Mortgage rates are creeping up, as the yield on a 10-year Treasury hits 3.7% — the highest since August.
So how high might they go next year?
Mark Zandi, chief economist at Moody’s, tells CNBC.com rates should hit 6% by the end of 2010.
Rates on a 30-year fixed-rate mortgage have been under 5% for months.
Of course, much depends on whether the Federal Reserve and the U.S. Treasury will stop buying mortgage-backed securities.
So what do you think?
Honestly, I forgot the U.S. Treasury Department was buying mortgage-backed securities (MBS), since its program is much smaller than that of the Federal Reserve. Here’s an update from National Mortgage News (bold added):
The Treasury Department has purchased over $200 billion in Fannie Mae and Freddie Mac mortgage-backed securities to support the mortgage market, but now it has to decide if it will continue that support. “We expect to provide guidance by the end of the year,” Treasury spokeswoman Meg Reilly said. Treasury began the MBS purchase program after the two government-sponsored enterprises were placed in conservatorships in September 2008. At the time, Treasury said it would terminate the MBS purchase program by the end of 2009. During the summer, Treasury reduced its MBS purchases and it is currently buying about $10 billion a month.
And NMN says the Fed has about $250 billion more in MBS purchases planned (bold added):
The New York Federal Reserve Bank purchased $1.09 trillion in Fannie Mae, Freddie Mac and Ginnie Mae MBS this year, according to the Federal Housing Finance Agency. At the start of the program in early January, the New York Federal Reserve Bank was purchasing $20 billion to $25 billion in agency MBS a week. Now the Fed is purchasing agency MBS at a $16 billion weekly rate, which means it could continue at that pace for another 10 weeks. At the conclusion of its monetary policy meeting on Dec. 16, Fed officials said they are “gradually slowing” the pace of MBS purchases so the last transactions will be completed by the end of the first quarter of 2010. Mortgage strategists at Credit Suisse say the slowdown in Fed purchases will not affect MBS spreads to any large degree. “The Fed’s exit from the MBS purchase program will likely be well absorbed by the market,” according to a weekly Credit Suisse “Market Watch” publication. After March 31, the “Fed will likely assume a backstop role for the MBS market to prevent a double dip in housing,” Credit Suisse strategists say.
When these programs end we should expect to see mortgage rates rise. Conventional wisdom is they could increase anywhere from 25 to 75 basis points. (There are 100 basis points in one percent.)
The reality is if they rise by more than say 50 to 75 basis points I would expect the Fed to start buying again (and maybe Treasury too).
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The House Financial Services Committee is expected to hold a hearing today on covered bonds backed by high-quality mortgages and consumer loans. Such bonds are used in Europe and some U.S. legislators think the bonds could help revive lending here, reports National Mortgage News. Here’s more:
Rep. Scott Garrett, R-N.J., is hoping the hearing will lead to legislative action in the spring and help provide liquidity for the U.S. mortgage market. European banks have issued $180 billion in covered bonds backed by high-quality mortgages and consumer loans this year while U.S. mortgage securitization, outside of the government sponsored or guaranteed market, has been virtually nonexistent. “Because of the problems in the secondary mortgage market,” covered bonds offer a way to provide needed liquidity for the U.S. mortgage market, said Mr. Garrett. A covered bond market would enable banks and thrifts to tap a low-cost, long-term financing while keeping the mortgage loans on their balance sheets. Covered bond investors know they have “dual” recourse and they can go after the bank or seize the underlying assets if the bonds go into default. In Europe, covered bonds have “performed well,” despite the financial crisis, Rep. Garrett told reporters. (The bonds did suffer during the crisis but not to the extent securitizations did.) In 2008, the Treasury Department and the Federal Deposit Insurance Corp. issued policy statements on covered bonds and a couple large U.S. issuers experimented with them prior to the crisis. However, legislation is needed to assure investors they will be made whole if an issuing bank fails, according to Tim Skeet, head of covered bonds for Bank of America. “A legal framework is a necessary prerequisite to the establishment of a vibrant U.S. covered bond market,” Mr. Skeet said at Rep. Garrett’s press conference.
