30 Year Mortgage

Is a $400,000 house with NINJA loan normal? How about a $200,000 REO with missing appliances, a dead yard, a long list of maintenance and no financing? Maybe normal is a $300,000 flip after the flipper fixed everything and colored up the yard, and did some upgrades to the interior. Some may suggest that normal is more like a $300,000 sale with a 5.5% fixed rate and 20% down. Then again, it may be more normal if this $300,000 sale is financed with a 3.5% down FHA loan at 4%. Of course, all of the above is actually referring to the same house. So what is normal? At the moment, we know prices are going up in certain markets, and so are sales. Mortgage rates are higher now than when QE3 started in September 2012. Investors are gobbling up everything in sight in their favored target markets. As an example, they are buying 30% of the houses in Southern California, 38% in Phoenix and 53% in Vegas. First time buyers do not stand a chance. The percentage of home ownership is declining. Are policy makers happy with these results? Are these intended or unintended consequences of public policies?

It’s easy to be pessimistic over the future prospects of liberty when major industrialized nations around the world are becoming increasingly rife with market intervention, police aggression, and fallacious economic reasoning.  The laissez faire ideal of a society where people should be allowed to flourish without the coercive impositions of the state is all but missing from mainstream debate.  In editorial pages and televised roundtable discussions, a government policy of “hands off” is now an unspeakable option.  It is presumed that lawmakers must step up to “do something” for the good of the people.  Thankfully, this deliberate false choice will slowly but surely bring the death of itself.   Illogical theories can only go on for so long before the push-back becomes too much to handle.  For those who desire liberty, it’s a joy that the statist economic policies of the Keynesians become even more irrational as the Great Recession drags on. The two following examples will illustrate this point.

While today the association of real estate advertising agents known as the NAR will tell us that the home market is improving - an economic observation which we will completely ignore as any data out of the NAR is now proven to be manipulated and fraudulent, a far better indication of the ongoing implosion in the housing market, and more importantly - the sheer powerlessness of the Fed to do anything about it - came out of the latest weekly Mortgage Brokers Association, which showed that refi applications were down 4.8% W/W, while purchases slid 2.9%, after collapsing 8.4% in the past week. This has taken the Purchase Application index back to the September lows, which just happens to be the lowest print in 16 years. And while this in itself would be ok if not exactly good, it took place at a time when the 30 year mortgage rate was down to all time record lows! In other words, Bernanke's sole prescription to fix the broken housing market diagnosis - low mortgage rates, has now been proven to be a complete disaster, even as Obama does everything in his power to get debt repudiation for deadbeats (at the expense of everyone else of course) and fails. So: what's the next plan?

A few days ago we presented an analysis by ConvergEx showing that due to the very close historical correlation between home prices and employment, it is the Fed's view that the only way to stimulate employment (aside from such BLS shennanigans as pretending that despite the natural growth of the labor force by 90k a month to keep up with population, those willing to work are in fact declining) is to raise home prices. Raising home prices be definition means either reducing supply - an event which is proving impossible with shadow inventory in the millions and rising, even as thousands of new delinquent mortgages appear each day while homebuilders keep on chugging out new homes that remain vacant for years, or increasing demand. It is the latter that the Fed targets, by attempting to make mortgage rates ever cheaper via LSAP, Operation Twist or other Treasury curve interventions that attempt to push down long-dated yields ever lower. This works in theory. In practice, however, as the chart below demonstrates, the Fed's entire ZIRP-targeting policy over the past several years has been one abysmal failure (for everyone expect those with immediate access to the Fed's zero interest rate capital - i.e., the Primary Dealers). As proof of this we present the following chart, which maps the SAAR in New Home Sales against the 30 Year Fannie Cash Mortgage. What appears very clearly on this chart is that despite ever declining mortgage rates, there is simply no interest in home turnover, and sales are at record low levels due to lack of demand, and lack of desire to sell into a bidless market, in essence causing the entire housing market to halt.

