Premier Mortgage Group

RATES IMPROVE ON WEAKER THAN EXPECTED DATA

STRAIGHT STATS

Mortgage interest rates improved this past week on weaker than expected economic data. Economic reports of note included the February Consumer Confidence index which fell to 46.0 on expectations that it would fall to 55.0. The consumer present conditions index fell to 19.4 from 25.2, the lowest level since February 1983. January New Home Sales fell 11.2% on expectations that they would increase by 3.8%. The median sales price fell to $196,000, its lowest level since 2003. Weekly jobless claims increased by 22k on expectations that they would fall by 13k. January Existing Home Sales fell by 7.2% on expectations that they would increase 1.0%. Also, the Treasury auctioned $118 billion in 2 Year Notes, 5 Year Notes, and 7 Year Notes. Overall the auctions were met with reasonably strong demand. Fed Chairman Ben Bernanke spoke to both the House and Senate and reiterated that short term rates will remain low for quite some time to stimulate the economy.

COMMENTARY

The week’s economic data were just awful, consistent with double-dip back into recession, and the reason mortgage rates went back to 5.00%, and below with small fees. For decades the normal spread between retail mortgage rates and the 10-year T-note has been about 1.75%; today’s 10-year at 3.60% puts the spread at only 1.40% — a record, and very hard to explain, given the Fed’s announced intention to stop buying mortgages on March 31. The Fed is still buying $11 billion/week, but its full stop in 30 days should make 60-day locks inordinately expensive, but they’re not.

Explanations… As the overall level of rates drops, it can contract historical spreads. 1.75% in an 8% mortgage market is a lot smaller than in a 5.00% one. Second, in a still-frightened investment world, ANY spread over Treasurys is attractive, so long as paid by super-safe Agency paper. Last, given the data this week, you can bet that the Fed’s focus on reducing stimulus is… um… under discussion.

Read more commentary here.

The bond market rallied this week, long-term rates falling, unfortunately in response to lousy economic news. Lowest-fee mortgages fell to 5.00%, and the 10-year T-note has approached its next key level, 3.60%.

Every item in this grim litany was forecast to improve, and none did. The Conference Board’s measure of consumer confidence in February collapsed to present-conditions 19.4, the worst since 1983. New claims for unemployment insurance jumped again, now almost back to a half-million weekly. New mortgage applications fell 8.5%, now to 1997 activity. January orders for durable goods fell 2.9%, excluding volatile transportation and military sectors. January sales of new homes suffered an 11.2% cave-in (the lowest rate of sale since 1963), and sales of existing ones dropped 7.2%.

Thursday morning’s business channels broadcast striking visuals: Perfesser Bernanke on split-screen left, asserting “nascent recovery”; Mr. Obama split-right, nouveau Nero obsessed with health-care fiddling; and from the screen-top data-stream the sad data listed above drifted down in little red embers.

As births go, this recovery is in ICU, but the Fed dares not say so. Just keep its rate at zero and visit the chaplain. The Health Care Summit collected the most unattractive group of politicians in modern times: John Boehner as the young Capone; Eric Cantor’s veneer of feckless ambition covering a core of feckless ambition; Nancy Pelosi the socialite annoyed to be called from dinner to quell a spat among the help; and Harry Reid as sour undertaker. Mr. Obama has law-school moot court competition confused with governing.

Good grief, people… the economy… the economy.

Now 18 months past Lehman, trillions in spending and tax-cut stimulus, support for financial markets and MBS purchases, the Fed easiest-ever… why no real recovery?

In a recession different from all prior, find explanation by hunting for the most uniquely different element in the overall pattern. One stands out: never before have households taken such a hit to net worth, and never at such a sensitive spot. Home.

We have had awful housing markets before, notably ’79-’82, when mortgage rates reached 18% and unemployment 11%. However, that was a time of very high inflation: a house worth $100,000 at the outset often still was at the end, the loss to the owner inflicted by inflation. That quirk of inflation meant that equity remained stable, nominal value versus mortgage, thus in those years there was no plague of underwater houses.

