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zugzwang

Us Mortgage Rates Not Loving The Taper

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Fannie and Freddie get anxious. Oh, Benny. What have you wrought?

http://www.testoster...ng-housing.html

The feverishly awaited taper announcement, after months of deafening Fed cacophony, is in the can. The Fed, unless it backtracks again, will cut its purchases of Treasuries and Mortgage Backed Securities by $10 billion in January, and possible every month until it's done with its money-printing and paper buying binge. The program repressed mortgage rates and inflated the value of MBAs.

But mere talk of ending it has sent mortgage rates soaring – and mortgage applications plunging to the "lowest level in more than a dozen years," lamented the Mortgage Bankers Association. The Refinance Index has crashed. The all-important Purchase Index is now 12% lower than last year.

People who need mortgages to buy homes – hence, not hedge funds, private equity firms, oligarchs, and other sundry investors – have been throttling back. It's just getting too darn expensive. Home prices have soared over the last two years. And mortgage rates have soared since May. A toxic concoction.

The average contract rate for 30-year mortgages with conforming loan balances ($417,000 or less) rose to 4.62%, up from 3.59% in early May. Over a full percentage point. Just on taper talk – though the Fed has continued its bond-buying binge with relentless determination. Where will mortgage rates go when the Fed actually stops trying to repress them?

Interesting times.

Now comes part three of the debacle, after soaring home prices and mortgage rates. It was drowned out by the hullaballoo over the Fed's taper announcement. It came from our favorite bailed-out, taxpayer-owned Fannie Mae and Freddie Mac that purchase mortgages from banks and then either keep them on their books or stuff them into MBAs that they sell with some guarantees. Biggest buyer? The Fed. It has been plowing $40 billion a month into them – to be reduced to $35 billion in January.

The banks love this system because they get the fat fees from originating the mortgage without having to absorb the risks. The GSEs and the Fed run the show. Banks are involved just enough to cream profits off the transaction. It's not exactly the paragon of a free market. But there are some efforts underway to encourage private capital to play a larger role. So last week, the Federal Housing Finance Agency announced that it would impose a 10 basis-point increase (1/10th of 1 percentage point) in guaranty fees that Fannie Mae and Freddie Mac charge banks. And now Fannie Mae and Freddie Mac have announced that they would revamp their risk-based matrix of fees that they charge lenders.

Lenders roll these fees into the mortgage, which drives up monthly payments. The change will hit borrowers with a so-so credit score who cannot come up with a down payment of at least 20% – hence the majority of all borrowers – the hardest.

"What had been an exercise by regulators to systematically attract private capital into the mortgage market has now turned into an attempt to shock private capital back into the system," explained Mortgage Bankers Association CEO David Stevens. "The timing of this could not be worse, especially with the Qualified Mortgage Rule, which is already tightening credit, going into effect in January."

And with mortgage rates already jumping.

Based on the Mortgage Bankers Association's analysis, guarantee fees – Loan Level Price Adjustments, they're called – could increase by 0.75 to 1.5 percentage points for borrowers stuck in so-so credit-score purgatory.

"As a result, a borrower with a 730 FICO score making a 10% down payment will pay an LLPA of 2.25% for a 30-year fixed-rate loan, up from today's fee of 0.75%," the Mortgage Bankers Association pointed out. "These increases are in addition to the 10 basis point ongoing guarantee fee increase. The estimated net impact on this borrower would be a 50 basis point increase in the interest rate costing borrowers thousands over the life of the loan." Half a percentage point! On top of the full percentage point that mortgage rates have already increased, on top of any increase in mortgage rates that might occur as a result of the Fed's withdrawal from binging on MBAs. That's the first hint of what might happen when a subsidized industry as housing is being encouraged to try to stand on its own wobbly feet.

The Mortgage Bankers Association, which represents banks that have gotten fat by creaming off profits from this subsidized process, is now aggressively lobbying against the change. They want neither the Fed nor the taxpayer to abandon them.

It was a "dangerous and misguided" approach, Stevens said. "These fee increases could have a negative effect on the fragile housing recovery and could harm the very potential home buyers and borrowers that the housing market needs to sustain that recovery."

Of course, home buyers only have to pay the fees if they want to get the lower mortgage rates that these government guarantees make possible. If they don't want to pay the fees, they can always pay an even higher rate for a mortgage that is not guaranteed by the GSEs. In either case, owning a home is in the process of getting much more expensive.

