Forecasting interest rates is very difficult. I haven’t had much success at it. The first challenge is to figure out what the market would do if left to its own devices. With the plethora of variables in play, that’s no easy task. Further complicating the problem is the federal reserve which will often intervene to make interest rates do the exact opposite of what a natural market would do. It’s very difficult to figure out when the federal reserve will move in and mess everything up.
For example, when the housing bubble burst, a free-market would have taken mortgage interest rates sky high. Mortgage rates were too low during the bubble as risk was mispriced. After prices turned south, the risk became much greater, so the natural response of interest rates would have been to move higher. In that instance, the federal reserve moved to lower interest rates, and to make sure they had impact, the government took over the GSEs to make sure mortgage interest rates came down. To correctly forecast the dramatic drop in interest rates since the bubble imploded, a forecaster had to recognize both the market forces at work and the impact of policy makers who control mortgages and mortgage interest rates. No easy task.
Despite the chorus of bottom callers talking up the housing market, sales volumes and prices have only ticked up slightly. The government and federal reserve is worried that the engineered recovery will fail just as it did in 2010. As a result, they are bring out their bazooka and aiming at the real estate market.
Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates
Published: Thursday, 13 Sep 2012 | 2:27 PM ET
By: Jeff Cox — CNBC.com Senior Writer
The Federal Reserve fulfilled expectations of more stimulus for the faltering economy, taking aim now at driving down mortgage rates until an improvement in unemployment that the central bank says will be a problem for several years.
The Fed said it will buy $40 billion of mortgage-backed securities per month in an attempt to foster a nascent recovery in the real estate market.
The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.
How much clearer can the federal reserve be? They will continue to keep interest rates low, particularly mortgage interest rates, until house prices rise enough to bail out the member banks.
“There’s strong hints that they’ll do Treasurys next,” Joe LaVorgna, chief economist at Deutsche Bank Advisors, said in a phone interview from London. “They’re pulling out all the stops to try to get this economy to gain some traction and, most important, to get unemployment down.”
Enacting the third leg of quantitative easing, or QE3, will take the Fed’s money creation past the $3 trillion level since it began the process in 2008.
“The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Open Market Committee said in a statement.
How many trillions of dollars will the federal reserve print before they’re done?
As a follow-up to the statement, the Fed released its latest economic projections, which foresee slow growth including a jobless rate that stays above 7 percent into 2014. The economic projections expect growth to remain slow but to improve due to the stimulate measures announced Thursday.
In addition, the Fed said it will continue its program of selling shorter-dated government debt and buying longer-term securities, a mechanism known as Operation Twist. It also will continue its policy of reinvesting principal payments from agency debt and mortgage-backed securities back into mortgages.
Perhaps the federal reserve could buy up the toxic loans from its member bank’s balance sheets and absorb the losses?
The Fed left its funds rate unchanged at near-zero but offered one change in that regard, saying the rate would stay at “exceptionally low levels” until at least mid-2015.
“These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” the Fed statement said.
The vote was 11-1, with Jeffrey Lacker voting against the notion of asset purchases as well as setting a time frame for rates.
At an afternoon news conference, Fed Chairman Ben Bernanke offered a defense of the Fed’s QE activities, saying they are not adding to the government budget deficit nor causing runaway inflation.
In addition, he addressed concerns that savers are being penalized from low interest rates, saying that the policy has allowed for growth in other areas.
“While low interest rates impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates promote,” he said.
In the meantime, the federal reserve will continue to steal the bread from the mouths of seniors.
Bernanke also issued his latest challenge to Washington to get serious about fiscal policy.
“We can’t solve this problem by ourselves,” he said.
With a summertime rally pinned on hopes for aggressive central bank intervention — both in the U.S. and Europe — the Fed essentially split the difference, offering a quantitative easing program the aggressiveness of which will depend on the strength of the recovery.
The stock market, which had been slightly positive prior to the decision, shortly after 12:30 p.m., surged while bond yields, particularly farther out on the curve, jumped higher. Gold and other metals gained at least 1 percent across the board while the dollar slid against most global currencies.
“The language of its policy stimulus leaves us in little doubt that the central bank is trying hard to allay fears over the prospects for inflation, which it continues to see as a low likelihood, as well as its exit strategy,” said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York. “The Fed is going all out to say that easy money is here for a very long time. Will markets warm to its latest actions? We think so.”