In the later 1980s, the total of American mortgages outstanding divided by the value of all homes led to an aggregate loan-to-value ratio in the 32%-38% range (All data here from the Fed’s Z-1 Flow of Funds). From 1990 to 2000, LTV crept to 42%. At the peak of the Bubble, in 2006, overall LTV was still only 45%: $22.9 trillion in value versus $10.4 trillion in mortgages of all kinds, 1^st and 2^nd. The nation’s homeowners held $12.5 trillion in home equity.

Then the catastrophe: by the 1^st quarter 2009, mortgages outstanding were still about the same, but aggregate home values fell to $15.7 trillion. Seven trillion dollars in home equity wiped out, one-third of total value, but two-thirds of equity. In two brutal years, aggregate LTV shot up to 66%.

Now the bad part. Only 70% of US homes have mortgages. If the total value of homes is about $16 trillion, the 70% with loans is worth about $11.2 trillion. The loans total $10.8 trillion today. Of course, many homes, maybe 20 million, are underwater, and a great many mortgaged homes have a lot of equity, especially in the huge, Bubble-free heartland, Colorado to Texas to the Dakotas.

However, on average, 70% of American homes have no equity. Bye-bye consumer.

Instead of more toothpaste-back-in-tube mitigation, how about an effort to support modestly rising home prices? And to absorb the millions of mothballed foreclosures?

Either restore adequate credit, or stay in this.

[1]  Points is Points
The absolute best on discount points and origination fee versus rates.

[2]  Real Time
How to understand the interest rates you think you get in the media

[3]  It’s the Principal of the Thing
15-year loans and prepayment are bad ideas

[4]  Teach Your Children Well
15-year loans and prepayment programs add to your overall financial risk.

[5] Pre-Approval Push-Pull
The inside skinny on this requirment; and how to avoid shooting yourself in the negotiating foo

[6] Two Time Loser
The bi-weekly payment scam revealed (and a couple of other ones as well…)

[7]  DEE-fense! DEE-fense!
When to use an ARM (not as often as you think …)

[8]  What It’s Worth
What appraisers are really doing

[9]  The Name Is The Game

The operations of the financial world change over time along with everything else

[10]  Sources of Closing Funds
Money Transfers, gifts, and borrowed down payment

[11]  Score Trap
Credit scores, and how to manage your credit report

[12]  Teaser Turnabout is Fair Play
Best tactics for ARM use.

[14]  Blink and Miss
Refinance? Or not? If yes, MOVE FAST

[15]  Service? Hah!
Who is REALLY doing what to whom

[16]  We Don’t Care, Anymore
Astounding siplifications in loan approval, all thanks to computer-based analysis.

[17]  So You Want to Add On
A guide to financing additions to your home — or reconstruction altogether

[18]  A Credit to Humanity(?)
Your credit scores matter to more people than just your mortgage lender… lots more.

The best chance to waste money while getting a mortgage is to misunderstand the relationship between discount points, origination fee, and the interest rate on your new loan.

Borrowers carry the intuition that the lowest interest rate is always the best deal, and expect to pay some sort of loan fee and “point” along the way somewhere. This intuition is half right: the lowest rate is a good idea, but it’s not worth paying for.
Mortgage jargon contributes to the confusion: “origination,” “discount,” and “point” require definition.

When you want to borrow at a rate below the bond market’s desired yield (changing minute-by-minute in global markets for capital), the market value of the loan is less than its face value. Just like a bond, the loan is said to trade at a “discount.”

If the market wants 6.00%, and you are determined to pay no more than 5.875%, you must make up the difference between the face value of the loan (100 cents on the dollar), and its market value. In the inexorable time value mathematics of the bond market, the 5.875% loan would be worth 99.50 cents on the dollar, and you would have to pay .50% in “point” to get your rate.

Before exploring the wisdom of paying such a fee for a lower rate, we still need to define this “origination fee” business.

In the dark ages of mortgage lending, back before 1983, origination fees were the primary compensation for mortgage people. Today, an origination fee is the same thing as a discount point. In the modern era, we get paid for creating and selling the right to service a loan: long story, separate column. (Note: regulatory changes in the aftermath of the Great Credit Bubble may cause a return of fractional origination fees in place of some “junk” charges, like documents, processing, or underwriting.)

Loan origination fees are still quoted separately from discount points out of historical habit, and perhaps the hope that borrowers will lose track of the real price. Worse, origination fees are often treated as automatic and inescapable, or omitted from advertising.

