Feb092017
Mortgage rates will rise when the Federal Reserve stops buying mortgage bonds
The Federal Reserve’s oft-forgotten policy of buying mortgage-backed securities helped keep mortgage rates low over the last several years.
The monthly housing market reports I publish each month became bullish in late 2011 due to the relative undervaluation of properties at the time. I was still cautious due to weak demand, excessive shadow inventory, the uncertainty of the duration of the interest rate stimulus, and an overall skepticism of the lending cartel’s ability to manage their liquidations.
In 2012, the lending cartel managed to completely shut off the flow of foreclosures on the market, and with ever-declining interest rates, a small uptick in demand coupled with a dramatic reduction in supply caused the housing market to bottom.
Even with the bottom in the rear-view mirror, I remained skeptical of the so-called housing recovery because the market headwinds remained, and the low-interest rate stimulus could change at any moment. Without the stimulus, the housing market would again turn down.
It wasn’t until Ben Bernanke, chairman of the federal reserve, took out his housing bazooka and fired it in September 2012 that I became convinced the bottom was really in for housing. Back in September, Bernanke pledged to buy $40 billion in mortgage-backed securities each month for as long as it takes for housing to fully recover. With an unlimited pledge to provide stimulus, any concerns about a decline in prices was washed away.
In addtion to buying new securities, the federal reserve also embarked on a policy of reinvesting principal payments from agency debt and mortgage-backed securities back into mortgages — a policy they continue to this day.
Everyone Is Suddenly Worried About This U.S. Mortgage-Bond Whale
by Liz McCormick and Matt Scully, February 5, 2017
Almost a decade after it all began, the Federal Reserve is finally talking about unwinding its grand experiment in monetary policy.
And when it happens, the knock-on effects in the bond market could pose a threat to the U.S. housing recovery.
Just how big is hard to quantify. But over the past month, a number of Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its unprecedented quantitative easing during and after the financial crisis. The talk has prompted some on Wall Street to suggest the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stashof mortgage-backed securities.
While the Fed also owns Treasuries as part of its $4.45 trillion of assets, its MBS holdings have long been a contentious issue, with some lawmakers criticizing the investments as beyond what’s needed to achieve the central bank’s mandate. Yet because the Fed is now the biggest source of demand for U.S. government-backed mortgage debt and owns a third of the market, any move is likely to boost costs for home buyers. …
In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Getting out of the bond-buying business as the economy strengthens could help lift 30-year mortgage rates past 6 percent within three years, according to Moody’s Analytics Inc.
It’s difficult to imagine that losing a buyer of that magnitude wouldn’t cause prices to fall, thereby raising yields and mortgage interest rates.
The surge in mortgage rates is already putting a dent in housing demand. Sales of previously owned homes declined more than forecast in December, …, according to data from the National Association of Realtors.
People are starting to ask the question, “Gee, did I miss my opportunity here to get a low-rate mortgage?” …
While this may close the door on the opportunity to get a low rate, it opens the door on the opportunity to get a low price.
People can only afford what they can afford. If their payment stretches to finance huge sums like they do today, then prices get bid up to that equilibrium price level. If their payment finances a smaller sum, like they will if mortgage rates rise, then prices will need to “adjust” downward to this new equilibrium price level.
I wouldn’t count on a big drop. Prices are sticky on the way down, particularly without a flood of foreclosures to push them down. Today’s owners with low-rate mortgages won’t sell unless they really need to, and lenders would rather can-kick than cause another foreclosure crisis, so any downward movement would be slow.
As prices creep downward, rents and incomes will rise offsetting some of the pain, and those buyers that are active will substitute downward in quality to something they can afford. It’s a prescription for low sales volumes and unhappy buyers and sellers. The buyers pay too much, and the sellers get too little.
Nevertheless, the consequences for the U.S. housing market can’t be ignored.
The “Fed has already hiked twice and the market is expecting” more, said Munish Gupta, a manager at Nara Capital, a new hedge fund being started by star mortgage trader Charles Smart. “Tapering is the next logical step.”