Anyone who actually read Daniel Tarullo's speech yesterday setting the stage for a new round of MBS monetization would be forgiven to expect a major drop in mortgage rates. After all the Fed board member said, "by increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates." There is no way he can be wrong, after all he is a Fed member (although no Ph.D., instead he has an uber-valuable J.D.). And there is no way the market can not be pricing in what is now obvious. So how does the 10 Year UST- 30 Year mortgage spread look like this morning post the "pricing in" - well it is tighter. By a whopping 0.04%! Surely this epic move in spreads will be the catalyst that unleashes hundreds of billions in refinancing activity and pushes the value of the US mortgage market higher by trillions of dollars. Or not. As the second chart below demonstrates, Operation Twist, whose purpose incidentally was just what Tarullo is suggesting less than 2 months after QE3 Lite came on the scene, has now been a total disaster. As the Mortgage Brokers' Association reported on Wednesday, the MBA mortgage applications index was down 15% in the week ended Oct. 14. This was the year's biggest decline! Worse, the refi index was down a massive 17% in the week! What does this mean? Well, that we have reached a point where prevailing rates on Mortgages have absolutely no impact on either refis or home prices at this point: anyone who could have refied, has already done so, probably many times over. Everyone else is simply not eligible. But yes, MBS monetization will sure help... all those banks that have loaded up on MBS in anticipation of just this (like Bill Gross as we first speculated back on October 11) to sell them right back to the US taxpayer. And, of course, all those who have been wisely stocking up on precious metals in anticipation of just this latest episode of Fed idiocy. Remember: as we have been saying since day 1: the Fed knows only one thing. To Print. And it will. Over and over and over.

Remember when the Chairman did a quick drive by with the much price in Operation Twist, and the market came, saw, and plunged? That was a week ago? Two? Well, as we have been predicting since December 2010, that was merely the appetizer, or as we phrased it the same as last year's July QE Lite to last year's August QE 2. Confirming both our speculation, and the realization that Bernanke knows only how to print more money and nothing else, were his first public remarks since the launch of Op. Twist, at a Cleveland Fed forum last night in which he said that "the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly... Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anemic. ""If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation," Bernanke said. The comment was made in response to a question about a recent decline in market-based inflation expectations, which policymakers see as a good gauge of future inflation trends." And since the key "deflationary" metric that he looks at, as wrong as it may be, is the stock market, looks for stocks to resume trading with schizophrenic abandon, surging ever higher on increasingly bad economic data. Of which we will have a lot.

The real issues of my generation have unfortunately been glossed over. There have been the occasional articles chronicling how lifetime earnings are adversely affected for those who come out of school into a recession, but this downturn has already had a duration above and beyond the norm, and at present doesn’t appear to be ending any time in the near term. Meanwhile, the bills are stacking up, and even those of us who are working from Generation Neutral are starting to be concerned that the debts we signed on for at 18 will live to haunt us well longer than our worst projections. There is beginning to be a certain resigned malaise hanging over us, and as capitalism is a system predicated on growth and a healthy amount of optimism in the future, this is yet another headwind to our economic and even psychological well being...I’ve yet to figure out what will break our apathy, as our misspent optimism still keeps us believing, however fleetingly, that this too shall pass. The day that we collectively realize that better days aren’t coming could well be too late, but the debts amassed during our optimistic youth will still continue to knock on our door. If our generation doesn’t have it better than our parents’, I wonder what the narrative we tell our children will sound like.

Confusion continues to reign supreme over what the French rollover plan does for the various entities. The details and mechanics are a bit sketchy, but I have attached the proposal that I found, and will use that as a basis for the analysis. As I go through the details, and incorporate the latest rating agency comments, the conclusion remains the same – this is a good deal for the Participants, a mediocre deal for the Troika, and punitive to Greece.

This report lays out an investment thesis for gold and one for silver. Various factors lead me to conclude that gold is one investment that you can park for the next ten or twenty years, confident that it will perform well. My timing and logic for both entering and finally exiting gold (and silver) as investments are laid out in the full report. The punchline is this: Gold and silver are not (yet) in bubble territory, and large gains remain, especially if monetary, fiscal, and fundamental supply-and-demand trends remain in play.