Hmm. I am intrigued by covered bonds, but troubled by the line “to assure investors they will be made whole if an issuing bank fails.”
Investors can be “made whole” by the sale of collateral but please, no government gaurantees!
What do you think?
I didn’t hear any buzz this week as mortgage rates dipped as low as 4.5% with a one-point fee. Maybe it’s the holidays, or maybe there aren’t many people left who could benefit from a refinance unless rates fall even further.
Then rates nudged up late in the week as the yield on a 10-year Treasury rose to 3.48% at close of trading Friday from a low of 3.20% on Monday.
Jeff Altman, a mortgage broker with WestCal Mortgage Corp. in Tustin, said he was able to lock in a few people at 4.5% on Tuesday, but the rate lasted for just a few hours.
Altman
He said rates on mortgages and Treasuries rose Friday on the dip in unemployment to 10%. Of course, there can be noise in the unemployment report.
“I don’t think there are a whole lot of people who believe in that labor report,” Altman said. “I don’t think rates will start going up until next year.”
The Federal Reserve is scheduled to stop buying mortgage-backed securities on March 31. Altman figures whether the Fed sticks to that date depends on Q4 economic news, including retail sales at Christmas.
“We still have a lot of REOs. These are very volatile times right now,” Altman said.
Read more about Mortgage Rates and the Federal Reserve.
The Wall Street Journal online reports on a talk by Brian Sack, the guy at the Federal Reserve who implements many of its market-tinkering programs.
Sack’s group estimates the Fed’s $300 billion in Treasury purchases helped push down rates on those securities by half a percentage point and its purchasing of mortgage-backed securities (it will eventually buy $1.25 trillion) is pushing down rates on those securities by a full percentage point.
If he is correct, then when the Fed stops buying MBS on March 31 it is possible that the jump in mortgage rates will be higher than the 25 to 50 basis-point increase some economists have predicted (there are 100 basis points in one percent). Of course, knowing this the Fed may once again extend its purchases of MBS, keeping rates artificially low.
He also argued that the Fed’s buying of Treasury securities could be pushing up prices of risky assets. Here’s more from the Journal’s Real Time Economics blog:
It works like this: As the Fed drives down yields on Treasury bonds and mortgage backed securities, investors bid up the prices of other assets, like corporate bonds and equities. (Sacks) goes on to say the Fed may some day need to raise short-term interest rates “further than would otherwise be the case” to offset the potentially powerful portfolio balance effects of these holdings. (Plain English Translation: If the Fed’s fast-growing balance sheet creates a lot of froth in the markets, the Fed might need to raise interest rates aggressively.) An alternative would be to dump the holdings. He doesn’t advocate either approach, but lays out the arguments for them.
Back in Finance 101 in business school, I was taught that the present value of a security is calculated by dividing anticipated income by a certain interest rate — we could say a risk-free rate plus a risk premium. Well, if the government is lowering the risk-free portion then we can expect people to be overvaluing the security — in this case I mean the risky asset he is talking about such as the stock of a company. (Please excuse my oversimplification of the PV formula.)
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The credit crisis rolls on with this tidbit from National Mortgage News:
Banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. Federal Deposit Insurance Corp. Call Report information shows that most of the buyback demands fell on JPMorgan Chase and Bank of America. Chase repurchased $2.7 billion in defaulted loans and BoA repurchased $2.3 billion to satisfy investor demands. Both are on the hook for troubled loans they took control of when they purchased ailing mega-thrifts — Countrywide in the case of BoA and Washington Mutual by Chase. The FDIC information also lists buybacks by Citibank ($898 million), National City Bank ($361.6 million), Wells Fargo Bank ($266 million) and SunTrust Bank ($232.3 million). Investors like Fannie Mae and Freddie Mac can require lenders to buy back defaulted loans that don’t comply with their underwriting requirements. Freddie Mac forced its seller/servicers to buy back $960 million in bad mortgages in third quarter. (Fannie does not disclose buyback information.) Ginnie Mae and Federal Housing Administration also require buybacks and indemnifications on bad loans.