This antique pricing system leads to the absurd mortgage patois of “pluses.” Such and such a rate costs “a half plus one,” while a lower rate might cost “two plus one,” the first number referring to discount points, and the second to origination, or vice-versa.

Ask your banker to quote total points. Any fee charged as a percent of the loan amount is a point, and is present in the deal to buy down the interest rate.

Having defined terms, is paying points a good deal?

Nope.

Never? Never is a long time. If you promise not to move, or refinance within six years, paying points will turn out okay.

“Breakeven” or “recapture” math goes like this. On a $100,000 loan, each one-eighth (.125%) in rate usually costs .50% in point ($500). Each eighth in rate amortizes to about $8.00 per month (at 6.00%). If you divide the monthly benefit ($8.00) into the cost ($500), you get the number of months it takes to recapture the fee you paid. In this example, 62.5 months; but really closer to six years because you paid the fee in 2010 dollars, and 62.5 months hence, eight bucks won’t be worth eight bucks. If you sell or refinance in less than six years, you leave money on the table.

Refinance note: points and origination are deductible in the year paid for purchase loans, but in refis deductible pro rata over the remaining life of the loan. In the example above, the fee and the interest payment are equally deductible; in a refi the altered deductibility takes fee-paying recapture out to seven or eight years.

This inevitable point versus rate relationship is one of Wall Street’s great self-fulfilling prophecies. In the 75 years since the FHA created the first 30-year loans, the average loan life has always been about six years. If the average loan lasts six years, the Street wants fee compensation for six years of deficient interest.

Always try for the lowest fee package at a given rate, clear down to “zero plus zero,” if you can find it. See, in the mortgage business, the highest virtue is pointlessness.

RATES INCREASE ON FED ANNOUNCEMENTS

STRAIGHT STATS

Mortgage interest rates increased slightly this past week on Fed announcements. First, the FOMC Minutes revealed that the Fed is considering selling assets. Second, the Fed raised the discount rate by 0.25% to 0.75%. The discount rate is the rate charged to banks on short term loans from the Federal Reserve. Economic data was mixed. Reports better than expected included the February New York Empire State Manufacturing Index, January Industrial Production, and the February Philadelphia Fed Business Index. Reports weaker than expected included January Housing Starts and Building Permits, weekly jobless claims, and January Leading Economic Indicators. On the inflation front, the January Producer Price Index (PPI) increased more than expected and the January Consumer Price Index increased slightly less than expected.

COMMENTARY

First of all, reassure clients looking for homes and Realtors: the Fed’s hike in its discount rate and tough talk are NOT signs of actual tightening. The Fed will tilt hard to easy money until private markets can generate credit. The Fed’s entire focus still is on recovery.

Second, the 10-year T-note is in the same technical zone as the three yield tops last year. Hold, and mortgages will drop back towad 5.00%. Break upward, and we’re headed for 5.75%. Bet on holding and improving.

On to things that we don’t know: jobs and housing. We are two weeks away from the employment report for February, and nobody knows how long before we will see some official recognition and plan for the housing reality in the Bubble Zones. For all the dominant happy-chatter about recovery, a failure of job creation is gong to become harder and harder to explain. The official silence about housing has been inexplicable for many months.

10-year Treasury rates have risen to 3.81%, roughly the same altitude as the tops last June, August, and December, mortgage rates still below 5.25%.

The increase has been caused by the usual worries: the Fed is going to tighten, the recovery is gaining strength, and the Treasury is borrowing too much money. Someday these forces will blow the eyebrows off the bond market, but this is not that day.

Mortgage applications have stalled at a level 18% below one year ago, and mortgage closings early this year are off more than that. January industrial production rose .9%, most likely a temporary spate of inventory-building, but it still counts. However, industrial capacity in use is in deep recession, eight percentage points below the 1972-2009 average. New claims for unemployment insurance were expected to fall if only because of weather, and instead last week soared 31,000 to 473,000.

The Fed held center-stage: it released minutes from its January meeting; Thomas Hoenig, Kansas City Fed president, delivered a scary speech; and last night the Fed hiked the discount rate from .50% to .75%.