Or perhaps market participants will become more cautious because the federal reserve is openly admitting the economy sucks and needs stimulus. There is one simple fact the federal reserve always ignores: providing stimulus never improves confidence. It may cause market participants to front-run the federal reserve for easy money, but the federal reserves actions call attention to how weak the underlying fundamentals really are. We will know when the economy is really healthy when the federal reserve winds down its stimulus programs and raises interest rates. Until then, attempts to bolster confidence will fail because market participants will rightly interpret the federal reserve’s actions as one of desperation. I’m not the only one who has noticed:
The economists note that the Fed plans to keep interest rates low for an extended period only because it believes the economy will be weak until then. This approach not only may make consumers and businesses fear a long period of economic malaise, but also suggests that the Fed will start to raise rates if the economy shows signs of recovery.
“You are changing expectations in a way that makes people even more reluctant about how they’re going to spend,” said Michael Woodford of Columbia University, who recently wrote a major paper on the subject. “That’s a large part of the problem with the economy — a lot of people are saying, ‘We should wait and see.’ ”
Doug Roberts, chief investment strategist at Channel Capital Research, said small-cap stocks, technology shares and precious metals probably will be the chief beneficiaries of QE3.
“What QE3 does is inject liquidity,” he said. “Right now what you do is follow the Fed.”
Actually, what you do is front-run the fed, buy assets before they do, then sell them to the fed at inflated prices. Bond traders will do well.
Though the Fed is ostensibly politically independent, the decision comes at a ticklish time with the presidential election less than two months away.
Washington conservatives have been critical of the central bank’s money creation, which has caused its balance sheet to swell to $2.8 trillion. They worry that the growing money supply will lead to inflation, which has reared its head in food and energy prices but has remained tame through the broader economy.
Bill Gross, who runs bond giant Pimco, said the new round of easing would take the Fed’s balance sheet up to nearly $3.5 trillion if the purchases continue for a year.
“That potentially is reflationary,” he told CNBC. “We’re just to have to see if it works.”
Interesting that he chose the word “reflationary” rather than “inflationary.” The injection of free money will serve to reflate the housing bubble and bond prices — from which Bill Gross will profit.
Faced with an unemployment rate stubbornly above 8 percent and other indicators showing only halting signs of recovery, the Fed was pressed into action by a market worried that the nascent recovery was on wobbly ground and needed more stimulus.
That’s encouraging, isn’t it?
Two previous rounds of QE had uneven effects on economic growth though they did manage to levitate stock prices by more than 100 percent from their March 2009 lows.
Quantitative easing reflates asset values, nothing more. The injections of liquidity do little to stimulate consumer demand, which is what the economy really needs to recover. The best way to stimulate consumer demand would be to increase employment and wages and reduce consumer debts. Since lenders are unwilling to write off the debts of the Ponzis they enabled during the housing bubble, consumer demand is weak and likely to stay that way no matter how much money the federal reserve prints.
They tripled their mortgage
Did you know anyone who tripled their pay from 1999 to 2007? Times were good, and wages did rise, but not that much. And if wages didn’t triple, how did this family expect to pay the mortgage? Oh yeah, with more borrowing, right?
- The former owners of today’s REO paid $221,000 on 5/7/1999 using a $176,800 first mortgage and a $44,200 down payment.
- On 9/13/2000 they obtained a $15,000 stand-alone second.
- On 10/18/2002 they refinanced with a $212,000 first mortgage.
- On 4/27/2004 they refinanced with a $275,350 first mortgage.
- On 7/13/2004 they obtained a $88,457 stand-alone second.
- On 11/3/2005 they opened a $135,534 stand-alone second.
- On 3/1/2007 they refinanced with a $535,000 first mortgage tripling their original $176,800 mortgage from 1999.
Tripling the mortgage may have had something to do with their losing the property, don’t you think?
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Proprietary OC Housing News home purchase analysis
802 South HILDA St Anaheim, CA 92806
$409,000 …….. Asking Price
$221,000 ………. Purchase Price
5/7/1999 ………. Purchase Date
$188,000 ………. Gross Gain (Loss)
($17,680) ………… Commissions and Costs at 8%
============================================
$170,320 ………. Net Gain (Loss)
============================================
85.1% ………. Gross Percent Change
77.1% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$409,000 …….. Asking Price
$14,315 ………… 3.5% Down FHA Financing
3.54% …………. Mortgage Interest Rate
30 ……………… Number of Years
$394,685 …….. Mortgage
$102,541 ………. Income Requirement
$1,781 ………… Monthly Mortgage Payment
$354 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$102 ………… Homeowners Insurance at 0.3%
$411 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,649 ………. Monthly Cash Outlays
($266) ………. Tax Savings
($617) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$122 ………….. Maintenance and Replacement Reserves
============================================
$1,905 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,590 ………… Furnishing and Move In at 1% + $1,500
$5,590 ………… Closing Costs at 1% + $1,500
$3,947 ………… Interest Points
$14,315 ………… Down Payment
============================================
$29,442 ………. Total Cash Costs
$29,100 ………. Emergency Cash Reserves
============================================
$58,542 ………. Total Savings Needed
The property above is available for sale on the MLS.