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I’m seeing more news reports quoting people who think the Federal Reserve should, once again, extend its purchases of securities backed by mortgages issued by Fannie Mae and Freddie Mac. The Fed is supposed to stop by March 31.
The latest comes from the Wall Street Journal quoting Federal Reserve Bank of St. Louis President James Bullard:
“I have advocated to keep the asset purchase program open but at a very low level, and wait and see what happens, and as information comes in about the economy we can adjust that program while the federal funds rate remains at zero,” Bullard told Dow Jones Newswires in an interview Sunday ahead of a conference in New York. He added “no decision has been made” about the program’s fate.
Bullard becomes a voting member of the Federal Open Market Committee, which decides interest rates, in 2010.
The Fed has purchased more than $800 billion in mortgage securities and will buy up to $1.25 trillion.
So what do you think?
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Newport Beach-based Pacific Investment Management Co. was picked by the National Association of Insurance Commissioners to help assess companies’ portfolios of residential mortgage-backed securities, reports Bloomberg. Here’s more:
Pimco will help evaluate about 18,000 RMBS owned by U.S. insurers, the NAIC said in a statement today. The evaluations will help regulators determine how much capital insurers need to guard against losses on slumping home-loan investments.
Regulators are seeking assistance in valuing investments after the housing slump pushed up mortgage defaults. State insurance commissioners, which monitor portfolios to make sure carriers have enough money to pay claims, discontinued their use of RMBS credit grades issued by ratings firms including Moody’s Investors Service after downgrades caused a fivefold increase in capital requirements this year.
Pimco, a unit of Munich-based Allianz SE, was selected from a short list of 11 vendors that were considered by the NAIC, the regulator group said. Mark Porterfield, a spokesman for Pimco, didn’t immediately return a call seeking comment.
In related news, Calpers trims Pimco bond investments.
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It is still hard but not impossible to get a jumbo home loan — that’s a mortgage too big to be sold to Fannie Mae or Freddie Mac.
In his latest column, Paul Muolo of National Mortgage News writes about one mortgage banker who has a system for jumbos:
Meet Lucy Malone, president of Bridge Capital, San Diego. Until June of this year her firm funded jumbos. “It went from being a market that was over-served to one that is extremely under-served,” she says.
Ms. Malone, a mortgage banker, got tired of struggling to find loan programs for her wealthy home buying clients. She had one client who had $2 million in the bank and wanted to buy a $500,000 home on the island of Coronado, right outside of San Diego proper. “He was an S-Corporation,” she said. “I couldn’t get him a loan.”
For the past few months she’s been acting as an agent for a commercial bank. Instead of making loans backed by the value of wealthy abodes, her firm makes a short-term line of credit that is collateralized by a home buyer’s stock portfolio — as in equities. “These are all cash deals that are going into escrow,” she explained. “This is asset-based lending. We look to the stock portfolio.” In Ms. Malone’s estimation, she had to change strategies to survive. She’s been in the business for 28 years.
The bank she works with will fund up to 115% of the stock portfolio’s value.
The loans are three to five-year interest only notes. For now, it’s a solution to a problem that could be solved by jumbo securitizations returning but she has no hopes of that happening any time soon.
She said she’s talked to the nation’s largest lenders — Bank of America, Wells Fargo & Co., and Chase. “It will be four years before securitizations come back,” she said. “We looked into it. That’s what we found.”
Muolo goes on to describe big banks making and holding jumbos. They are restrictive, asking for as much as 50% down.
Find out more about: MORTGAGE ANSWERS | MORTGAGE RATES | FORECLOSURES | HOME PRICES | INVENTORY | RENTS | FED |
The Mortgage Bankers Association yesterday released a statement to a Senate subcommittee saying the system of turning loans into securities needs to be fixed and returned to its former glory. Securitization provides liquidity and disperses risk, according to the association. (Download the MBA Statement)
When it comes to home loans, government-controlled Fannie Mae and Freddie Mac are the only ones still churning out mortgage securities in significant numbers.
