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Art Cashin Confirms That Operation Twist Is A Failure Before It Has Even Begun
Yesterday we documented that the by now widely bashed Operation Twist has been a failure before it was even launched as confirmed by recent trends in mortgage refinancing, or more specifically, lack thereof. Today, none other than market (and alleged bar) veteran Art Cashin confirms precisely what we said: that the one goal of the Twist - to get mortgage rates lower and refinancing higher - is and will be a failure. Again, it is very unfortunate that what is by now glaringly obvious to all will never become clear to the Fed until after the economy has finally been pushed over the precipice.
From UBS' Art Cashin
Mortgage Input From A Guru (And A Friend) - On Tuesday, I had suggested in the Comments that I might be writing about the possibility that, as a substitute for QE3, the Fed might decide to target the 10 year Treasury, hoping to drive mortgage rates to super-historic lows that would ignite an explosion in refinancing and maybe inspire home buying.
To gain a solid background on both the relationship between 10 year yields and mortgage rates, and the current mortgage outlook, I turned to a friend and well-respected guru, Barry Habib. I asked Barry for a few points on the topic. What I got instead was a well thought-out analysis that Barry generously passed along. So, to avoid “reinventing the wheel”, here’s some of Barry’s thoughtful notes:
Frustrated by the slow economy and fearing a possible recession, both the Fed and the Administration have been exploring ways to stimulate the economy. The housing market has significantly underperformed, and acted as a drag on the overall economy. So finding a way to help housing could do a lot to improve overall conditions. But with previous stimulus having lackluster effects and there also being very little appetite for additional spending, there are difficulties in finding ways to accomplish this.
Enter “Operation Twist” – a plan once used in the early 1960’s where the Fed purchases 10-year Treasury Notes, which would – in theory – cause mortgage rates to drop, and therefore, cause an upswing in housing activity. And better still, the funds to purchase these would come for the Fed selling its holdings of shorter term maturities, so there would not be a need for additional money. Sounds interesting, but there are many flaws. If the plan is successful, short term yields would rise and longer term yields would fall, creating a flatter yield curve. The banking industry would see profits erode, and many businesses would see short term borrowing costs rise.
But the real problem with “Operation Twist” is, like other plans we have seen in recent years, it could still fail even if it works. Mortgage rates are already so low…really historically, ridiculously low. So why would making rates even lower solve the economy’s ills? It won’t, and it will not fix the housing market either. The problem is not that rates are too high, it is that individuals can’t take advantage of the low rates that are already on the market. Most people want to refinance but can’t. In many cases it’s because they owe more on their home than the acceptable appraised value. This actually causes many of them to become frustrated and to stop paying their mortgage, which exacerbates the problem. A better idea would be for the Fed to step in and take a second position so that individuals can refinance and lower their payments.
So “Operation Twist” would reduce the yield on the 10-year Note and likely even cause mortgage rates to decline a little. But it would do nothing to help the housing market or the economy. It would not stem the tide of foreclosures…it may even cause more frustrated homeowners to stop paying their mortgage as the only way out. The same individuals who refinanced these past few months would refinance again…saving a few more dollars, but not making any significant improvements in the economy.
Given Barry’s well-deserved reputation as a top mortgage maven, Mr. Bernanke may be working with wet tinder.
Mortgage rates are already at 50 year lows and there is no great rush to either buy or refinance. In fact, mortgage applications have actually been falling recently. Some feel that in addition to the problems Barry cited, there may also be a problem of perception.
Say you read that 30 year fixed mortgages are selling at 3.75%. You decide you want to lock that rock bottom rate in. But, when you go to the bank, you find the rate to you is, maybe, 4.25% (credit ratings, etc.). Not a big deal, but folks apparently see it as a large “percentage” difference in these low, low rates. Reports are that many folks just walk out. Warm up that helicopter, Ben!
Bonus: Here is today's trivia corner from Art:
Today's Question - I'm thinking of two numbers. When I add them I get a result which is the exact same result I get when I multiply them. What are these two numbers?