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31 Responses to “Fed buys more mortgages to keep interest rates low”
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Oh lookie….. the central planners are attempting for a 3rd time to destroy the value of debt further so that govt can pay its debts in debased money fast enough before service costs go up from rising rates while simultaneously attempting to keep a lid on gold, ag and oil prices to defend the value of the dollar they want to debase to keep the economy going, even though it didn’t work the first two times.
The next leg down will be implacable.
I believe the Fed seeing in a different way and they aren’t looking that further down the road as you think they are doing now. What they are really concerning right now is whether the US economy is tiptoeing into recession because durable order is dropping hard lately. As a result, they want to prop up the equity market and housing market to entice consumer spending (2-5% increased spending per $1 equity gain or 10-15% spending per $1 RE gain). That’s the reason.
There are consequences to it and whether it works or not, I’m saying this “Paper isn’t the economy”
Unfortunately, spending the unrealized gains on asset values is a big part of what got us into this mess. As mentioned in a comment below, their solution is more of the same nonsense that created the problem.
There goes more punishment for being a saver.
Do they realize that only half the country, if not less (I hope), are habitual borrowers? The majority of us (again, I hope), are actually conservative with our money and like to have more of it then we give up.
Why reward only half the group at the expense of the other half. If they would instead reward the savers, those savings would then flow into the economy and actually stimulate much more then any FED action can.
“If they would instead reward the savers, those savings would then flow into the economy and actually stimulate much more then any FED action can.”
Savers are an expense to the banks whereas borrowers are income. When you see what the bank’s incentives are, it shouldn’t be surprising the central bank consistently favors those who make other banks money versus those who cost banks money.
I agree with you though. The economy would benefit more from rewarding savers versus spenders.
And don’t you think The Bernank or at least the other governors are smart enough to know that? I don’t understand why folks continue to take these statements at face value.
It’s not about the housing market. Everyone with two cents of sense in economics knows very well that the cure for a bubble is not attempting to re-inflate it. They know that, too. Protestations that this is all to protect homeowners is all just fluff and nonsense for credulous journalists and voters.
It’s not even about the economy any more, at least not directly. Again, anyone with a brain understands that still MORE easy borrowing is not going to goose consumer demand, or cure a massive misallocation of capital caused by — wait for it! — too much easy borrowing. Again, they’re not stupid. If it seems like they keep issuing the same dumb as a rock economic arguments, consider the possibility that they’re lying, not stupid. You don’t get to be Chairman of the Federal Reserve by being an economic ignoramus. But you may very well have to be good at lying to the public (for it’s own good, of course, tee hee).
Bernank even went as far as he dared at revealing the real problem, with his hints about the necessity for a “fiscal solution” in DC. That’s as much as he can say, very likely, without running the risk of bringing down the house of cards.
The problem is very simple. The Federal government needs to borrow $125 billion dollars every single month, for the forseeable future. If they have to borrow that at anything remotely resembling normal interest rates, the Federal budget would explode from the interests costs, and there would be — as even the most passionate Ronulan advocate of small government would have to agree — an immediate and hideous effect on the US economy (not to mention all those Democratic brain-trust guys, including Bernanke and his boss Obama,would be hanging from lampposts at the hands of enraged citizens).
So Bernanke needs to print money to keep the Federal borrowing costs low low low, for as long as they need to keep borrowing that horrible number. I’m sure he would like to have all that easy money to goose the economy so that Federal tax receipts soar and push down the borrowing. He and Team Obama have been rubbing the lantern, clapping their hands, and wishing real hard for nigh on four years now, for that outcome. But whether it happens or not, he simply must keep the printing presses on, at this point.
Is it a coincidence QE3 amounts to about half the government borrowing needs, which is about what the Fed has been supporting already? Is it a coincidence that it arrives just a few short weeks ahead of the next debt-ceiling debate? Hmm.
Very astute observation. Thank you.
That is grim. I was happier assuming Ben was just a bank flunky that wanted to make banks richer.
Bernanke was originally appointed by G.W…
They are simply buying time to loot the treasury while purchasing power is relatively high, exit stage left, and watch this sovereign debt crisis ensue.
Massive shift in wealth from paper to hard assets.
While I agree, and realize that they are not dumb, all that this is accomplishing is “kicking the can down the road”.
