Mortgage Rates

I came across a funny article and just had to laugh at it.  It's title: "Mortgage Rates Rise Despite Fed Intent".  What made me laugh was the comment that rates "jumped" up in the latest week 10 basis points from a national average from 3.52% to 3.62%.

I mean this is hysterical; we're seeing sub 4% interest rates and it's crazy busy in this business right now and a fraction of a percent raise is considered a "jump".  This kind of talk is just nonsense.  The problem is that rates have been so low for so long that people are just immune to it like they are to advertising messages.  Ever notice how many messages are thrown into our face everyday through several media modalities and outlets? You have some that catch you eye every now and then but for the most part, we ignore them.

Same philosophy here; people are immune to the low rate environment but a 10 basis point increase is no where near a jump.  To give you a perspective on how much of an increase that is; 1 basis point is 1/100th of a percent.  So we're talking 10/100ths of a percent increase in rate.  On $165,000 loan you're talking $9 a month.

That's not exactly breaking the bank here folks.  The article you can find here.. I don't care what they say, and of course I could be wrong, but artificial low rates are here to stay.  They can't lower them.  I think the FED has done so much for so long; they're all in now baby...We'll be riding this wave for a while.

If you're in the market to buy or refinance it a good time but keep in mind that lenders are slammed right now and loans are taking longer to close and documentation requirements are still heavy so make sure you see both of my posts on Today's Mortgage Environment and Mortgage Application Tips...

These will help get your mindset right, explain a little bit about what's been transpiring on the back end and how to be full prepared at application to help improve the processing, underwriting, and closing of your loan.

D...out..

Looking at 2010 for Housing

As we get closer to the end of the first time homebuyer tax credit which has helped get first timers back into the market, we ask will it be extended. I'll agree this was badly needed (the first time homebuyers buying that is) because they are the first domino that leads to all the others falling into place. As sellers list properties for sale - they need the first time buyer to come in and buy their homes - which will lead to them buying someone else's, and so on and so forth. It's a domino effect that needs to begin with the first time buyer.

Will the government extend? I'm really not sure. As the residential market begins to stabilize Congress may not extend the credit as it would, yet again, add to the ballooning deficit which ended 2009 fiscal year at 1.42 trillion dollars. Wow! That's an amazing number; but since trillions and billions has been thrown around like a frisbee in the media lately, when you think of the concept of that much money, it just goes in one ear and out the other. This is boat load of money and its being projected by economists, the deficit will continue to rise unless either spending is lowered or taxes are raised or a combination of both. If you ask me I"m tired of taxes.

But any rate - Congress has a tough decision as we reach the final stretch here and we approach the November 30th deadline. Interest rates have been low all year except for a few weeks in May and beginning of June when we saw massive government auctions that took the market by surprise. Record debt flooded the market and buying just couldn't mop up the access - almost like dipping a sponge in a bucket full of water - the market just couldn't absorb it all so selling forced prices downward and yields up (making interest rates rise).

Now that we've enjoyed almost the whole year with low interest rates; what will happen in 2010? Well inevitably rates will have to go up as the FED exits stage left, and the market adapts to a major buyer disappearing, forcing it to stand on its own. With 1.25 trillion in MBS (mortgage-backed securities) the FED will eventually look to unload those securities which will cause even more downward pressure on bond prices equalling higher mortgage rates as a result. All year it seems as if investors have been trading on policy and not spreads. Will the FED hold its positions? Will it sell most or all of its securities? Who knows but the FED.

If you're in the market - now is the time to jump in and buy while historically low rates still remain. But that's not the only reason you should buy right now. As you know home prices have retracted since their highs of 2006 and owning home has many benefits of which building equity is only one. You have tax advantages along with knowing you've made a long term investment that pays dividends for years to come. Not everyone deserves a home and its something that is earned, and in my opinion, not guaranteed.

Make it a wonderful end to 2009

God Bless!

Inflation Manipulation?

Inflation numbers are due out tomorrow for the prior month. Expectations are .2% increase but one interesting thing to note. The Bureau of Labor Statistics is going to include the subsidized Cash for Clunkers program $4500 dollar rebate as a way to reduce auto prices by the same amount. Hmmmmm.... now isn't that aggressive use of accounting techniques? Keep in mind the government is the one releasing these numbers and we are in a severe recession that many are calling over, but I just don't see how that's possible. So with a 1.8 trillion dollar deficit due to heavy borrowing, who would benefit from lower interest rates? Bingo! The government would.