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stop paying your mortgage and stock up on ammo and pm's
bitchez
The three big B's. Beans, Bullets, and Bullion.
big 4:
beans, bullets, bullion, bitchez.
Big 5:
Beans, Bullets, Bullion, Bitchez and Booze
Big 6:
Beans, Bullets, Bullion, Bitchez, Booze and no Bras
Wouldn't that be minus 1? And you could have chosen "boobs" "boobies" "breasts" "bazooms" "boosoms"...
You are hereby commanded to turn in your testicles as they have clearly atrophied from disuse.
But those weren't my choices. "NO BRAS" was my choice. Live with it, lol
Plus or minus? It depends. A theoretical mathematician would say minus. An applied mathematician would say plus. I never had much use for theory myself. I was constantly told to apply myself in school.
Big 7:
Beans, Bullets, Bullion, Bitchez, Booze, no Bras and Bigamy.
Big 8:
Beans, Bullets, Bullion, Bitchez, Booze, no Bras, Bigamy and more Bitchez.
You know, all you have to do is decide to eat soup instead of legumes, and you could change your mantra to "Bullets, Bullion, and Bouillon."
Just sayin.
how much time you have until foreclosure begins depends on where you live. In some states, banks begin foreclosure sixty days after default (midwest), while in states badly affected by the real estate crash, you might get much much more time.
read something the other day that said avg turn time across the nation is 600 days
It's not per state per se... it's more a function of two overarching issues: (1) the amount of equity (negative) in the property; and (2) the creditor's desired level of capitalization/profit. If you have a positive equity, then expect to get the boot... whether you're in california, florida, iowa, or BFE, you're going to get the boot. If you have a negative equity, it'll probably be a lot bigger number where the real estate bust has been more pronounced... which probably leads to a much longer foreclosure time, if ever.
Banks face the same problem that prospective homeowners have with refinancing. If they want to refinance (foreclose) an underwater house, then they'll have to show up to closing with a check for the difference.
operation twist does not add money, unlike qe2, so impact on stocks will be muted
2 and 2 is the answer to the riddle
Hey, y'all remember when the market was down for like 15 mins this morning? God was that scary.
if fractions are allowed then since ab = a+b the solutions are a,b such that a = b/b-1 so if b=2 then a = 2/2-1 = 2 and 2,2 is a solution
(works for b!=1)
a=2 b=2
a=1.5 b=3
a=1.33 repeating b=4
a=1.25 b=5
etc.
Maybe I am just naive in my rememberance of notations, but wouldn't "b/b - 1" always be 0??? (and, by extention "2/2 - 1" does not, ever, equal 2).
Your solution sets are technically correct, but you you failed in the show your work department. B- grade, unless I can find the person you incorrectly copied from ;)
ok, lets say you want two numbers a,b whose product is equal to their sum...as in the trivia problem...then the product ab is equal to the sum a + b so ab = a+b is simply a restatement of the trivia problem...from there it is just a matter of algebra
ab = a+b so subtract a from both sides and you get
ab - a = b now factor a from the left side and you get
a(b-1) = b now divide both sides by (b-1) and you get
a = b/(b-1) which is simply a restatement of the original identity ab = a+b now use the identity to find solutions b!=1 to avoid 0 in denom...
oh and i think the confusion with the expression was due to my omission of the () in (b-1) that's a habit
Would you please care for a proper proof ?
The spectrum of solutions is described by ab = a+b = c, c being a constant for a given (a,b) solution.
Rewriting the previous as a^2 - ca + c = 0 (or b^2 - cb + c = 0), it is therefore easy to perform a discriminant analysis of this second degree equation. Discriminant D is defined as D = c^2 - 4c.
D cannot be anything but >0 for the equation to have to disctinct solutions (a and b, you guessed it right).
As D = c^2 - 4c, D>0 means c>4.
And therefore a = (c + SQRT(c(c-4))) / 2 and b = (c - SQRT(c(c-4))) / 2.