Fed politics are usually eye-glazing speculation. It does not leak, except on purpose, so if you weren’t there, you’re just guessing. The Fed often jawbones markets, and media and markets inevitably over-analyze. Also, the Fed is a deeply cautious institution that doesn’t do anything dramatic until the need is transparent to everybody.

In today’s conditions we can count on a few things. First, the Fed faces the worst political threats in its history. Congress wants to limit its regulatory oversight and emergency capacity; no matter how well the Fed did post-Lehman, Congress doesn’t want any other entity to have that kind of power. Second, the Fed has to respond to critics certain that its monetary ease will cause serious inflation. Third, it fears political pressure to monetize runaway deficits (buy new Treasurys with invented cash).

The Fed’s response to the power-limiting threat has been to resume customary invisibility. Stop buying MBS now, even if it should buy, and un-do all of the post-Lehman emergency programs. Of course, post-panic all had fallen into disuse, and all could be reactivated in a single morning. Artful stage-management without content.

Countering the inflation worriers is harder to do. In the last 27 years CPI was above 5% for one year (Iraq War I), but the worriers look at the ‘60s-‘70s charts and are just sure that inflation will be back any minute. The Fed is aware that the recovery is fragile, and is painfully aware that credit continues to contract at a double-digit pace. If credit is tightening on its own, what do you want us to do? Stop credit altogether?

(Sidebar: in the backwards world of bonds, premature tightening by the Fed is our dream of Christmas. Nothing takes down long-term rates faster than aborted recovery.)

In these circumstances the Fed is adept at the appearance of action. The Fed’s minutes said that it would soon sell securities that it had bought in the panic to create bank reserves, but was silent as to pace and magnitude. “Excess reserves” in the banking system total $1 trillion, all in disuse because banks are short of capital; the Fed could put on a great show by dumping a few bonds, but have little tightening effect.

The hike in the discount rate brought gasps from the media and markets, but the discount rate is obsolete, and will have no current effect on credit. However, the move offers calm to the inflation worrywarts.

Then the miracle of the jawbone. The KC Fed’s Hoenig is a guaranteed source of inflation monomania and formal dissents in favor of tight policy. However, few outsiders know that he is an empire-building duffer. He’s never worked anywhere but the KC Fed, and has installed himself as permanent president there — 19 years, three times the tenure of any other regional Fed-head. Instead of asking him to cork it (as Fed Chairmen will do), let this bird preach on, and his choir will be happy.

The authentic signal in the minutes: the December set mentioned “housing recovery” a dozen times. These minutes: “Improvement in the housing market slowed.”

RATES FLAT WITHOUT MUCH NEW DATA TO DIGEST

STRAIGHT STATS

Mortgage interest rates were mostly flat this past week without much new economic data for the markets to digest. Of note, the Treasury auctioned off $81 billion in new debt and the auctions were slightly weaker than expected. December Wholesale Inventories and Business Inventories dropped more than expected. The December Trade Deficit was larger than expected. Weekly jobless claims and continuing claims fell more than anticipated. January Retail Sales were in line with expectations and the University of Michigan Consumer Sentiment Index was weaker than expected. Also of note, the European Union announced that it would help Greece avoid defaulting on its debt. Markets are also concerned that Portugal and Spain may be in danger of defaulting on their debt as well. China will be increasing its bank reserve requirements to help cool its economy.

COMMENTARY

The domestic data pattern seems to be softening, which has to be disturbing at Fed/Admin. In an extremely technical move, Fannie and Freddie have added to mortgage supply (hence chaos in price/rate spreads), I assume to ease the transition away from Fed purchases of MBS. However, without some miraculous ignition in the financial system, there is no way for it to absorb the huge volume of sovereign debt coming here and in Europe, and provide a minimal supply of corporate financing, and take the place of the Fed’s $1.25 trillion in mortgage credit in 2009.

Like stretches of 2007 and 2008, it feels as though tension is rising underneath the surface, but it is impossible to tell what lurching release lies ahead. Mortgages should benefit from any negative economic or market surprise, and sooner or later policy makers are going to have to add to support for housing.

A good-news week in the credit patch — an exceedingly odd mix, but good.