Paul Krugman, a Nobel-winner in economics, wonders why anyone wants securitization — he calls it shadow banking — to return.
“The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold,” Krugman writes on his blog.
What do you think?
In my last post, I noted the possibility mortgage rates could rise in January, if the Federal Reserve stops buying mortgage-backed securities as planned. But 30-year fixed mortgage rates are indirectly linked to 10-year Treasury notes, and Goldman Sachs sees their yield at “risk” of falling toward 3% amid low inflation. Here’s more from Bloomberg:
The U.S., the U.K. and Australia will be the “main beneficiaries” of a rally in longer-maturity government bonds, Francesco Garzarelli, chief interest-rate strategist in London at Goldman Sachs, wrote in a research report. Australian 10-year securities are the “cheapest” among markets tracked by Goldman and should trade at yields below 5 percent, he wrote.
“We see risk skewed in the direction of 10-year yields breaking towards their 200-day moving average of 3 percent, from their current 3.4 percent level,” Garzarelli and Michael Vaknin wrote in a separate note to clients. “The global bond premium remains elevated, although off the June highs, and there is plenty of excess liquidity in banks balance sheets which needs to be put to work.”
Inflation risks are subdued by high unemployment and under utilization of industrial capacity. But with a weak dollar, big government deficits, and the Fed spreading money around the inflation threat should not be ruled out. So 3% Treasury yield is probably less likely than Goldman suggests.
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The latest from National Mortgage News:
If the Federal Reserve Board suddenly stops purchasing agency mortgage-backed securities on Jan. 1, mortgage rates could jump by 30 basis points to 50 bps, according to Fannie Mae chief economist Doug Duncan. Conventional mortgages with principal balance up to $417,000 would likely rise by 30 bp and rates on higher balance loans of $650,000 to $729,750 could go up by 50 bps, he told MortgageWire. The Fed’s $1.25 trillion MBS purchase program is slated to expire Dec. 31. But Mr. Duncan expects the Fed will extend and slowly wind down its purchases of Fannie, Freddie Mac and Ginnie Mae MBS. “Thus, incremental winding down of the Fed’s program may not be too disruptive of rates and spreads,” Mr. Duncan said in his August economic forecast. The Fed is expected to decide how it will wind down the MBS purchase program at the Sept. 22-23 Federal Open Market Committee meeting.
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This is an interesting story from Bloomberg:
The rally among home-loan bonds without government backing is being fueled by errors made by “most market participants” in translating current prices to potential returns, Amherst Securities Group LP analysts said.
Investors are overestimating potential yields in part because they are failing to consider how many loans are becoming delinquent for the first time and partly because they are arriving at incorrect conclusions on how long it will take to liquidate seized homes, the New York-based analysts led by Laurie Goodman wrote in a report yesterday. Those issues can influence both the size of foreclosure losses and how quickly bonds get paid down.
“Do your homework, and sell securities which are being evaluated incorrectly by the marketplace,” the analysts wrote.
Non-agency home-loan bonds have soared from record lows or near-nadirs in March amid speculation that Treasury Secretary Timothy Geithner’s Public-Private Investment Program, or PPIP, will add as much as $40 billion of demand to the market, and that the longest U.S. recession and worst housing slump since the Great Depression are easing.
For example, the most-senior classes of 2006 and 2007 securities backed by prime-jumbo mortgages have rallied to more than 80 cents on the dollar, from as low as 55 cents, according to Amherst. So-called super-senior bonds backed by “option” adjustable-rate mortgages have jumped to about 48 cents, from the “low 30s,” the analysts wrote.
I should jump in here and say that pricing on such deals is hard to obtain. Speaking of whole loans, as opposed to securities mentioned by Amherst, Wells Fargo reportedly sold $600 million in distressed subprime mortgages for 35 cents on the dollar. Wells declined to comment on the deal and the Irvine investor never returned my phone call.