As the federal reserve tapers its purchases of mortgage bonds, it opens up this market to private investment. Perhaps money will flow out of 10-year treasuries into mortgage-backed securities for a little more yield. It’s also possible that Congress will reform mortgage finance and remove the government guarantee from these securities, making them less desirable.
It’s entirely possible that the yield on the 10-year treasury will drop this year. Higher short term rates and a strengthening economy means the US dollar should appreciate relative to other currencies, attracting foreign capital. Once converted to US dollars, that capital must find someplace to invest, and US Treasuries are the safest investment providing some yield. If a great deal of foreign capital enters the country and buys treasuries, yields will drop, and mortgage rates may drop with them. Rising mortgage rates are not a certainty.
For now, the federal reserve will keep buying mortgage-backed securities, but the messy taper is on the horizon. Apparently, when it comes to boosting housing, Yellen plans to stay the course.
Trump Can Now Re-Create the Housing Crisis That Got Him Elected
After meeting with Wall Street executives today, President Donald Trump signed a directive to begin dismantling the federal regulations enacted after the financial crisis to prevent the same thing from happening again. The end of Dodd-Frank could return the nation’s financial system to the Wild West days that prevailed before 2008—the lending environment that precipitated the Great Recession.
President Trump’s sweeping directive is darkly ironic. For starters, he castigated the Wall Street players at the heart of the foreclosure crisis during his campaign. Trump once called JP Morgan Chase CEO Jamie Dimon “the worst banker in the United States.” As president, he has invited Dimon into his circle of Wall Street confidants, whom he met with on Friday.
On the other hand, Trump promised to overturn Dodd-Frank from the very beginning of his campaign. So the greater irony here is that, by sweeping away banking regulations, Trump promises to punish his core supporters. The same supporters who, in part, voted him into the White House because they are still suffering from the foreclosure crisis.
Wishful thinking…
Housing demand may keep market afloat, even if rates rise
How will the housing market handle rising rates?
Ever since the November election, when the unexpected Trump victory sent bond yields flying and mortgage rates following closely behind, analysts have been preoccupied with that question. From overly cautious lending standards to extremely tight inventory, the housing market has plenty of challenges, and any additional constraint won’t help.
But new data from Black Knight Financial Services suggests that demand might be resilient enough to withstand higher borrowing costs in 2017.
The last time mortgage rates spiked was in mid-2013, when then-Fed Chairman Ben Bernanke warned markets that the central bank would shortly begin to unwind its extraordinary stimulus programs. Rates jumped a full percentage point between April and September, and mortgage applications plunged.
So did home price appreciation.
In an illiquid market like housing, it takes time for prices to respond – in this case, until August, when they were rising at an annual rate of 9%. Then appreciation fell every month for over a year until hitting bottom.
When price gains finally starting rising, in early 2015, they kept going. Lower rates helped boost demand, and that was reflected in stronger pricing, said Ben Graboske, Black Knight’s vice president of data and analytics.
This should surprise no one.
Realtors ask Trump to reinstate FHA mortgage insurance premium cut
The National Association of Realtors believes that the Trump administration’s recent decision to suspend a reduction in the Federal Housing Administration’s annual mortgage premiums will keep as many as 40,000 potential homebuyers from becoming actual homebuyers in 2017, and wants the premium cut reinstated “as soon as possible,” the trade organization said last week.
In one of the Trump administration’s first actions after President Donald Trump took the oath of office, the Department of Housing and Urban Affairs suspended a cut to the FHA’s mortgage insurance premiums, which was announced by the outgoing Obama administration in early January.
The cut had not taken effect when the Trump administration announced its intention to suspend the MI premium reduction, but in a letter addressed to Ben Carson, Trump’s choice to lead HUD, NAR said that the suspension of the FHA mortgage insurance premium cut caused “uncertainty and confusion” in the housing market and cost many consumers the opportunity to buy a home this year.