How do you solve a debt problem with more debt? What is the end game?
All they do by delaying is hurt the savers and reward the irresponsible, which plants the seeds of the next crisis.
Congressman Takes Eminent Domain Battle to D.C.
Rep. John Campbell (R-California) introduced to Congress a piece of legislation designed to keep local governments from using eminent domain to seize homes with underwater mortgages.
Titled “The Defending American Taxpayers from Abusive Government Takings Act,” the bill would prohibit Fannie Mae, Freddie Mac, FHA, and the Veterans Administration from purchasing or guaranteeing loans originating in counties where a municipality has seized a mortgage loan through eminent domain in the last decade.
Campbell said the act is intended to protect taxpayers’ investments and preserve the rule of law.
“There is no question that we need to take steps to assist American homeowners in distress,” Campbell said in his introduction of the legislation.
“But these steps must not undermine rule of law, must not engage in corruptive and abusive practices, must protect the American taxpayer, and must not further degrade the housing market,” he continued.
In a release, Campbell’s office points out that widespread use of eminent domain powers to seize mortgage loans may result in Fannie and Freddie losing up to 30 percent in the private-label residential mortgage-backed securities in their portfolios.
As an alternative to the eminent domain program, Campbell and Rep. Gary Peters (D-Michigan) introduced H.R. 5940, “The Preserving American Homeownership Act.” This bill would direct Fannie/Freddie conservator FHFA to establish a program to pilot principal reduction programs for loans owned or guaranteed by the GSEs.
Campbell’s bill has already seen support from the Mortgage Bankers Association (MBA).
“While the problem of underwater borrowers continues to slow the housing recovery, using eminent domain to take those mortgages is not a responsible answer,” said MBA president and CEO David Stevens. “Beyond the obvious legal issues of using eminent domain in such a radical way, the government seizing mortgages would set a precedent that will hurt those communities and borrowers it is most designed to help.”
The Defending American Taxpayers from Abusive Government Takings Act is currently awaiting consideration in the House Committee on Financial Services.
Behind the Fed’s New Round of Stimulus: Will It Help Housing?
As of Thursday, homebuyers could get a 30-year fixed-rate mortgage at an average interest rate of 3.55%, according to Freddie Mac FMCC +3.92%, meaning borrowing money to buy a home is very close to as cheap as it has ever been.
Don’t look now, though—those rates could fall even lower.
The Federal Reserve is launching a third round of “quantitative easing,” or start buying mortgage-backed securities guaranteed by government-sponsored entities at the rate of $40 billion per month, in a move meant to put downward pressure on long-term interest rates, especially mortgages.
The goal, the Fed says, is to stimulate the economy by pushing up the value of assets like stocks and homes, spurring employers to hire more and spurring more consumers to buy homes or refinance their mortgages and pump the savings back into the economy by spending it.
“If house prices are rising, people may be more willing to buy homes, because they think that they’ll, you know, make a better return on that purchase.” said Fed Chairman Ben Bernanke in a news conference Thursday. “One of the main concerns firms have is that there’s not enough demand.”
But a number of analysts and economists were skeptical about whether this latest round of bond-buying will have much effect on the housing market. For one thing, one of the main things holding back the housing recovery is that many consumers have bad or damaged credit after losing their jobs or missing payments during the downturn, making them ineligible for loans—something the Fed is powerless to change.
Millions of others simply don’t have enough savings for a down payment, or aren’t confident enough in the economy to take the plunge and buy a house. If the Fed’s actions stimulate the economy enough to broadly improve consumer confidence, it could have an effect, but there is no guaranteed impact.
“I do think it’s going to have enough force to move the economy in the right direction,” Mr. Bernanke said Thursday. “These tools are at least able to provide meaningful support to the economy.”
Here’s what other people are saying about QE3:
Nishu Sood, housing analyst Deutsche Bank DBK.XE +4.97%: “Apart from the general economic effects of QE3, whereby any increased job growth would drive greater housing demand, the main housing impact would be through lower interest rates. However, we don’t think the effect is going to be that significant, for a couple reasons: (1) Mortgage originators haven’t been fully passing on lower rates to borrowers because they have more business than they can handle. (2) Overall rates are already low enough to spur a lot of refis, it would take a material further drop in rates to take this trend a lot higher. 3) The level of mortgage rates isn’t the problem – it’s restrictive credit overlays. For example we have been doing a rent vs. buy analysis for many years and the relative attractiveness of owning has been at historic highs for several years already.”