Granted, those were subprime loans not option ARMs or prime jumbos. Paying 80 cents on the dollar for securities backed by prime jumbos might make sense, but everything depends on where the loans were made, when they were made and what the delinquency rates are like. And, frankly, I’d look carefully at which company packaged the securities.
Bloomberg continues:
Investors also have been doing too little analysis of the differences, such as the level of home equity, among borrowers with currently non-delinquent mortgages backing non-agency bonds, which lack guarantees from government-supported Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae, they said.
After correcting two of the three common mistakes by investors, the potential yield on a Countrywide Financial Corp.- issued option ARM bond now trading at 48 cents on the dollar would fall to 6.49 percent, from 12.67 percent, assuming the London interbank offered rate remains unchanged, Amherst said. Adjusting for all three reduces the yield on a Wells Fargo & Co. jumbo-mortgage note bought at 85 cents to 7.15 percent from 11.52 percent, the analysts wrote.
That is “much lower than most market participants believe they are receiving on the security,” they said. “Moreover, the yield must be evaluated in conjunction with the level of uncertainty about our assumptions” around whether borrowers will continue to refinance at the “fast” pace of recent months and how many borrowers with “negative equity” will default.
Third Point Profits
Scott Simon, mortgage-bond chief at Newport Beach, California-based Pacific Investment Management Co., the world’s largest fixed-income manager, told Bloomberg Television on Aug. 4 that “from a long-term point of view, a lot of this paper still will yield a lot after losses.”
A buyer last quarter of at least some kinds of home-loan bonds was Third Point LLC, the hedge fund run by Daniel Loeb, which entered the market amid lower prices after profiting from bets against subprime-mortgage bonds in 2007, according to a July 31 investor letter from the New York-based firm.
Third Point bought $160 million in mortgage bonds and made more than $20 million in profits from April through July, Loeb wrote. He estimated that under “severe economic distress” where all of the underlying loans default and home prices drop another 20 percent, the debt the fund held as of June 30 would return 10 percent based on the prices it paid. The debt would return 17 percent to 20 percent under “our base case economic assumptions,” he said.
The implication of the story is that companies that hold such securities may have overvalued them on their books, thus limiting recognized losses. Let’s face it, accounting rules were changed to give companies more leeway in evaluating assets they hold and the TARP money gave them a cushion against which to downgrade assets by the amount deemed necessary by the companies.
The bad assets are still out there, a potential cloud over the economic recovery.
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Housing sales are up, but the market will fully recover only when investors start buying mortgage securities again, some experts say. So what will get them buying?
Investors are holding back because home prices are falling and no one knows how far loan delinquencies will climb, experts say. Government, by lowering interest rates and offering buyers tax incentives, is doing everything it can to support home prices.
As for uncertainty about delinquency, data crunchers TransUnion LLC and First American CoreLogic say they got it covered. TransUnion is one of the big three credit reporting agencies and CoreLogic tracks loan data as part of title insurance giant Santa Ana-based First American Corp.
Investors have relied on rating agencies — Standard & Poor’s, Moody’s and Fitch – to assess default and other risks. But the agencies gave some rosy ratings they later had to take back on securities backed by loans that are non-conforming, meaning not backed by Fannie Mae or Freddie Mac.
Joe Mellman
Joe Mellman, a vice president with TransUnion, and Dan Berman, a senior vice president with CoreLogic, said in an interview that they are jointly offering investors data and analysis that helps assess default risk. Dubbed TransUnion Consumer Risk Indicators, the service is also offered to buyers of whole loans (not securities).
Q. So is this new service necessary because the rating agencies can’t be trusted?
Mellman: “The fact that rating agencies recently haven’t made the right calls certainly enhances the need. But this information goes beyond that. Independent of how rating agencies perform there is still a need for this. I think the key point is that it adds additional insight above and beyond what the rating agencies have provided.”