Now try any c > 4 and you'll get the corresponding a and b. c does not need to be a round number, can be anything you'd like it to be as long as c>4.
Ex : c=9, a = (9+SQRT(45))/2 and b = (9-SQRT(45))/2.
That was the elegant way to describe the solution spectrum, thank you for your attention, bitchez.
Beeee-eeeeeeh
Let me point out as an Elliott Wave analyst and Fibonacci fan...
http://en.wikipedia.org/wiki/Golden_ratio
Phi = 1.6180339... (Golden Ratio)
1.618 + 2.618 = 4.236
1.618 * 2.618 = 4.236
1.618 ^ 2 = 2.618
1.618 ^ 3 = 4.236
Ha. Yeah. 2 + 2 = 4.
If only the Bernank could do such high-level math.
(I think that must have been Art's drippingly sarcastic point).
The answer to Art's question is the number of years Obama will be president. Or in the case of the answer being zero, it is exactly the same as the percentage chance of the idiot being re-elected.
Answer: zero
closing cost between $5-7,000
The other part no one mentions is that PMI has doubled in the past two years! Unless you have 20% equity, expect PMI to eat up any interest rate savings.
Condo's are high risk all of sudden, must pay higher rate
People who may not have PMI before might have it now due to loss of equity when the home is appraised for the refi. Assuming they still have equity at all and can even qualify for the refi. Then of course the amortization schedules starts over. Then you have closing costs.
Lower mortgage rates are pissing in the wind in the aftermath of a housing bubble.
I want a 5 year refinance and they won't give it to me 10 is the lowest. So I gave up
Two. And zero. Now here's my question and it ain't trivial: "who invented the zero?"
Mayans.
I don't know who invented the zero, but I know Ben Bernanke perfected it.
Aryabhat, Indian astronomer and mathematician.
Which leads to our next question: as the Western world rediscovers the zero "who discovered The Zero?"
John Kerry. He invited Him to the 04 Convention.
Muslims inherited algebra from others...as for the "discovery" of zero...really? Nobody had any comprehention for a value of zero? There was no concept of nothing? I don't think so. It's another "impossible to prove piece of propaganda". Besides, "Muslims", don't really do much of anything...you can tell by looking at the middle east, backwards people living in a backwards culture. It's sad, and blacks do the same. I guess it's all in what you consider success. Religious piety and sustinence survival, or fuck God and heidonism?
The official reason to OT is to reduce mortgage rates which is more likely to fail. However as pointed out by Phil in his daily blog entry at http://www.philstockworld.com/
he points out that another side-effect of OT is to increase existing 10Y Tbond value in the hands of holders by lowering new bonds yield. This is again an indirect and "twisted" bailout to big banks.
It won't change THE FACT that THE US IS BROKE! There will be no money until S&P says so!
PS "get Short(y)"! :))))
Broke people in suits talking about all the money theyre going to throw around...sounds like a Skid Row alley discussion among some hobos around a trash can fire.
Art must be thinking of 2 and 2
aka the Chuck Woolery
http://www.youtube.com/watch?v=kmZvyUny4YM
Explains clearly why OT2 won't work to stimulate the economy. Answer to today's question: 2 and 2.
None of their plans will work, theyve already failed repeatedly....so hey lets do more of it and run up equities!
They don't need plans that work. They need to buy time to purchase gold. It's all kick the can.
We are long past the point where this could be fixed.
Perfect credit score, bought at top of the market in the Northeast, wife and I have high family combined income.. Cannot re-finance because LTV is too high.
You cannot re-finance your way out of this if everyone's property value has crashed.
If that includes people with adjustable rate morgages, then we have our answer as to why the Bernanke said no interest rate increases through 2013 (that and the USG wouldn't be able to service its debt)
Come on baby, let's do the twist
Come on baby, let's do the twist
Crank on up that printing press
And go like this!
Op Twist is already a known failure, and QE3 $2.5 trillion is clearly not going to happen....hey I know, lets ramp stocks up anyway!