Jack Micenko, analyst, Susquehanna Financial Group: “It’s hard to see where this is directly positive in stimulating housing demand. Yes, it will lower rates some, but low rates clearly aren’t driving a massive demand for new housing loans. We are recovering, but it’s modest. Will lower rates make banks less risk averse? Unlikely, because it’s even harder to get paid for that risk. And we are coming out of a refinancing wave now so most people already have loans in that 3.5 to 4% range. Rates would need to fall on the 30-year fixed-rate mortgage to about 3% for it to spark more refi demand, apart from [government refinancing program] HARP, of course. This shows that the Fed won’t let economy slip and that’s generally good for housing, but rates are so low that pushing it a bit further down doesn’t have the impact it once did.”
Jim Vogel, interest rate strategist, FTN Financial: “This gives the entire mortgage/housing market more time to continue down the long road toward a stable recovery. Previous improvements in housing have faltered when rates stopped falling. Now, continued Fed buying should remove the overhang of the potential for rates eventually going back up. Consumers may not see an immediate benefit, but keeping the housing window open for another several quarters is a strong positive for household balance sheets and housing affordability.”
Falling incomes: More bad news for housing
The median income of American households decreased by as much in the two years after the official end of the Great Recession as it did during the recession itself. The latest estimates from the Census Bureau show that the median income for U.S. households in 2011 was $50,054.1 In 2009, the year the Great Recession ended,2 the median income of U.S. households had been $52,195 (in 2011 dollars). Thus, in the two years since the end of the recession, median household income has fallen by 4.1%.
The decrease in household income from 2009 to 2011 almost exactly equaled the decrease in income in the two years of the recession. During the Great Recession, the median U.S. household income (in 2011 dollars) dropped from $54,489 in 2007 to $52,195 in 2009, a loss of 4.2%. By this yardstick, the recovery from the Great Recession is bypassing the nation’s households.
I have never understood how the solution caused to the problems created by a long season of cheap money involve the creation of more cheap money. This is like the drunk who just needs one more (little) drink so he can be ready for his 12-step meeting – or so it appears to me. I am not economist.
Bill
If all you have is a hammer, everything looks like a nail.
The federal reserve doesn’t know any other way to solve financial problems other than more of the same thing that caused them.
Or they’re trying to solve an entirely different problem — the cost to the government of its borrowing. See above.
If I overborrowed, went to kinkos, color copied counterfeit $100s, paid my debts, and they would let me get away with it; I would.
That’s exactly why politicians do it.
Is it fair to now say, that any renter with the ability to purchase a house (credit + capacity) is “fighting the Fed” and losing?
We all know higher-end OC house prices are too high, but when do we start sounding like a hedge fund guy shorting a stock with terrible fundamentals while losing his shirt, yet still decrying “The market’s wrong!”?
“Is it fair to now say, that any renter with the ability to purchase a house (credit + capacity) is “fighting the Fed” and losing?”
I think that’s a fair assessment of the situation. Rents are going up and wlll likely continue to do so. Rates are very low and likely to stay that way. The fed has created the incentives necessary to induce buying — it’s cheaper to own. And unless prices go up significantly, it’s likely to be cheaper to own for the foreseeable future, probably until this mess is mopped up.
Problem is, it’s only ”cheaper to own” on paper.
It’s cheaper to own………gold.
Give credit where credit is due…
el O has been calling QE3 since about the second QE2 ended. Nice one amigo.
IR- I knew Bernanke’s proverbial middle finger to seniors would get your attention. You were the first person I thought of when I read his comments earlier.
Have a nice weekend guys.
Thanks, Mellow Ruse. Have a good weekend.
[...] is super low interest rates, and those are likely to be with us for a while, particularly now that the fed is printing more money to buy mortgages. Agents will then begin talking more frequently with actual homebuyers – seeking them out from [...]
[...] of the reasons the federal reserve recently began buying more mortgage-backed securities is to lower home mortgage rates to stimulate housing. The collapse of the housing bubble is causing [...]
[...] is super low interest rates, and those are likely to be with us for a while, particularly now that the fed is printing more money to buy mortgages. Agents will then begin talking more frequently with actual homebuyers – seeking them out from [...]
[...] is super low interest rates, and those are likely to be with us for a while, particularly now that the fed is printing more money to buy mortgages. Agents will then begin talking more frequently with actual homebuyers – seeking them out from [...]
[...] of the reasons the federal reserve recently began buying more mortgage-backed securities is to lower home mortgage rates to stimulate housing. The collapse of the housing bubble is causing [...]
[...] of the reasons the federal reserve recently began buying more mortgage-backed securities is to lower home mortgage rates to stimulate housing. The collapse of the housing bubble is causing [...]