Weakness in Europe, authorities in China tightening into a bubble, a softening data-pattern here, an add to mortgage supply, and a woozy stock market conspired to hold lowest-fee mortgages to 5.25%, the post-August high. That despite Treasury auctions of $81 billion in long-term paper. Bond ghouls love lousy news.

The National Federation of Independent Business survey (www.nfib.com, “SBET”) in January found no meaningful improvement in a small-business “L” non-recovery, and overall retail sales poked along at a .4% gain.

The euro-zone trouble with its weak members entered a new phase. Germany said at mid-week that it would intervene to prevent a Greek default, and interest rates and stock prices here rose fast, fear abating. All of that is reversing as no one in Europe has said how Greece might be supported. Nor has anyone in Greece offered a credible plan for austerity: meeting euro treaty requirements would mean semi-permanent poverty (as it would for the rest of Club Med); to depart the euro for necessary currency devaluation would mean recession, but recovery one day. Poverty doesn’t sell well.

The euro-game now resembles the months before Fannie and Freddie required a total US guarantee, as markets crashed one inadequate backstop after another. Overnight the capacity of the euro-strong to bail out anybody has weakened: 4^th quarter European GDP rose a negligible point-one percent, in Germany itself, zero.

Germany’s long-running cognitive dissonance… to take over Europe, or to leave it?

Here, a great many people still worry that the Fed’s effort to get credit going will result in inflation. The Fed has tripled the monetary base, but that money can reach the economy only via loans, and bank lending in January is still in free-fall (12% annual rate of contraction). Nevertheless, Perfesser Bernanke this week had to explain to Congress how the Fed would withdraw all this monetary stimulus. The Gods were merciful: snow saved him from going, and he explained by web posting.

The Fed will have trouble with timing: given limits to predicting the future, it will tend to be late to withdraw, and then over-do it, but nobody should worry about its ability to pull back. Some things are hard for the Fed, some easy. Rebuilding financial markets after a systemic failure is much like one of those game shows in which you’re given a tube of Elmer’s, a broken iPod, five trash cans, a rear-view mirror, the engine from a ’67 VW Beetle, and three hours to build a replacement for the Hubble telescope.

Withdraw money? Just swing the hammer: sell the MBS and bonds the Fed bought.

Speaking of which… the whole mortgage world (and several other minor planets) have wondered what will happen when the Fed stops buying MBS in March. The private credit system is just as broken now as July 2007, utterly unable to provide an adequate supply of mortgages. Very good news: the authorities have noticed, and acted.

In an operation too technical for Congress to object (just try to appeal to the Tea Party half-cups in your district by yelling: “Freddie Mac is buying from its own MBS-PC guarantees those loans now 120+ days delinquent! To arms!!”), Fannie and Freddie will inject $100-$200 billion into the markets for MBS or Treasurys. Doesn’t much matter which. That will buy time, supply, and keep rates down until… ummm… May?

This delicate move has the fingerprints of the Fed, which dares not buy more for its own account lest Congress notice, not unless the economy dips and it’s time again to elbow women and children from the lifeboats. Also Geithner’s. The White House? Financial Czar Larry Summers now responds to all recovery questions just like my last building contractor: “Six months.” Christina Romer, a very fine economist, chair of the Council of Economic Advisors, has no power and the unfortunate TV appearance of Mayberry RFD’s Aunt Bee. The unemployed and frightened are not up for grins.

If signs of economic stall are confirmed, this group may at last understand that hyper-tight credit will not repair a period of too much credit, and recalibrate.

RATES IMPROVE ON WEAKER THAN EXPECTED JOBS DATA

STRAIGHT STATS

Mortgage interest rates improved this past week on weaker than expected employment data. Today’s employment report for January showed non farm job losses of 20k on expectations that 13k jobs would be created. The unemployment rate fell to 9.7% on expectations that it would remain unchanged at 10%. The unemployment rate may be distorted though by the Federal government hiring temporary workers for the census count. Weekly jobless claims increased by 8k on expectations that they would decrease by 16k. Continuing claims also increased slightly. Q4 Productivity increased more than expected and Q4 unit labor costs decreased more than expected, implying that businesses are getting more out of their workers and may be less likely to hire new workers. Other news of note included December Personal Income which was slightly better than expected and Personal Spending which was slightly weaker than expected.