“NAR estimates that the premium reduction would have reduced costs for 750,000 to 850,000 homebuyers in 2017 with mortgages backed by the FHA. In addition, it would have made homeownership possible for an additional 30,000 to 40,000 homebuyers,” the trade organization said in its letter to Carson.
“The suspension of the premium reduction has created uncertainty and confusion for a significant number of borrowers, sellers, lenders and underwriters who entered into a new or refinance mortgage transaction in reliance on the reduced rates,” NAR continued. “These borrowers must face an increase in the cost of their loans and some may no longer qualify to purchase the home they intended to buy due to the increase in the premium rates.”
On the flip side, reinstating the cut could cause “uncertainty and confusion” among taxpayers, especially if they are called upon, once again, to bail out the FHA.
I read another article today about how mortgage insurers aren’t thrilled about the idea of an FHA rate cut because it will force them to lower their prices for PMI.
I fully expect Trump to do this.
Here’s the easiest way for Trump to fire CFPB Director Cordray
But there is a way for Trump to easily fire Cordray, and he would only need to issue one order, according to the article from WSJ. Trump could order Cordray to withdraw the appeal.
From the article:
The Constitution vests all executive authority in the president. There is no fourth branch of government to house truly “independent” agencies. If the president were to instruct Mr. Cordray to abandon his appeal, that order would seem to be perfectly appropriate—and constitutional. Moreover, the Dodd-Frank Act specifically requires that the CFPB coordinate with the Justice Department on litigation. The bureau must also seek the attorney general’s consent before representing itself before the Supreme Court.
Ordering Mr. Cordray to drop the appeal would put him in a quandary. If he complies, the opinion from last fall becomes law, and he may be fired “at will.” If he refuses, then he may be fired for directly challenging a presidential order.
This is karma for a guy that truly deserves it. He has put so many businesses into quandaries that are impossible to comply with, followed by draconian punishment, it’s nice to see that the worm has turned. I’m not just talking about his time at CFPB either, but his tenure as Ohio Solicitor as well. This guy is a serious opportunist that only cares about justice when it serves as a stepping stone to higher political office.
If Trump fires him, that will help bring him to prominence in the Democratic party.
Trump would do better to wait until next year and just appoint his own man then. He will burn up political capital for a battle he can win by simply avoiding the fight and waiting a year.
Bay Area immigrant tech workers are pulling out of buying real estate over Trump visa concerns
Some Bay Area immigrant tech workers are pulling out of buying local real estate over concerns that President Trump’s H1-B visa plan could force them to return to their home countries, local real estate agents report.
Business Insider cites real estate agent Tim Gullicksen, who said he recently had an Indian couple pull out of an imminent sale because they weren’t sure they’d be able to come back from India under the Trump administration’s evolving immigration policy.
“We were just about to submit an offer that was due … today, actually,” Gullicksen told the site. “A couple days ago, they said, ‘We loved that house but we’re really nervous about spending that much money and maybe not staying here.”‘
The nerves surrounding Trump’s plans for holders of H1-B visas have continued as a series of court cases wend their way through the legal system in an attempt to clarify who will and who will not have freedom of movement in and out of the U.S. H1-B visa holders are also concerned about what would happen to their real estate investments here if they are expelled from the country.
“[It] appears Trump will go after the H-1B visa directly in an attempt to open up more jobs for American workers, according to a leaked draft of a new executive order,” Business Insider reports. “In the hypothetical situation that an immigrant worker gets their H-1B visa revoked shortly after buying a house, they would have to pay between 6% and 7% of the home value in closing costs and transfer tax, a one-time fee imposed on the owner when a property changes hands.”
The H-1B visa program is being abused by companies as a way to suppress the wages of their workers. It’s supposed to apply only to jobs that can’t be filled in the US, but it often times leads to layoffs of American IT staff. (See the expose on Disney Corp as a notorious example.) The program needs a complete overhaul.