Hard-pressed consumers are already hitting a wall. So, something will have to give: either mortgage rates (if the Fed were to backtrack) or home sales and eventually prices. And that would be the end of the "housing recovery."

Edited by zugzwang

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Hard-pressed consumers are already hitting a wall. So, something will have to give: either mortgage rates (if the Fed were to backtrack) or home sales and eventually prices. And that would be the end of the "housing recovery."

what a shame does this mean the FED will now have to work harder to find a real recovery instead

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Bit of a mess isn't it?

The banks love the current system. What's not to love? Fat fees for initial mortgage administration and none of the risks. Nice work if you can get it.

For 3 months straight the number of house sales fallen - although a boost has come from cash purchasers who made up 32% of transactions in November. 19% were investment sales. The money to purchase must be being withdrawn from other 'investment' areas but is not enough to maintain a housing recovery.

http://bigstory.ap.org/article/us-existing-home-sales-drop-3rd-straight-month

Bit off topic, but interesting (I think) Ocwen Financial Corp has 'agreed' with federal regulators to reduce borrowers loan balances by $2 billion over foreclosure abuses. They have also agreed to stop 'robo - signing' documents and to change the way they manage mortgages.

http://www.nytimes.c...d=tw-share&_r=0

You couldn't make it up. It's a farce.And the tapering hasn't started yet.

Edited by @notsoshouty

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US 30yr bond yield for the last 3 years (wkly).

You can see the end of the bond bull market (probably in July '12).

Not sure FED reducing the purchases to $75bn per month has made/will make much difference.

If anything it looks like the scare in May was a tad overdone, so they may well ease off a bit from here

http://scharts.co/191V4Qs

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US 30yr bond yield for the last 3 years (wkly).

You can see the end of the bond bull market (probably in July '12).

Not sure FED reducing the purchases to $75bn per month has made/will make much difference.

If anything it looks like the scare in May was a tad overdone, so they may well ease off a bit from here

http://scharts.co/191V4Qs

The Fed is like a rat chasing its own tail. The more money it prints, the more income it steals from middle-class pensioners and savers, the less inflation it gets. November CPI was 0.0%. Since the onset of QE3/4 in November 2012 CPI has trended down from an annual rate of 2% to below 1%. In per capita terms retail sales are back to 1998, nominal wage growth is stuck at 2%, and fewer than 50% of Americans have full-time jobs. There's no consumer price inflation because there's no consumer demand!

Meanwhile, house prices are up 12% nationwide (down somewhat on the middle of the year because of the taper talk) and stock prices are up a whopping 28%, benefiting the richest 7% overwhelmingly.

QE and ZIRP are supposed to stimulate the economy, create jobs and generate a little bit of inflation. It seems clear to me that the more these policies are pursued the less effective they are. We may very well have passed the point where diminishing returns have become negative returns. I expect the taper to continue.

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The Fed is like a rat chasing its own tail. The more money it prints, the more income it steals from middle-class pensioners and savers, the less inflation it gets. November CPI was 0.0%. Since the onset of QE3/4 in November 2012 CPI has trended down from an annual rate of 2% to below 1%. In per capita terms retail sales are back to 1998, nominal wage growth is stuck at 2%, and fewer than 50% of Americans have full-time jobs. There's no consumer price inflation because there's no consumer demand!

Meanwhile, house prices are up 12% nationwide (down somewhat on the middle of the year because of the taper talk) and stock prices are up a whopping 28%, benefiting the richest 7% overwhelmingly.

QE and ZIRP are supposed to stimulate the economy, create jobs and generate a little bit of inflation. It seems clear to me that the more these policies are pursued the less effective they are. We may very well have passed the point where diminishing returns have become negative returns. I expect the taper to continue.

Which is why they're slowly exiting. They've reached the same conclusion and are now switching the emphasis to a lower for longer policy rate instead.

In any event, the 30 yr fell 2% as you can from the chart on Friday. Market (imo) had run way past itself the last 6 months.

But sure, if the recovery continues and cpi picks up a bit over the coming months, then you'd expect the term premium to start rising too at some point irrespective of zirp, and the curve ought to steepen a bit.

Pretty much what Jim O'Neill said a while back in fact. A slow move up by a couple of %. It's slowly normalising.

It's more obvious on this chart

http://scharts.co/1fOxF6V

Edited by R K

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