COMMENTARY

Contrary to what you read above as cause of the rate decline this week, the downward shove in rates has come from threatening collapse of the euro currency. Whether the strong find a way to bail the weak and insist on their discipline, or the zone breaks up, the result is near-term instability, more losses at European banks, and long-term slower economies. The prospect knocked the knees from under global stock markets and all commodites (even gold, which usually thrives on chaos, but this is deflationary cahos), and pushed a lot of fearful cash into he dollar — even though our financial health is not much better than Club Med.
The run to the dollar increases demand for Treasurys — a good thing, as we’re offering the world a whole new pile next week. Toward the end of next week’s Treasury auction, maybe Wednesday afternoon into Thursday, mortgages might well touch the 4.75-4.875 low of the Great Recession. Do not bet on either prenetrating that level, or staying there — not unless the Fed re-enters the game as buyer, and that decision is a month or two away.

The potential collapse of the euro currency, sinking stocks, and a dead job market here have combined to push long-term rates down. 10-year Treasurys are trading at 3.57% despite a huge new borrowing next week, and mortgages are 5.00% flat.

Job losses appear to be bottoming, but the issue is new employment. The “V” recovery spinners are the same guys as all last year, and someday they’ll be right, but new unemployment claims are back up to 480,000 weekly, 2009 job losses were revised up by a million, and the drop in unemployment to 9.7% is statistical wandering.

We have survived the Great Recession thus far because of “sovereign guarantees” all over the world. Bailouts and deficit spending are ultimately backed by national tax revenue to make good on promises and debts, and it has been a matter of some curiosity which nation or currency might fail the test of confidence. Europe it is.

The euro experiment rested on belief that Club Med nations would behave like Germans, disciplined in annual borrowing and cumulative debt. They never had behaved so, pre-euro, and their lower-productivity economies allowed them to play Germany only in good times. Now in hard times, Club Med’s massive debt and deficits require massive sales of new bonds, and the soaring interest rates they must pay now have concluded the Ponzi scheme.

Dominoes, again. Big ones. A bunch of banks, no matter how big, was nothing compared to a row of sovereigns.

The G-7 ministers meet this weekend, and they will slap on some kind of shin plaster before Monday market-open. However, the Europeans have only two choices: the strong may bail out Club Med, or the euro-zone will break up — back to drachma, lira, pesos, and a super-strong, remnant deutsche-euro. A bailout may buy time, even years, but would weaken the strong (even Germany’s fiscal/debt position is precarious) and still not change the behavior of Club Med. A bust-up would collapse the value of Club Med bonds, a great many held by gullible German-zone banks.

In the short term, euro lose-lose is USA win-win. We are suddenly a safer haven than the previous safe haven. Dollar up, commodities crashing, it is easy to float our own version of Club Med. However, in the long term we are a domino ourselves, vulnerable by economic, financial, and political disarray.

Released Monday, our 2011 budget calls for $3.8 trillion in spending and a $1.3 trillion deficit. The $900 billion in defense spending is almost as big as Japan’s total budget. Our deficit is larger than any nation’s entire budget. Total Social Security, Medicare, and Medicaid spending in 2011 — Boomer retirement still ahead — will be $1.5 trillion versus $934 billion in revenue.

One of the central lessons of the Great Depression: don’t try to balance your budget during a sick economy. Truth then — when we owed practically nothing — is not necessarily truth now. A fiscal fix is terribly difficult in the belly of the Great Recession, and in the presence of deeply deceptive Sirens like Paul Krugman who advocate limitless borrowing, but plan equally limitless tax increases at the first sign of recovery.

There is a lot at stake here: 400 years of Western Democracy brought unimagined prosperity, now threatened by 40 years of unspeakable self-deception, the system of government itself corrupted. Most democracies have behaved like warring spouses, each with a credit card, one wanting big house and travel, the other clothes, wine, and boat, and the inability to agree has racked both cards to the sky. In the end game, we lose both house and boat.

Different times, different challenges. If FDR had insisted in 1933 that the nation’s greatest need was reform of health care, his own party would have hauled him off to a padded cell. Today, this nation is aching to hear from someone in either party or a new one, “Our national security depends on living within our means, and competing in the global economy. Nothing else matters, or is even worth talking about.”