UP!
The only REASON house prices got as high as they did was the creation of exotic loans and fraudulent lending which created the damand and market for these loans. Without them, demand is dead in the water. On top of that, when you consider unemployment trends, tanking wages, the CRE debacle, etc, etc, prices simply have nowhere to go but DOWN.
Obama thinks all he has to do to throw the public a bone is to give them better loan terms, but people are SMARTER THAN THAT!! Who wants to allow the govt. to tether them to an over-valued and rapidly depreciating house that is worth nowhere close to that 600K they paid, but maybe HALF that...
All efforts to date are just a transparent attempt to keep the criminal banking cartels from having to take the losses..they would rather force YOU to take the loss, and that aint gonna fly.
Sorry but your premise for a "solution" is totally well intended but misdirected. The only real "solution" the gov is looking for is extend/pretend, not establishment of real prices. The long term "solution" is to get everyone back in the housing pool via fear of or honest to goodness inflation dragging housing prices higher (of course in real terms we'll all be poorer) but only inflation will get people buying again and folks taking on credit. Deflation is a nasty, third party establishing process. Don't bet on it 'cause those in power will do everything and anything to avoid it.
+1000
I'm a simpleton I guess, but how can anyone expect housing to recover when the food chain that is the mortgage market and all the derivatives that spring from it is based on the ability of the average family to afford the average priced home? Never mind the economy recovering, until median wages go up and/or housing prices come down so the small fry that the big fish have been dining on are sufficient in number to support the predators, an evolutionary die off seems the only outcome. Equilibrium always comes, but not necessarily with the same competitors. Excessive success is usually followed by extinction. Some banks need to go the way of the dinosaurs.
Saw this today. rally looks very tired at end of day.
was looking for more of a signal. hard to tell what is going on right now, because there are lots of different signals around.
But yes I noticed this as a break out, and in trading tbt it fell below the horizontal line I made.
But . in looking at candle stick format. today look for sure like a short term peak. I'm going to keep, and buy some tbt to hedge of it starts to drop.
I agree, but a bit too far a bit too fast. I expect one more small bounce up (down) and then the up move. I have been charting tlt for a while. It would certainly indicate the smart money looking for a correction in the rally, but I don't think that's going to happen until the euro shorts are covered and the euro drops again. There has been a pattern of the US market holding position while rest of the world sells off only to go up when the rest of world corrects from oversold position. See SPY before the santa rally. while dollar has been selling off since 12/1 (profit). the us market suffered no profit taking correction at end of year (funny that manipulation thing again). then after the santa rally we had the sell off as the dollar gained. Now euro looks to be rising,
I don't know what will happen, and keeping eyes open, but from my tlt chart it looke to me that bonds had a bit more to fall. My tbt purchase is below tlt so I pick up some hedgeing if it turns the other way.
I like playing both sides of things at are traded. I get to follow one index and trade both ways, with effecting hedging strategy. it also allows me to dollar cost average in while I am making a profit on the other way.
same with sso and sds. the hard thing to adjust to is getting you mind around seeing both ways at the same time. I'm still a bit new at this.
just a few problems with the assumptions in this post :
1) Everybody from Bill Gross to a few hundred other bond guys are short GSE mbs out the whazzoo and screaming like spanked babies as the bonds have only outperformed everything else in USA since they sold ...... my guess is there is a few hundred billion short GSE mbs ..... Tyler been yelling about this since Q3 2009 and GSE mbs have simply outperformed all along the way and Gross now appears weekly on CNBC exhorting the masses to dump their GSE mbs ( so he can cover at less of a loss)
2) Fed has made it clear its holding what it bought ( mbs pay down principal every month and with FNM/FRE buying back $200 bln of delinquint loans , Fed probably gets half of that cash back in next few months alone ) . Meanwhile , everybody who sold their GSE mbs like Bill Gross is ready to jump in and BUY BUY BUY on assumed cheapening coming ( they starting to look like all the boy genius's who shorted the hell out of the USD in Q4 2009 ( can't lose trade )
3) Portfolio managers who bought corporate and junk bonds instead of GSE mbs have big profits in them and dying to lighten up on them and buy GSE mbs they own nothing in " once they get cheaper "
"Assuming it ends on March 31st as planned, the laws of supply-and-demand would seem to indicate that the MBS market is headed for a heap of trouble. Why? The Fed has been the biggest buyer of residential mortgage-backed securities by far over the past year or so."