"Say you read that 30 year fixed mortgages are selling at 3.75%. You decide you want to lock that rock bottom rate in. But, when you go to the bank, you find the rate to you is, maybe, 4.25% (credit ratings, etc.). Not a big deal, but folks apparently see it as a large “percentage” difference in these low, low rates. "
...it's not the difference in the rate, it's that people are tired of being lied to by fucking bankers. That 3.75% the becomes 4.25% when you walk thru the door and becomes 4.75% by the time the signing comes along. Again, it is a low rate but stop lying, you fucking Jackals. A full percentage is a big number when the bank only gives you half of that so they can lend your money out.
If 4.25% is such a 'not a big deal' then lets raise the rate BANKERS have to borrow at from 0-.25 to 4.25!
Oh THEN it would be a REAL big deal!
I said this in a comment a couple of days ago. Incomes have dropped and house prices have dropped. Mom & Pop cannot afford to bring the $50K - $100K to the closing table to cover the difference between the appraised value and the mortgage value. I'm not sure that we could qualify for our house in this economic environment.
For years, the Fed has been centrally planning the short end of the curve. Now, in an enormous expansion of its megalomaniacal conceit, it wants to rule the whole yield curve.
In fact, these PhD morons would be clueless even to set the price of bread, much less the base price of credit for a $15 trillion economy.
Delusion on such an epic scale cannot be fixed or treated.
SHUT THE SUCKER DOWN AND START OVER.
Yea exactly, these mad scientists who now want total central control of every price could not run a lemonade stand for half a day without it running up $3 billion in losses.
Numbers are 2 and 2. Pass that brainbuster along to the Chicago Fed and see if Evans can get it right.
Can't wait for Twisted MFR ... that is where Bernanke buys the S&P futures every day and sells them at the close. Never mind.
The only way for banks to clear this junk off the books, is to foreclose and charge it off. I think it will end up at Fannie Mae, sooner or later.
I'm going long carrots, as thats all the FED has left
'Carrot and stick', all theyve got left.
2 and 2 you say! what would the bernank say?
The answer using 2 different numbers is 18.94427191 and 1.05572809.
The answer is zero/zero. Which means amusingly when there is no input then there is no output.
Your right
chaba, Your the first one I can find who got the answer right Zero and Zero. 0 + 0 = 0, 0 X 0 = 0.
Tyler, I have a question for you, how do so many of the others on this page get to log in with your simple math questions without constantly getting them wrong?
But you overlook the obvious... 2 and 2. Oh, I forgot... In Today's Reality "The Bernank's" world - 2 and 2 equals QE69.
"Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month."
http://online.wsj.com/article/SB1000142405311190410340457655694305125923...
Every month it seems the media has to come up with a new description for the Fed's actions to revive the economy - seems all the descriptors have been synonyms from the unprecedented family.
Market forces will win...rates will skyrocket and inflation will soar to 10% or more per year for decades.....
The mortgage rates is a sham. First of all, who wants to buy something that will be cheaper this time next year? Secondly, who has the 800 FICO score and 20% down to buy a house at these "low" rates? Thirdly, the perception is the problem. Bankers are like car salesmen these days--I see ads saying a new Honda Accord is $17k, but when you get to the dealership, and they add on everything under the sun, the car is $25k. Bankers do the same thing. Advertise a 3.75% rate that nobody can qualify for just to get foot traffic in the door.
And lastly, who has the debt capacity to take on even more debt? Unless you've hit the lottery recently, you most likely already have a house/car purchased during the boom days of 2006, along with student loans if you've graduated recently. The Fed is only encouraging people to take on more debt, but it is all futile because consumers have voted loudly through their wallets that they don't want to take on anymore debt.
They should do a QE4 where they buy my personal debt and have it retired. Then yeah, I'll go out and buy a house and another car to stimulate the economy.
oops...accidental post
"...( and alleged bar ) veteran Art Cashin..."
