Mortgage Backed Securities providers will start charging Guarantee Fees. These fees are to help off set some of the credit related losses in mortgage pools. The Guarantee Fee will be effective until October 2021.
The new fee will add on average .125% to the RATE. When you buy down a rate the lender usually charges 1 point in order to achieve a .25% reduction in rate. That means a person with a mortgage of $200,000 will end up paying an extra $1000 (a half point) or take a higher rate by .125%. That extra increase to the rate will cost the consumer $250 per year.
The problem is the money is being used to fund a payroll tax credit. This from a Bloomberg article with the link below "lawmakers tapped the government-supported mortgage companies to pay for last month’s extension of a payroll tax cut, according to Bank of America Corp." That means the Government is taxing you if you wish to refinance.
The problem is the money that they are charging may be just enough to kill refinance deals. The other problem also listed in the Bloomberg article is the purchase of Mortgage Backed Securities. “This greatly diminishes the last remaining avenue for revenue growth, and we believe the credit rating agencies will see this as a net negative for their credit,” Axel wrote in his report. “When combined with the issue of limited capital, this significantly increases the possibility of a rating downgrade in the medium term.”
Investors will be less likely to purchase a more risky Mortgage Backed Security. This will reduce the price, drive up the yield and take mortgage rates higher.
These fees will start officially in April but lenders are starting to add them to the rates now. A mortgage originated today may not be pooled and sold until April. If they sell it early they keep the added fee for their bottom lines.
http://www.bloomberg.com/news/2012-01-09/fannie-rating-faces-cut-as-lawmakers-siphon-funds-bofa-says.html
Mortgage Backed Securities are PLUS 9bps today.
The Fed earlier this week came out with a statement following a two day meeting of the FOMC. The statement extended the time line for an increase of the Fed's overnight rate. This is the rate used by the central bank when lending to domestic institutions. They previously stated that it would stay at the current level until the end of 2013. The current statement pushes that date back to the end of 2014.
The Fed is signaling that we will have a prolonged slow growth story. It means the Fed does not see the government stepping in with new programs to stimulate the economy or help unemployment until after the election. Companies have learned to do more with less over the last few years and will see no need to expand. Company earnings have been adequate for the last two quarters. Without growth we will not see hiring or expansion. Those are the key elements missing and why the Fed says it will continue until 2014.
The Fed has not signaled that it will do more to purchase MBS. The have said they will continue to purchase MBS to keep interest rates low. Investors will look at this as an opportunity to put some risk on in the short term. They are able to borrow money at very cheap interest rates. That could cause a run higher in the equity markets. We will then either see a continuation or a reversal after Q1 earnings.
The bottom line is the Fed will keep rates low and we should be in a range of 3.75% and 4.75% for a 30 year fixed in 2012. The equity markets as a whole should not have a tremendous upside or downside after 12 months. We will see volatility in both directions during the year. When we look to ring in the New Year 2013, we will see we have only gotten a year older and nothing much has changed.
Mortgage Backed Securities are PLUS 3bps this morning.
FRANKFURT (MarketWatch) — Greece’s European Union partners applied increased pressure on private bondholders to accept a lower interest rate on restructured debt amid worries a proposed deal won’t put the country on a sustainable fiscal path.
Greek Finance Minister Evangelos Venizelos told reporters in Brussels Tuesday that finance ministers from the 17 nations that share the euro gave Greece the “green light” to wrap up debt talks in coming days. But the talks appear to be moving slowly.
The talks are on going and giving hope to the world markets. That can be measured in the Volatility Index http://www.marketwatch.com/investing/index/VIX. The index which peaked at 48 during the most precarious times of the Euro debt crisis have fallen to under 20. It is a widely held believe that the best time to invest long term is when the VIX falls below 20. That could be why we have seen a decrease in secondary market credits used to pay down closing costs and decrease mortgage interest rates.
We also have seen more positive numbers in manufacturing. The Richmond Manufacturing Number increased from plus 3 in December to plus 12 in January. This is evidence that the economy is turning around.
Trying to turn around the economy and the unemployment numbers is like trying to turn Titanic. We are showing signs that the maneuvers that have been taken are righting the ship. This will start taking mortgage interest rates higher.
Mortgage Backed Securities are MINUS 9bps this morning.
We talked recently that the mortgage rates had hit record lows. We also suggested that the Fed's plan to keep interest rates low did not mean historic lows. We have seen the spreads on the secondary market shrink. This has caused interest rates to rise on some products and reduce the credit available for closing costs on all products. Will this trend continue?
The Treasury is auctioning off $99 billion in new debt this week. There is a $35 billion 2 year auction on Tuesday a $35 billion 5 year auction on Wednesday and $29 billion of 7 years on Thursday. We also have earnings again this week and Europe is always a concern. We will see some volatility this week I am sure.
Mortgage Backed Securities are PLUS 6bps this morning.
Equity markets are firmly in positive territory today. The long weekend and negative news from Europe was not enough to push markets lower. The markets seem to be putting a great deal of weight into the Empire Manufacturing Data. That report shows that manufacturing in that region is at its highest level since April. Mortgage Backed Securities are doing well thanks to the Fed purchase program.
I was reading an article on housing from marketwatch.com and here are some of the highlights.
Economists will also look to see if the depressed U.S. housing market shows further signs of emerging from its worst downturn in modern times. Economists at Deutsche Bank argue the sector might give growth more pop in 2012 than most expect.