Disagree. It is definitely about supply and demand, but I don't see a whole ton of new mortgages coming to market any time soon. Is there a ton of house buying and re-fi activity expected going forward? The Fed's QE effectively met the supply of the last year, but remember that supply was largely securitizations of EXISTING mortgages that were sitting on FNM/FRE's books. And those who could re-fi have for the most part done so. Going fwd, I see less supply, and by the looks of things (not to mention fund flow data) I see plenty of demand for fixed income.
+1,111
China didn't lose title as top US Treasurys holder after all - DJ
DJ reports Japan did not surpass China to become the world's largest foreign holder of U.S. Treasury securities in December after all, the Treasury Department said. In a revision to figures released earlier this month, the Treasury said China held $894.8 billion in Treasury securities at the end of December, more than the $755 billion that had been previously estimated. Japan in December actually held $765.7 billion in Treasury securities, less than the $769 billion Treasury had estimated. Still, the figures show that the value of Chinese holdings of Treasury securities has been falling. In June, China held an estimated $915.8 billion in Treasury securities.
Look north my friends.
Good post, but perhaps missing the fact that Geithner, whom I like to call Pinnochio, on Christmas lifted the the cap on support for FNM and FRE. With the unlimited resources now coming from the treasury, FNM and FRE will in all likleyhood fill the gap the Fed leaves. This will be Q.E. with a different name.
Surprise!
NEW YORK (CNNMoney.com) -- Battered by the housing crisis, mortgage finance company Fannie Mae said Friday that it needs another $15.3 billion in bailout money from the federal government.
http://money.cnn.com/2010/02/26/news/companies/Fannie_mae_results/
They may widen but only marginally unless the fed starts to tighten or market rallies a ton and we get a refi wave. What is missing in this analysis is 10 yr swap spreads which are histortically tight at just 8bp. If you look at mtgs vs swaps (as most participants do because they fund sub libor) they are not that mis-priced. Swaps are mis-priced. Also, with fed on hold, there is huge demand from Banks to add agency MBS on any pull back on prices. Think they widen vs swaps 10-20 bp but vs treasuries will be determined by swap spreads.
Another thing -- mtgs should be viewed vs the 10 yr part of the curve, not the bond (although the bond does have an impact on pricing). Fyi - 30 yr swap spreads are -14 bp.
Forgive my ignorance of MBS. Is this because of MBS duration?
yes - Mtgs amortize over 30 yrs and have average life more consistent with the 7-10 year part of the curve. They also prepay due to lower rates or people moving. They have "cash flow" durations close to 8 yrs but option adjusted duration closer to 6 years -Mbs is long a bond and short a prepay option.
Horrible housing news for Florida - NASA's layoffs....
http://www.floridatoday.com/article/20100226/NEWS0204/2260321/23-000-now...
What is missing from this discussion is the issue of who is the buyer once the Fed departs. Do you anticipate the private market stepping into the Fed's shoes and making this volume of purchases with nary a misstep or hiccup? If you do, I am surprised. I have seen no rush to buy this agency paper, no cries of "foul" or "me first" from those who seek fixed income instruments. I think the rates go up simply because the private buyers are assessing credit risk and valuation risk and a 2012 expiration on the Treasury's "we'll backstop all losses Christmas Eve promise" and will think twice about a meager spread over 10 year treasuries. I hope I'm wrong.
exactly, look at this chart.
http://www.caseyresearch.com/displayCcs.php
Agency MBS is guaranteed by the usa treasury. Spreads are going to zero.
Why keeping it all "propped up" is horrible policy and stopping any recovery--
America's housing market implosion was the epicenter of the Great Recession. It's hardly surprising that the federal government directed enormous resources at the market. Besides bailing out vulnerable banks, the federal government nationalized mortgage behemoths Fannie Mae and Freddie Mac, opened the lending spigot at the Federal Housing Administration (FHA), passed a first-time home buyers' tax credit, and established a mortgage modification program for troubled homeowners. The Federal Reserve embarked on a $1.25 trillion purchase of mortgage-backed securities in an effort to engineer lower mortgage rates.
