Saturday, March 15, 2008

As Predicted: Mortgage rates are a rising

Well folks I have been warning about this for a few weeks and now we have some great data to back it up. Bloomberg has a great article today discussing the dire financial straits of the banks and its effect on mortgage rates.

Some excerpts:

" Ben S. Bernanke can't
revive the housing market and the banks are no help.
The U.S. Federal
Reserve cut interest rates five times, pumped $200 billion into the financial
system, and yesterday its New York branch provided funds to help rescue Bear
Stearns Cos.
None of that has brought down mortgage rates for residential
borrowers, whose success in refinancing or buying would help bolster the U.S.
economy. The interest rate on a 30-
year fixed-rate mortgage has climbed to 6.37 percent from 5.5 percent since Jan.
24, according to the Mortgage Bankers Association, as financial institutions
try to cover $195 billion in mortgage-related losses and save capital for future
``The mortgage rate isn't down as much as it should be because the
banks are in desperate straits and they need to maintain a larger spread than
they normally would,'' said Alan Nevin, chief
economist with the California Building Industry Association in Sacramento. ``The
banks need to generate income and the easiest way to do that is to broaden the
spread. If they pay 3.5 percent and charge 6 percent, that's a lot of money.''
Over the past 10 years, the average spread between 10-year
U.S. Treasuries and 30-year fixed-rate mortgages
has been 1.75 percent. Last week, the spread was 2.83 percent. That means a
homeowner's mortgage costs are more expensive now than they have been."

My take:

Well my fellow time bombers this is what happens when banks are under capitalized and need money. They widen the spread to make more money on each loan so they are capitalized to weather the next set of write downs. So rates are now up almost .9 percent since Jan. to 6.37!! That will shrink the average buyers pool of houses that they can qualify for. This is after all of the Fed action taken above. Rate cuts and a 200 billion dollar liquidity injection has done nothing. I think its too late for the Fed to really have any effect on the crash of housing.

So what are some other reasons rates are rising? From Bloomberg:

"Investor Trust
The Fed lowered its target for federal funds 13 times from Jan. 3, 2001, to June 25, 2003. After each cut, mortgage costs fell eight times and rose five times, according to North Palm Beach, Florida-based
That has little to do with Fed policy and everything to do with the confidence of investors, who aren't buying securities backed by home loans, said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California, and chairman of the Fisher Center for Real Estate at the University of California, Berkeley.
``No one wants to lend much of anything today,'' Rosen said. ``The secondary market system for many loans has broken down. People don't trust the paper. We have an investor strike going on.''

Remember that little trust word I keep bringing up? Bottom line here is the Fed at this point really can't do anything to save housing because their is no trust between banks, and they are under capitalized. So as a result they will keep raising rates until trust is back and they are in a much stronger cash position. The Bear Stearns debacle will make every bank CEO look at their liquidity and I wouldn't be surprised to see rates go even higher just based on the Bear Streans disaster.

So when you see those Fed cuts don't start cheering. They are having zero effect on mortgage rates. As you can see in 2001-2003 mortgage rates dropped because the banks were loaded with cash and ready to lend. Today you have the banks in the opposite position. M ost are crippled and need to make more profits so they won't drop rates. Instead they are raising rates despite all of the help from the FED.

A little piece of advice if you have Credit card debt See what the 1 year financing charges are on your card for carrying a balance. Some banks are charging up to a 40% annual interest rate charge for an unpaid balance!! Switch cards and get a lower rate for 6 months.

One more piece from the article:

"The median price of an existing home fell 13 percent in January from its peak in July 2006, according to the Chicago- based National Association of Realtors.
``The Fed actions are not going to stop house prices from falling,'' said Morris Davis, a former Fed economist and professor of real estate at the University of Wisconsin- Madison's School of Business. ``In an environment with falling prices and defaults, mortgages are a lot riskier now than three years ago. In an environment where housing prices are falling you should expect spreads to widen.''

Looks like Morris is right in my camp. 13 percent drop from 2 years ago is huge! Thats 60-70k on a 500k house. And its only going to get worse. This data was from the NAR by the way who are the one group you cannot trust when it comes to where housing is going. Its realtor backed and in 2006 declared THERE IS NO HOUSING BUBBLE! As I have said before much of what has been talked about in terms of the housing bubble has been speculative. The data is finally starting to show how bad this situation really is. Banks failing, hedgies failing, and mortgage rates are rising. this will all put furthur downward pressure on housing prices. The time bomb is close. Patience will reap great housing rewards.

Link below:

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