Rich Bernstein who while at BofA used to be one of the few (mostly) objective voices, today got into a heated discussion with Rick Santelli over yield curves and what they portend. In a nutshell, Bernstein's argument was that a steep yield curve is good for the economy, and the only thing that investors have to watch out for is an inversion. Yet what Bernstein knows all too well, is that in a time of -7% Taylor implied rates, QE 1, Lite, 2, 3, 4, 5, LSAPs, no rate hikes for the next 3 years, and all other possible gizmos thrown out to keep the front end at zero (as they can not be negative for now), to claim that the yield curve in a time of central planning, is indicative of anything is beyond childish. A flat curve, let alone an inverted curve is impossible as this point: all the Fed has to do is announce it will be explaining its Bill purchases and watch the sub 1 Year yields plunge to zero. Yet the long-end of the curve in a time of Fed intervention is entirely a function of the view on how well the Fed can handle its central planning role: after all, the last thing the Fed wants is a 30 year mortgage that is 5%+ as that destroys net worth far faster than the S&P hitting the magic Laszlo number of 2,830 or whatever it was that Birinyi pulled out of his ruler. As such, Santelli's warning that a steep curve during POMO times is just as much as indication of stagflation as growth, is spot on.

The United States and its leaders are stuck in their own Catch 22. They need the economy to improve in order to generate jobs, but the economy can only improve if people have jobs. They need the economy to recover in order to improve our deficit situation, but if the economy really recovers long term interest rates will increase, further depressing the housing market and increasing the interest expense burden for the US, therefore increasing the deficit. A recovering economy would result in more production and consumption, which would result in more oil consumption driving the price above $100 per barrel, therefore depressing the economy. Americans must save for their retirements as 10,000 Baby Boomers turn 65 every day, but if the savings rate goes back to 10%, the economy will collapse due to lack of consumption. Consumer expenditures account for 71% of GDP and need to revert back to 65% for the US to have a balanced sustainable economy, but a reduction in consumer spending will push the US back into recession, reducing tax revenues and increasing deficits. You can see why Catch 22 is the theme for 2011.

Sick of bears explaining QE2? Prefer to watch Jon Stewart roasting the monetary Hewlett Retard instead? Here is your chance. Somehow catching Ben Bernanke lying on national TV has become not only a national sport, but one that provokes uncontrollable laughter... Ironically that is the laughter of all those whose money on a daily basis is worth less and less, courtesy of the Chancellor (Chairman is so QE1) buying back $50 billion in debt every week. Presumably laughing as one's net worth is getting destroyed makes it more palatable. Just wait as the country collapses into uncontrollable hysteric guffaws as the 30 Year mortgage passes 5%, then 6%, then 7%, etc. destroying up to 25% of household net worth.

Is the floor in mortgage rates in? After hitting a record all time low of 4.19% in the week ended October 14, the Freddie 30 Year Fixed mortgage rate has risen slightly but appreciatively to 4.21% (chart below). This is not all that surprising considering the 10 Year UST has been meandering around the 2.5% spot for a while now. What it does indicate, however, is that absent QE2 mortgages may have just hit their floor for the current regime. As it is no secret the Fed is intent on lowering mortgage rates as low as possible the question becomes whether a level in the low 4%'s is enough for mortgage activity to finally pick up.

The 30 year Freddie Fixed Rate Mortgage has just printed on the south side of 4.50%, at 4.49%: a fresh new all time record. The spread to the 10 year Bond (which, yes, is tighter once again, flirting as usual with the 2.9% barrier), is about 158 bps. Of course, should the Fed recommence QE, which is now just a matter of politically self-destructive time, the spread will collapse, the 10 Year will plunge, and the administration will bankrupt all mortgage lenders (who are idiotic enough not to have been subsumed by the bankrupt GSE Borg) who will soon be forced to lend a 30 year mortgage at something around 3%. Alas, by the time the administration realizes that it does not matter what rate the mortgage is, and that the security of having a 1) cash flow and 2) job is far more important, and still as missing as always, it will be too late.