Q. How does it work?
Mellman: “Historically, in the non-agency mortgage securities market there hasn’t been as much concern about default. There weren’t defaults when housing prices were going up. Obviously, that’s changed over the last couple of years with the housing collapse. Now there is a driving need for consumer default and prepayment behavior information.”
“At TransUnion, one of the core competencies is tracking consumer behavior. At First American CoreLogic it is the detailed loan-level information on securitized loans. We figured out a way to marry that to TransUnion’s consumer details.
Dan Berman
Berman: “Among our core competencies is the loan level data on virtually all no-agency mortgage-backed securities, roughly 96% of the non-agency market. We get files through securitization and update those monthly.”
Q. How does this differ from what is currently used in the industry?
Mellman: “Up until recently, looking at specific consumers or borrowers of loans in each securitization has not been possible. The information hasn’t been used and for good reason: there wasn’t a need as long as default risk wasn’t high.”
Berman: “We now have the ability to join TransUnion data to that of loan level data to get the borrower’s perspective. Stakeholders in securities can get updated views.”
Q. Are you targeting investors in mortgage-backed securities?
Mellman: “That’s a fair statement. Investment banks, hedge funds, pension funds — anyone with a financial stake in non-agency mortgage securities (is our target).”
Q. Is this service both for when a security is issued and later, say if an investor wants to be distressed assets from a bank?
Berman: “It precedes securitization and is post securitization. It can tell you if people are paying or not paying, if home prices are going up or down, if people have taken out additional loans on the property. Up until this solution, the client wasn’t able to know post origination, post securitization what the overall risk encumbrances are. A loan can be 80% LTV at origination, but that can change based on additional loans the borrower may take out. Also, the property value is going to change.”
Mellman: “A consumer may look safe at origination, but that can change over time. This (service) offers a broad sweep of information, generally covering most of the information traditionally available on a credit report. We have narrowed it down to the set most helpful to financial investors. For example, consumer credit utilization – how much credit a consumer has available — is a good predictor of risk. Also, the timeliness of payments, including on credit cards, is a good indicator. The consumer credit data encompasses most debt; it’s not just focused on a specific property. The investor can see if I have eight mortgages outstanding.”
Q. How will data be presented to investors?
Mellman: “It’s a large data set. We can be very flexible with different security types, but usually we do an electronic data feed. Data is detailed but anonymous. We don’t identify borrowers.”
Q. Is everything geared toward default risk?
Mellman: “That is a big focus, but it can help model and anticipate prepayment risk.”
Q, What does it cost?
Mellman: “We are privately held. We don’t provide that information to the market.”
Q. What info do you have on adjustable-rate mortgages?
Mellman: “TransUnion has access to First American CoreLogic’s adjustable-rate information, such as when the interest rate is going to reset and how much it will reset to.”
Berman: “That’s particularly useful for a portfolio of junior liens. Junior lien holders can see whether or not there will be payment shock on reset, including the risk before and after the resetting event.”
Q. Investors have relied on rating agencies. Why do you think they will take this extra step and use your service?
Mellman: “Two reasons: one we alluded to earlier. The rating agencies go it wrong on a lot of these securitizations. There is going to be a period of time, when some trust needs to be built back into that. But even more importantly, independent of that, sophisticated investor are always looking for an information edge. We have incremental insight into how a security is going to perform that directly translates into making more money for them. The rest of the market doesn’t have that clear a picture, and they can translate that into dollars.”
Q. What companies/investors have signed up for it, if any?
(Mellman and Berman both declined to name clients, citing privacy agreements.)
Q. Are you hoping some investors in the Obama administration’s public-private investment partnerships (PPIP) use your service?
Mellman: “Absolutely. Anyone who has an interest in establishing a more accurate price and knowing the true risk of a security (is a potential customer).”
Berman: “We are hopeful the folks participating will leverage this information, creating a little more – or a lot more — transparency in the market. Hopefully, that will lead to greater liquidity in the market.”
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