The Herculean efforts may be understandable. But they were a mistake in the early months of the downturn—and now stand as a public policy blunder in the early months of a recovery. That's a harsh judgment, but it's way past the time for ending taxpayer support of the housing market.
These policies are geared toward propping up home prices, the definition of a perverse public policy. Artificially holding prices at above-market levels harms new potential buyers, from young adults starting their own households to immigrants putting down stakes in the American Dream. The subsidies wrongly delay the inevitable home market price adjustment to excess supply in many markets across the country.
"I don't see anything being gained by holding housing prices higher than the market rate," says Dean Baker, economist and co-director of the liberal Center for Economic & Policy Research in Washington. "It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes."
The biggest policy blunder involved the miscalculation of depth and duration. Housing props were assumed to be temporary backstops, viewed through the prism of other recessions over the past two decades. Deflation in real asset pricing at these levels had no recent precedent and did not enter into the depth and duration calculation ( see " bank stress tests " for more evidence of delusional assumptions ).
Now economic policy has been trumped by political hysteria and a growing uproar over the deficits. Open market price discovery is politically untenable , even though it is the only sure means to greatly shorten the period required for stabilization.
So the original errors, made in haste, will be compounded and extended until multi-institutional failure brings it all to a halt....an event is required.
Never forget that unstimulated fair pricing of residential housing is only one issue. Realistic and honest valuation is the boogeyman for ALL economic public policy gone horribly wrong. Asset deflation breeds denial.
there will be qe2 but it will take a different form than it has now....but i don't know what....there is only so much crap which the fed can buy - how much remains after mar 31? lots? i am sure the banks are writing bad business again because they know it will go to the fed....
the fed might start buying bad credit card debt, car loans, corporate debt...but it will buy debt....or it might begin buying cds / cdo / irs etc etc.....foreign debt?
now where is the report about gdp which was revised up .2% to 5.9%?.....you would think with such roaring growth that the fed could totally abandon currency debasement and sell into the the huge economic rally.....
Rather than rates having to rise, how about if mortgage standards were tightened a bit, home prices where allowed to sink a little further and Obama institutes a foreclosure moratorium.
1. Does it matter if the FED stops buying MBS if homes aren't selling and no one needs a mortgage?
2. Does anyone think the FED will let mortgage rates get too high without stepping in?
3. This is a command economy: bond market is manipulated with funny money, stock market is manipulated with funny money.
4. The only people who win investing or trading are those who know whats going to happen before it does. Goldman Sachs. They skim money from the financial markets every day they're open.
The fact that Goldman is still so untouched is stomach turning. The level of corruption and collusion should STUN every person on this planet.
Goldman is a sacred American cow and its financial weapon, so it is better not to touch them...
The Fed can -- and will -- keep buying forever....
Don't worry Obama will save us!
Phase Shifts, Stick/Slip and the Demise of Our "Socialist" Housing Policy
February 26, 2010
Any of several critical factors could trigger the next phase shift decline in housing prices.
One of the central ironies of the current "housing recovery" is that it is 100% "socialist," that is, funded entirely by the Federal Reserve and the Federal Government. The Fed has purchased quite literally 99% of all the mortgage-backed securities issued in the past year--$1.2 trillion. Without the Fed purchases, there would be no mortgage securities market. It's as simple as that.
The government owns well over half the nation's $10 trillion in mortgages via its defacto ownership of Fannie Mae and Freddie Mac, and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.
Anyone claiming to be a supporter of free-market capitalism must demand an immediate end to this 100% "socialist" support of the U.S. housing and mortgage markets.
The reason why realtors, bankers, builders and politicos are nervously whispering "we're all socialists now" is simple: were the Fed and Federal government to withdraw their subsidies, guarantees and outright purchases of mortgages, the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.
If hypocrisy was fatal, virtually every realtor, banker, mortgage lender, Fed and Treasury official and craven politico would instantly expire. Housing is the ultimate "too big to fail"--yet it is failing nonetheless. ...
http://www.oftwominds.com/blog.html
I think that the risk in housing is not met by a 30-100 bps increase in the spread once the Fed departs. To the contrary, it may be like many things in this economy where governmental intervention has skewed the market, and we'll find a bid-ask spread so wide there simply will not be any mortgages. If that occurs, housing slides into a collossal abyss, and then the banks holding all of the commercial AD&C mortgages right behind them. The TBTFs will get bigger, as the little guys fold.
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