“We wonder if forecasters have counted this sector out for so long that they are overlooking the possibility that it could pose an unexpected mild boost to the economic outlook in the year ahead,” Deutsche Bank said. “Judging from the new and existing home sales data, we believe that the housing sector is now in recovery mode.”
I have been watching the housing market. It appears that there are less homes available in the areas I have been watching. I have read articles that would suggest that another round of foreclosures could be forthcoming. I will curb my enthusiasm until the spring buying season approaches. With interest rates at historic lows and pricing still favoring the buyer, it looks like a great time to purchase a home.
Mortgage Backed Securities are PLUS 12bps this morning.
The Fed will release its Beige Book this afternoon. The report shows us the economic condition of current Fed Districts. This report is released 8 times per year. This report could confirm what the Friday unemployment numbers and the Monday Alcoa earning are hinting. The US economy may be getting better. Just do not ask your unemployed neighbor, he may see things differently.
The Treasury had a successful 3 year note offering yesterday. Today they will have a 10 year auction. Tomorrow will be the last auction of the week. We will see the University of Michigan Sentiment report on Friday.
The US equity markets are lower this morning. This is due to the continued concerns surrounding Europe. The first part of this commentary was all positive things for the US economy. A whisper out of Europe and our equity markets take notice. That is why it is hard to predict with certainty the future of rates. We do not believe that they will not stay at historic lows.
Mortgage Backed Securities are PLUS 18bps this morning. A change of 35bps usually will change the secondary market credit that effects closing costs and rates.
Earnings season kicks off after the bell today. Alcoa will be first up to report. All the key employment data has shown that the economy is improving. This will be the first litmus test for economy since the employment numbers were released. We will also have $66 Billion in Treasury auctions that start on Tuesday. The week then ends with the University of Michigan Consumer Sentiment report. Plenty of news to move markets this week.
It seem that the equity markets are content to wait for Alcoa. We are seeing a very tight trading range in all three major indexes. The only major mover seems to be oil down one percent.
Volatility could help move markets slightly lower. The long term risks are still a spike in rates to the upside. Remember the Fed said they would keep rates low for an extended period of time. They did not say they would hold at historic lows.
Mortgage Backed Securities are PLUS 12bps this morning.
This article was on marketwatch.com. Please pay attention to the underlined portion of the article. The reason why we are in this mess is exactly what the Fed is proposing again. I have wrote many articles on how the government was to blame for the housing crisis. I went back and looked for articles relating to the Fed telling banks to loosen their guidelines. I could find nothing to support my thesis. Well the Fed is back putting pressure on the banks. The proof is in the article below.
By Steve Goldstein
WASHINGTON (MarketWatch) -- Building on a Federal Reserve paper on the housing market released earlier this week, a key Fed president on Friday called for new ways to improve the market, notably an increase in mortgage refinancing and "earned" principal reduction for borrowers who are underwater but kept on making their mortgage payments. New York Fed President William Dudley on Friday said he would like to see "refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments." Dudley also called for getting banks to accept more risk, have looser underwriting and smaller risk-based premiums, and getting appraisers to have less of a "downward bias." He also called for a $15 billion-a-year bridge loan program to those who are laid off so that they can keep paying their mortgage while finding a new job. Dudley added that the Fed should continue to "evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not.
The mortgage broker industry was vilified for letting under qualified borrowers obtain mortgages. Now the Fed is putting pressure on the banks to loosen guidelines. That means the banks will create new products for brokers to sell. When it goes south, like it did in 2007, the brokers will be hung out to dry again.
Mortgage Backed Securities are MINUS 3bps this morning.
I remember the days when I would get up at 5am and starting watching to see how the markets were moving. It would tell me how busy my day would be. The current policy by the Fed has taken all the volatility out of the market.
Today the equity markets took a small hit on worries over Eurozone debt. Like we have not heard that song before. The markets opened lower and are now moving higher. We could surmise that it is based on the better than expected retail numbers or the lower unemployment figures. Some are saying that the Fed may step in with QE3 to jump start a flat economy. That usually causes the market to rally.
There is no clear direction for the equity markets. We have been told that interest rates will remain low for an extended period of time. The Fed has done a great job of holding to its word. Earnings season starts next week with Alcoa kicking it off on Monday. Good earnings and decent forecasts could put a ripple in these tranquil waters. Then the Eurozone will falter on some promise that they made and we will be right back where we started.
Milwaukee interest rates are at historic lows. When rates reverse it will be hard to catch the train. Refinance now while you can still take advantage.
Mortgage Backed Securities are PLUS 28bps this morning.
Milwaukee Mortgage rates have remained unchanged to slightly better over the last two weeks. Freddie Mac's announcement that rates would remain low for an extended period again goes with what Chairman Bernanke has stated. Last week and this week have been short on news and volume as investors rest up for the New Year.
We do not anticipate any major shift in the current direction of rates. That is why we have have been slow to update our mortgage commentary. The New Year will bring its own unique set of challenges and opportunities. We also hope that it bring some volatility in the mortgage rates.
Flat mortgage rates do not give potential home buyers any sense of urgency. The lack of urgency will perpetuate the slog that has been in our housing market for the last 2 years. We need home buyers to realize it is better to catch the best interest rates in this century than wait for the housing market to reach its bottom. We need sellers to realize their home is worth less than what it was two years ago. We need these things and a little more in the New Year to get the housing market on track.
Thanks again for the all of your business in the last 11 years. I wish my current, former and future clients a Happy New Year.