And here we thought old Birnam was the highest decorated bar veteran of the ( rye shot ) shooting wars !
http://img23.imageshack.us/img23/7857/80568346.png
Warm up the helicopter? Hell, the thing is about worn out from overuse and hasn't had regular preventive maintenance in nearly three years. I'm just waiting for the Bernank's "Blackhawk Down" Moment.
The doctor has accidentally removed the kidneys, and has thrown them into the waste basket.
He is now cutting the liver in half to replace the Kidneys.
We have all been assured this will work.
So "Operation Twist" is just jawboning with a lot of arithmetic thrown in.
Sure as hell isnt a $2.5 trillion QE3 diamond encrusted Tiffany trunk stuffed full of free money everyone was expecting now is it?
Todays trivia answer- 0 and 0.
It didn't work in '61 and won't work especially right now. It doesn't matter how low mortgage rates go, the people that truly can afford the costs, debt incurrence, never had a problem getting a loan in the first place. They just get better deals now! Drive the mortgage rate to zero, and we will still have no houses selling.. That's what happens when you loan to people who can't generate the income level to pay debts. This is also what happens when the only people a bank can loan to, can't generate any income on a sustainable level to begin with. Nope, not fixed yet.
Steady as she goes..
I think Mr Habib has hit the nail on the head, my friend was unable to refinance recently because he had 3 credit cards on his credit report that said they were in dispute, but they have been paid off since 2004...the lender said he had to go back to the creditors and get letters advising they are no longer in dispute and then send these letters into the credit bureaus to have them remove these disputes from his credit report, then once this is done the lender will issue an approval (see lender comments below)...how the fuck is a consumer supposed to go back to a company he has not had credit with since 2004 and get these "disputes" removed. Needless to say he told the lender to fuck off. By the way this guy had a 780 credit score, was at 40% of his property value, tons of assets etc. This is why the lending industry is fucked and why Bernanke thinks lowering rates will make a difference. It won't because there are so many other issues with the qualifying process, (as mentioned by Habib above) that very very few people will even get to take advanatge of these super low rates!
"Disputed accounts Must be cleared by the creditors and the Fannie Mae DU approval, results must be reissued referencing a new credit report. A credit supplement is Not acceptable, a new credit report is required after removal of consumer disputes" ....did you notice who really makes the rules?.....yes Fannie Mae.
Yep. And unemployment among young people is at record all-time record, so no first time home buyers; and foreclosures are at an all-time high, so *all* of those people will be effectively locked-out of the mortgage market for at least 10 years each.
Ergo, no buyers.
The rates could be *negative* and it wouldn't matter.
I need some advice.....meeting with Bank tomorrow in regards to purchasing house next door. We knew the owner like a member of the family, she passed and was left to her son. He is offering it to us for $200K and it is easily $300. 15 ajoining acres and we are raising cattle on side.
We owe $80K on our current mortgage.
Have $136K pre tax in CD, liquidate and ~$65K
Combined Salary $160K, no other debt, $15K cash, $10K PM.
Ideally, cash out CD, pay of existing, "own" current home, take $200K mort on 2nd and and rent it.
Won't have a DP, but mortage is ~30% under value.
Or refi combo $280K (don't want to, but option)
Please advise OH great ZH blog. Thanks!
Just sell everything and hang yourselves from that big pretty 100 year old Oak Tree out in front.
All problems solved..
PS...Leave a note to the kid that he's getting ripped off too.
The house is a good deal that has presented itself at an especially bad time in history. It is a gamble. I'm not a gambler and would put it all on PMs (which is exactly what I did). However, you left out important information.
What is the rental situation in your area? How much can you rent it for and are similar rental properties remaining empty?
Is the job market in your area dependent upon one or two big companies, and if so, how are they doing?
Has your area already taken a huge hit in real estate, thereby making an argument why you won't get hit as bad by the next wave of recession/housing collapse?
Will the owner of the property consider a rent to own? In that case, it takes a lot of risk off your shoulders. He obviously won't worry you will trash the place.
