Dennis' Mortgage Blog

Question of the week:  What happened?

Answer:  Usually if I repeat a question it is several months or even a year later, this is a repeat from the August 5^th Weekly Rate & Market Update, when the Dow Jones had dropped 500 points in one day.  At the end of the answer to “what happened?” I said, “Hang on folks, it will be an interesting autumn.”  Today is the first day of autumn  and it is interesting.

Earlier this week the Federal Reserve Open Market Committee (FOMC) met, as they do with regularity, and there was considerable speculation as to what the Fed would do to try to stimulate a moribund economy—perhaps even an economy again in recession.  As I commented last month  in the link above, the Fed’s options are extremely limited.  Those following my blog posts and YouTube presentations have seen the beneficiaries of Fed policies from the last few years have been primarily investors in stocks, gold and bonds.  The beneficiaries have not been those looking for jobs.

On Wednesday the Fed finished its meeting and announced “the Twist” as its latest, and perhaps only, move to try to help push the economy forward.  The Twist will see the Fed sell its short term Treasury bills and take the proceeds and purchase long term Treasury bonds, the goal being to turn $400 billion in shorts to longs.  At the same time the Fed will reinvest the principal it recoups from mortgages it holds that pay off back into the mortgage backed securities markets.

By turning the portfolio from short term to long term bonds and recirculating their mortgage pay-offs back into mortgages the Fed is moving to keep long term interest rates extremely low. 

Key to this most recent Fed move is that no additional money will be put into the economy; which makes this policy much different from the Fed’s two quantitative easing policies (QE1 and QE2) in which approximately $2 trillion dollars in new money was pushed into the economy.  As mentioned above the primary beneficiaries of QE1 and QE2 were stocks and gold. 

In making its Twist announcement yesterday the Fed said that there is grave concern about the economy and its current stall.  The Wednesday announcement followed on the heels of Secretary of Treasury Timothy Geithner’s weekend visit to Europe to meet with bankers, treasurers and other financial leaders in Europe to determine what could be done to prevent Greece from total economic collapse.  Geithner came home empty handed signaling the eminent demise of Greece.

Greece doesn’t go alone, when it goes European banks will fail, when they fail extreme stress will be put on American banks. 

The reality of European excess in government spending, our own federal deficit issues and economic data that has been showing all summer that we could be in another recession hit investors on Wednesday.  Finally.

As a result investors have fled stock markets and invested heavily in bonds, and mortgages.  The result has been plunging stock prices and interest rates.

As I said in August, hang on, it will be an interesting autumn.

Have a question?  Ask me!

This week’s blog posts:

Will the Fed do the Twist? If so Mortgage Rates May Go Up  On the day before The Twist was announced I look at how it could push rates up instead of down.  For two days I was wrong as rates dropped; they pushed back on Friday to wipe out Thursday’s gains.  We’ll see in about a month if I continue to be wrong or if investors bail out on mortgages before being undercut by the Fed.

Mortgage Rates Drop on the Twist a YouTube video showing comparison of mortgage and Dow Jones charts on the day The Twist was announced, it was a day I have never seen in my career.

Shel Silverstein has written many children’s books with funny sayings and titles such as “Falling Up.”  It brings to mind something Larry Baer, a mortgage analyst heavily subscribed to in the industry, says.  When analyzing a market Baer often issues a caution with the statement, “markets rarely crash up.”  On Wednesday and Thursday mortgage markets crashed up.

Lost in all the news about the Twist, Europe and markets crashing down and up was that existing home sales increased in August.  Seems like it should be bigger news than it was.

Mortgage rates cannot get lower.  I will probably write more about this on the blog next week, for now the simple explanation is that mortgage rates are based on Mortgage Backed Securities.  These securities are part of issues with certain interest rates, or coupons.  The lowest 30 year fixed rate coupon for Fannie and Freddie is 3.75%, for a 15 year it is 3.25%.  So rates cannot go below these rates until, and unless, lower coupons are issued.  Since rates cannot go lower what results is credits from lenders to borrowers for the rate chosen increase.  This fouls up my mortgage rate chart I have been issuing for over five years. 

Rates for Friday September 23, 2011: Even with the mortgage market losing ground gained yesterday in profit taking rates, except for high-balance conforming which is close, are on the bottom.  With today’s poor mortgage market we lost credits not interest rate.  Until Fannie, Freddie and Ginnie offer lower coupons for investors you cannot go below 3.75% for 30 year fixed rate financing for conventional or government mortgages. 

FIXED RATE MORTGAGES AT COST OF 0 (zero) POINTS*

30 year conforming                               3.75%               Down 0.125%+ credits

30 year high-balance conforming           3.875%             Down 0.25%

30 year FHA                                         3.75%               Flat

30 year FHA jumbo                              3.75%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Call for quotes as each day credits are varying depending on several factors.

A tinge of fall in the air as the sun rises a bit later every morning and sets a bit earlier.  School is in full session, household routines are back to “normal” following summer schedules.  Hope your summer was great and that you have a terrific fall.

Have a great weekend everyone, I’ll be riding the laptop and cell phone if you need me!

Dennis