The Multi-Pronged Mortgage Debacle Next Year (So Long, “Housing Recovery”)

Wolf Richter's picture

Wolf Richter

The feverishly awaited taper announcement, after months of deafening Fed cacophony, is in the can. The Fed, unless it backtracks again, will cut its purchases of Treasuries and Mortgage Backed Securities by $10 billion in January, and possible every month until it’s done with its money-printing and paper buying binge. The program repressed mortgage rates and inflated the value of MBAs.

But mere talk of ending it has sent mortgage rates soaring – and mortgage applications plunging to the “lowest level in more than a dozen years,” lamented the Mortgage Bankers Association. The Refinance Index has crashed. The all-important Purchase Index is now 12% lower than last year.

People who need mortgages to buy homes – hence, not hedge funds, private equity firms, oligarchs, and other sundry investors – have been throttling back. Sales of existing homes slumped for the third month in a row in November, down 4.3%, to a seasonally adjusted annual rate of 4.9 million, 1.2% below last year – the first annual decline in over two years. It’s just getting too darn expensive. Home prices have soared over the last two years. And mortgage rates have soared since May. A toxic concoction.

The average contract rate for 30-year mortgages with conforming loan balances ($417,000 or less) rose to 4.62%, up from 3.59% in early May. Over a full percentage point. Just on taper talk – though the Fed has continued its bond-buying binge with relentless determination. Where will mortgage rates go when the Fed actually stops trying to repress them?

Interesting times.

Now comes part three of the debacle, after soaring home prices and mortgage rates. It was drowned out by the hullaballoo over the Fed’s taper announcement. It came from our favorite bailed-out, taxpayer-owned Fannie Mae and Freddie Mac that purchase mortgages from banks and then either keep them on their books or stuff them into MBAs that they sell with some guarantees. Biggest buyer? The Fed. It has been plowing $40 billion a month into them – to be reduced to $35 billion in January.

The banks love this system because they get the fat fees from originating the mortgage without having to absorb the risks. The GSEs and the Fed run the show. Banks are involved just enough to cream profits off the transaction. It’s not exactly the paragon of a free market.

But there are some efforts underway to encourage private capital to play a larger role. So last week, the Federal Housing Finance Agency announced that it would impose a 10 basis-point increase (1/10th of 1 percentage point) in guaranty fees that Fannie Mae and Freddie Mac charge banks. And now Fannie Mae and Freddie Mac have announced that they would revamp their risk-based matrix of fees that they charge lenders.

Lenders roll these fees into the mortgage, which drives up monthly payments. The change will hit borrowers with a so-so credit score who cannot come up with a down payment of at least 20% – hence the majority of all borrowers – the hardest.

“What had been an exercise by regulators to systematically attract private capital into the mortgage market has now turned into an attempt to shock private capital back into the system,” explained Mortgage Bankers Association CEO David Stevens. “The timing of this could not be worse, especially with the Qualified Mortgage Rule, which is already tightening credit, going into effect in January.”

And with mortgage rates already jumping.

Based on the Mortgage Bankers Association’s analysis, guarantee fees – Loan Level Price Adjustments, they’re called – could increase by 0.75 to 1.5 percentage points for borrowers stuck in so-so credit-score purgatory.

“As a result, a borrower with a 730 FICO score making a 10% down payment will pay an LLPA of 2.25% for a 30-year fixed-rate loan, up from today’s fee of 0.75%,” the Mortgage Bankers Association pointed out. “These increases are in addition to the 10 basis point ongoing guarantee fee increase. The estimated net impact on this borrower would be a 50 basis point increase in the interest rate costing borrowers thousands over the life of the loan.”

Half a percentage point! On top of the full percentage point that mortgage rates have already increased, on top of any increase in mortgage rates that might occur as a result of the Fed’s withdrawal from binging on MBAs. That’s the first hint of what might happen when a subsidized industry as housing is being encouraged to try to stand on its own wobbly feet.

The Mortgage Bankers Association, which represents banks that have gotten fat by creaming off profits from this subsidized process, is now aggressively lobbying against the change. They want neither the Fed nor the taxpayer to abandon them.

It was a “dangerous and misguided” approach, Stevens said. “These fee increases could have a negative effect on the fragile housing recovery and could harm the very potential home buyers and borrowers that the housing market needs to sustain that recovery.”

Of course, home buyers only have to pay the fees if they want to get the lower mortgage rates that these government guarantees make possible. If they don’t want to pay the fees, they can always pay an even higher rate for a mortgage that is not guaranteed by the GSEs. In either case, owning a home is in the process of getting much more expensive.

Hard-pressed consumers are hitting a wall. So, something will have to give: either mortgage rates (if the Fed were to backtrack) or home sales and eventually prices. And that would be the end of the “housing recovery.”

These hard-pressed consumers are already showing their teeth. Discount retailer Loehmann’s did what other retailers – and a large number of other junk-rated companies – will do once the Fed allows a sense of reality into the markets: it filed for bankruptcy. Read.... Junk-Debt Time Bomb: Ticking Till The Fed’s Money Dries Up

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W74's picture

I've been inside a few forclosed homes, some of those "owned" by HUD/VA.  More than a few of these are completey destroyed and gutted, I mean to the point where the ceiling fan has been ripped out, drywall busted down and the copper pipe stolen, etc.