Will he sell you the excess acreage and not the house? It sounds like that is a big motivation for the purchase.
How secure are your jobs and your health? Those answers can change everything.
The house is a good deal that has presented itself at an especially bad time in history. It is a gamble. I'm not a gambler and would put it all on PMs (which is exactly what I did). However, you left out important information.
What is the rental situation in your area? How much can you rent it for and are similar rental properties remaining empty? It's a 1976 4 bedroom, $2500sqft raised ranch , new siding, roof, windows, boiler attached 2car garage, hardwood floors. Assuming ~ >$1000/month
Is the job market in your area dependent upon one or two big companies, and if so, how are they doing? Albany/Saratoga Area upstate NY.
Has your area already taken a huge hit in real estate, thereby making an argument why you won't get hit as bad by the next wave of recession/housing collapse? I would say less change than 80% of country
Will the owner of the property consider a rent to own? In that case, it takes a lot of risk off your shoulders. He obviously won't worry you will trash the place.He lives 3rhs away ion Long Island, wans it off his plate.
Will he sell you the excess acreage and not the house? It sounds like that is a big motivation for the purchase. Acreage is main reason, Could flip house.
How secure are your jobs and your health? Those answers can change everything. Both mid 40's no issues, relatively secure jobs (engineer's)But nothing is 100%, that's why owning current house outright is priority
Thanks for your Help!
there's no getting around the failure of the fiat system.
grow or die. if the credit pie can no longer expand by voluntary borrowing, the debt=money fantasy is over.
Not sure why anyone is surprised by current circumstances. TPTB wanted the US public enslaved in debt and running in the hamster wheel just to feed the banksters greed...they got what they wanted. The US public are virtual prisoners in their debtor's cage...their home. Mobility in the housing market is no longer an option due to the giant ball-chain attached to their legs. Drop the mortgage rates to .0001% and you will get no better results. Sick of these assclowns not looking at the real world and only viewing the public as stupid fucking rats in a maze that can be enticed to move exactly where you want it to go only if you put the right cheese at the end.
Met with a client yesterday who started a refi in June. Since then, the bank has been asking and asking for more forms, more documents, more signatures. Then, they start over. It got to the point that he told them that if they call and ask for one more piece of paper he will keep his current low rate and they can shove it.
Another client has found a willing buyer for a two flat. Everyone agreed to everything in June. The bank is pulling off the same crap and the loan has still not been approved.
A reallyl massive problem is the bank's inability to lend to due ridiculous lending underwriting requirements. It's killing deal after deal. It does not matter how low rates are if the bank's won't approve the loan.
I am suspicious of these policies. It may be that they won't lend, even to obviously solvent borrowers, because they know they are going to take a haircut on these loans. I don't think the USD will go to zero, because I think they will switch monetary systems first, but only an idiot would think the USD isn't going lower eventually and housing along with it. They won't lend because they know what is coming.
Your refi guy *is* getting screwed, but that buyer just benefitted tremendously by not being able to commit an unforced error.
Looks like a wash to me.
The stated goal of Op Twist is not the actual goal. So wahtever you might think about mortgage refis and encouraging same, I guarantee that is not the purpose anyway so it doesn't matter if it is effective or not. Insead, what does it do, and who benidts? That will answer the question of the true goal of Op Twist.
Very clear thinking Ned.
re-fi and you fix the bank's defective title. MERS and REMICS destroyed the property title system in the US...this is the fix.
It must be the wording. Operation twist sounds fucking cheezy. Howz about Oliver Twist. Thats better. Please sir, Can i have some more?
I agree. In fact, the Fed doesn’t even have to take the second loan position; just backstop the excess (underwater) portion of the primary loan with a side guarantee to the lender. It’s effectively doing for the qualified little guy what the government did for the big banks when all credit weakened and the interbank lending system froze.
OT2 to encourage refinancing is the sizzle and sorting out defective title is the real aim...document re-do
saving America...one banker at a time