Dennis' Mortgage Blog

Question of the week:  I read in the paper that the Federal Reserve was taking mortgage money and buying Treasury bills, what does that mean?

Answer:  It means that the low interest rates are enabling continued low interest rates as refinancing homeowners allow one sector of the government to buy debt from another sector of the government. 

Let’s recap.  In 2009 and through March 2010 the Federal Reserve, aka the Fed, purchased $1.25 Trillion of mortgages on the secondary markets.  The purpose of this program was to keep mortgage rates low and support the housing markets.  At the completion of the program the Fed had $1.25 Trillion of mortgages and the question became, “what is the Fed going to do with $1.25 Trillion in residential mortgages?”

Speculation about how and when the Fed would liquidate its massive mortgage portfolio was a good topic to fill any awkward silences in conversation.  If the Fed announced it would sell the holdings during a period of time the market would react to an oversupply, prices would plummet and rates would jump—hurting the housing markets. 

Well the mortgage market has solved its own problem, well the mortgage markets and the rest of the economy.  Second quarter economic news has been so not-positive, just plain flat and stagnant, that growth has almost stopped.  Fearing a slide from first quarter growth to second quarter stagnation to possible third quarter contraction the Fed and others have reacted with measures that caused mortgage rates to drop further after the Fed mortgage purchase program ended rather than increase, which was the common wisdom.

Because interest rates have dropped many homeowners who acquired mortgages in 2009 and early 2010 have refinanced those mortgages, thereby paying off their portion of the mortgage debt held by the Fed.  The early pay-offs are shrinking the Fed’s mortgage holdings by up to $20 billion per month. What is the Fed doing with this $20 per month? Same thing it has done with the repayments from TARP and interest and dividends from government stock holdings: buying more debt.

This week the Fed announced that it holds a little over $2 Trillion in securities, government bonds and mortgages.  It plans to maintain that level of investment in securities by converting paid off mortgage money to Treasury bills.  Knowing it has a constant source of funds in the market of $20 from the Fed the Treasury markets will have positive pricing and continued low rates.

The good news?  Some think continued low rates is good news, others feel rates need to rise to get banks and companies out of cash and into investing.  On a more macro scale by homeowners refinancing to lower interest rates the Fed is essentially refinancing, or financing, government debt to lower interest rates reducing the burden on future budgets to pay for the current $1.4 Trillion and growing federal deficit. 

Refinance, it’s patriotic!

Have a question for me?  Ask me!

How does this make you feel about the economic future?  “The pace of economic recovery is likely to be more modest in the near term than had been anticipated.”  “More modest?”  That is the Federal Reserve’s statement after its meeting on Tuesday, essentially backpedalling from Fed Chief Ben Bernanke saying at the end of July the Fed was forecasting a 3% plus growth in GDP this year.

Not with numbers like these:  Initial unemployment claims jumping ahead of expectations again to 484,000 filings; retail sales ex-autos at only 0.2% (that is zero point four percent, not forty percent) ahead of June, GDP revisions below 2%, Consumer Price Index, an indicator of consumer activity, at only 0.3% and 1.2% for the year.  “Yeah but no inflation is good right?”  Not if no inflation is because there are no jobs.

Despite the low mortgage rates,  the Freddie Mac weekly rate survey breaking new ground yet again this week at 4.44% at cost of 0.7 origination points for national average, applications are at a plateau.  Total applications for the week ending August 6^th are reported up only 0.6% by the Mortgage Brokers Association.  No real increase in either refinances or purchases.  Refinances still holding at 78% of total applications.

Broken Record Alert! Jobs, jobs, jobs.  In the private sector.  That is the only segment of the economy that can pull the economy out of its malaise and inspire any growth in consumer spending, tax revenues and new job creation.  Every job created in the private sector creates a portion of a job elsewhere as that new worker has funds to spend on shelter, food, clothing and other essentials, plus wants like new television, a round of golf or BlueRay player.  Jobs.  Private sector jobs.  Until we see the private sector hiring at over 150,000 per month we can expect the economy to float around like that balloon your kid brought home from the birthday party…last weekend..bouncing on the floor.

Rates for Friday August 13, 2010:  Markets made a good move down on the Fed’s pessimism but profit takers jumped in with both feet yesterday and kept rates pretty flat from last Friday.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.00%                              Flat

30 year conforming-jumbo 4.375%                   Flat

30 year FHA    4.00%                          Flat

30 year FHA jumbo 4.37                                 Down 0.125%

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. 

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

On Friday the 13^th the talk is always of triskaidekaphobia, do you know anyone, or are you, triskaidekaphilia? 

Have a great week,

Dennis