My question is this: If a person has a mortgage what parts of the house are owned by whom?  I mean, who owns the brick?  Who owns the plumbing?  Who owns the vinyl siding?  If it came with appliances who owns those?  The water heater?

And if modifications are allowed continually on these things, one would presume that the dweller owns the house.  But what if they default?  Now the asset is significantly modified from what was purchased and therefore what was borrowed for the purchase.

Is it any wonder that people have been gutting their own dwellings (I assume to sell parts for what they can get) before defaulting and skipping town?  Seems to me like the banks deserve what they're getting.  Deals made in bad faith will always end badly.

Gromit's picture

I've wondered for a while what the true free market price of unguaranteed 30 year fixed might be.  Maybe 30% down and 8% interest?  Perhaps one day soon we'll find out.

My company flipped homes in'11 and'12.  Basically we bought product which didn't qualify for GSE love and sold product which did.


steveo77's picture
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Fishhawk's picture

MBA's are Mortgage Backed Assets, ie, securities which consist of piles of mortgage notes, separated from the properties they are supposed to secure, making them now unsecured, ie, non-recourse debt paper, sold to hedge funds for the 4% cash flow.  As the harvest continues, and more 'homeowners' make the decision to stop paying their mortgages, these MBA's will go bad, meaning the cash flow they are supposed to generate will drop, triggering other derivative debt bombs, such as Credit Default Swaps, which are private insurance contracts which pay the holder the difference between the cash flow the MBA was supposed to generate, and the amount it actually generates.  The Volker Rule (page 745 or so) will supposedly require the banks to keep some fractional ownership of the mortgage securities they package, which will kill this financialization mechanism.  However, not to fear, the Federal Reserve will continue to buy all mortgage originations as they have done for years: when you sign a mortgage note, the bank accepts it for value and sells it to the Fed.  They then take the money the Fed paid them for the note and lend it to you.  See the Credit River Decision for details of this fraud...


Keloid's picture

Seems to me that median home sale price should roughly equal 3X(Avg Income). Say ,"Hello" to affordable housing.

Oh well, perhaps we can finally undo what Lincoln did during the War of Unprovoked Northern Aggression. HINT: Slavery would have eventually been abolished any way, sort of like the rest of the world, without all of the unnecessary bloodshed. Also, the food supply chain for those of African descent might not have been interrupted so drastically as to starve to death 25% of the beneficiaries of emancipation.

Obamacare, incidentally, will likely have a similar effect on those that the gubmint is attempting to "help."

Rene-Paul's picture

Help me out, The first paragraph refers to the value of "MBA"s. What is that? MBA is later refered as Mortgage Bankers Association.  MBS maybe?

apberusdisvet's picture

The root problem is that no one, except those in the 1% can afford jackshit these days; declining median H/H income, student loans, the 7%+ YOY  true inflation on neccessities, and the huge killer to disposable income that is Obamacare.

adr's picture

What's odd is that when the mortgage rate was 7% in 1999 my house sold for $111k. With the mortgage rate below 5% I can't get anybody to buy my house for $110k even after $100k in upgrades since 1999.

Something tells me the root problem isn't the mortgage rate or the asking price.

Paveway IV's picture

Do you accept EBT? 

Seriously though, I feel for you. The canary in the coal mine for the Great Depression wasn't inflation, it was the deflation that preceeded it. Your $110K house is also in the max pain zone - young, working couples. The ones that are left have been slated for extermination.

I don't know if anyone else is seeing this, but I'm starting to notice some prices at the grocery store going down. Not many - but you just notice them because it hasn't happened in such a long time. It's usually the boxes of crap they shrunk while keeping the price the same. Kind of odd. Not big movers like Tide laundry detergent and Bounty paper towels (popular brands in the US) - they're insanely high . If I see the price of those start dropping, then I'll be cleaning out my bank accounts for physical cash - the ATMs are not going to work when the SHTF and a *real* depression is the absolute worst time to sell phys. Gramps was right: hoard cash. 

moneybots's picture

“The timing of this could not be worse"


How so?  The plain and simple truth is that a manipulated market manipulates back.  The timing of blow back is always going to be worse.  What time was a great time for the housing bubble to burst?


Animal Cracker's picture

Time for the Affordable Housing Act!

Come on, Obama...gimmee an Obamahome!

Ying-Yang's picture

Wolf... you keep saying "creaming off profits"

The mental imagery is distracting.

LauraB's picture

Bring on the lower prices!

AmericasCicero's picture

Whats the 30-year rate on a shipping container from london?

Popo's picture

Stop using the word "recovery"!  As if inflating prices are a good thing!   Do we talk about a "food recovery" or an "oil recovery" when prices inflate?   How about an "education recovery" when the price of education soars?

Someone, somewhere is *always* on the sell-side of any asset.  

A "recovery" would be a return to 2x median income.   That's a "recovery".