Perhaps the contractors on Trump’s wall can issue H-1B visas to the Mexican rapists they need as laborers.
You know there is a website for job openings in the Trump administration. I think you may have found your calling.
The company I work for uses an alternate method to offshore jobs. They use some 3rd party agency to hire workers in India, Philippines, etc. and then those folks just login remotely from their country and work using our computers here in the United States.
Thousands in the U.S.A. have been laid off and replaced with these cheaper workers that simply work from their respective countries.
Trump jumps the shark.
SUCKERS
The Freedom To Be Fleeced—How Donald Trump Made Financial Hustles Great Again
Donald Trump came out last Friday for a freedom most Americans never imagined they wanted and that only financial predators would embrace: the freedom to be fleeced.
In a memo to the Labor Department, Trump took an initial step to making it easier for financial advisors to rake in more in fees for themselves, leaving clients with less money for old age. He instructed the Secretary of Labor to delay implementation of a new rule that would have extended fiduciary responsibility to all financial advisors handling retirement accounts.
Requiring financial advisors who manage retirement savings to put the interests of their clients first (a principle known as the fiduciary standard that requires “a duty of loyalty”) “may not be consistent with the policies of my administration,” Trump wrote in a Feb. 3 memorandum to the Secretary of Labor.
Putting clients first “may adversely affect the ability of Americans to gain access to retirement information and financial advice,” Trump wrote.
Come on Larry get real. From my perspective if you believe that Barney Frank or Chris Dodd had the American Public interest at heart you are delusional.
What would you say their goals were? Their legislation succeeded in making the mortgage market much safer which translates to more stable home prices. Dodd-Frank also restricts the ways Wall Street can rip off Main Street, which looks to me like it is in the public interest.
Their goals were to increase government power and authority. Citizens are more dependent on government for everything now. Government now has additional controls on their house (via dodd frank) and bodies (via the affordable care act).
I still think the Affordable care act is doing as it was designed to do which is fail. This then forces congress into single payer which they couldn’t originally sell to the public.
what color are those black helicopters when you get really close?
I’m not that cynical about government. When you think about what Wall Street did 10 years ago, they clearly demonstrated that if they aren’t regulated, they will find a way to destroy markets and the people who depend on them. The regulations in Dodd-Frank don’t put any restrictions on people. It puts many on lenders, but even those restrictions were common sense things like don’t loan money to people who won’t pay it back, and keep enough money in the vault to cover your losses. The only restrictions it puts on lending pertain to mortgages, and even then, it allows banks to get around the restrictions if they use their own money and maintain sufficient capital reserves to cover the losses. This entire issue is one gigantic right-wing propaganda campaign to convince people something is wrong when it isn’t.
The institutions that were too big to fail (TBTF) back in 2008 are even larger today!
Rolling back regulations on TBTF institutions that are even bigger today than in 2008 can’t end well for the consumer or the tax payers. Since they expect to be bailed out again.
The fact the banks are not keeping their own money in mortgages should be a glaring red flag on the quality of those products. The entire mortgage market exists on a Government guarantee which means they are AAA dog crap investments.
The fiduciary rule is a ruse. Their goal was to undermine the small regional banks so they could be gobbled up by the big banks. If Banks were too big to fail in 2008 what are they now? How has Dodd-Frank made that better?
By the way I would not call home prices in the bay area stable. Home prices have been kited by controlling supply and not pursuing foreclosure.
I do not think too big to fail banks and fake home prices are in the public interest.
Dodd-Frank forced the TBTF banks to provide plans for winding them down, and several larger companies have dowsized to avoid the additional capital requirements (MetLife), so Dodd-Frank hasn’t been a failure on that front.
The most disingenuous bullshit about Dodd-Frank comes from Jeb Hensarling. He claims his bill will dismantle the TBTF banks, but since he gets most of his campaign money from financial institutions, it’s unlikely any provisions of his proposal that would break up the TBTF banks would actually be implemented.