See bonds are sensitive to inflation since bonds tie up investor money for long periods of time; but bonds can be resold on the secondary market and if prices are dropping due to inflation fears, investors lose money. The way bonds are calculated for their value is by using simple time value of money calculations. Its quite simple. A dollar today is worth more than a dollar tomorrow. So if an investor is going tie up their money for a longer time, they want a good return - or at least a return that is suitable for current market conditions. In times like this, investors flee to safety - in the form of bonds - which are usually safe investments. If inflation is higher than expected this is not good for bond holders because now their return - inflation adjusted - is much less than originally anticipated. So by the inflation numbers coming out in line or lower, its to much of the benefit of the government who still has to borrow very heavily in order to service the existing debt payments (interest) and the barrage of entitlement and social programs and wasteful stimulus programs.

But how does all this affect mortgage rates? Quite simple actually. MBS (mortgage-backed securities) compete with other bonds for investor cash and are susceptible to inflation worries just as other bonds are. What happens is MBS bonds are priced over treasuries in order to attract dollars and be competitive. Bonds have risk factors that investors have to take into consideration and credit default is just one such risk. MBS add another risk factor - early payoff. Mortgage loans in a low interest rate environment have a high propensity to pay off early. This eats into the returns of investors and therefore they need to be compensated for that risk. So what happens is MBS bonds are priced at a fixed spread over treasury yields in order to attract investors to assume that extra risk.

With gold hitting yet another high of $1,080 an ounce; the dollar is weak, and oil is up, this spells inflation. There are few schools of thought out there with respect to the definition of inflation but I side with the Austrian view of the vast expansion of the money supply that we've seen from the FED over the last 18 months IS inflation. I just don't see an argument here. When you expand the money supply and aggregate demand does not rise equally, and wages do not rise with this, you have inflation and rising prices - period. The price level has to rise in order to balance the increase of money in the system. Back when we were on the gold standard, massive expansion of the money supply could not be done like this because you could exchange your dollars for a fixed weight of gold keeping the FED and our law makers honest.

The first time homebuyer tax credit will likely be extended and maybe inclusive of all homebuyers not just first time. While I've enjoyed the short term benefit of the increase in volume, I know that we are just prolonging the pain that will eventually come. Housing isn't out of the water yet, however if you are in the market to purchase I suggest doing it now. Rates can't stay this low for long. Just one year ago before the FED intervened, interest rates were at almost 7% on a 30 yr and then plummeted to below 5% making the investment into a new home very attractive at this point.

God Bless, until next time.

The Federal Reserve's Power Trip

Beginning almost a year ago the FED announced an MBS (mortgage-backed security) purchase program in conjunction with a treasury buying program that would equal roughly 1.25 trillion (yes that's right TRILLION) dollars in subsidies in order to bring mortgage rates down and get people buying homes again. While I've enjoyed the benefits of this action in the short run; I understand the long term effects, and inevitably this action will bring inflation and higher interest rates. The government, along with the FED have been pursuing drastic measures to reinlfate the housing bubble caused by the prior FED chairman Alan Greenspan. This man is considered by most a financial genius. I say hardly so and that statement is completely unsubstantiated.

What Mr. Greenspan was good at was manipulating interest rates, creating bubbles, and bailing out companies when they failed at taking too much risk. Here's the deal; when you have artificially low interest rates this creates malinvestment and encourages excessive risk taking. After the dot com bubble and 9/11, chairman Greenspan needed to "kick start" the economy again. While Fannie and Freddie were in trouble for their accounting scandals, and Mr. Greenspan lowered the FED funds rate to 1%, all hell broke loose in housing. Stated income stated asset loans, no income verification, you name it. Breath on a mirror, you got fog? You got a loan? Got a pulse, got a loan? It didn't matter if you had the capacity or willingness to repay the loan, it was about making as many loans as possible so they can pooled, packaged, and sold to the investors around the world.

Now back to our new bubble causing action from the new "genius" Ben Bernake. What's happening is the FED is printing money to buy bonds issued by, now fully government owned, Fannie and Freddie, in order to drive mortgage rates down. On top of that they are buying $300 billion in treasuries which is what they do when increase the money supply through their open market operations. Now because we operate on a fractional reserve banking system, that $300 billion is multiplied 9 times to create "new" money out of thin air. How does this work? Let me simplify using smaller numbers. It completely boggles my mind when now we're throwing around the word billion and trillion like its nothing. Well wake up, because the FED is printing TRILLIONS of dollars to solve a borrowing and spending problem. That's like telling a junkie to shoot up more to solve their dependency problem, its completely absurd.

But anyway here is how the creation of money occurs. Lets say the FED wants to increase the money supply. They buy $1,000 in treasuries on the open market. That $1,000 is now put into the system. Okay now the FED require most banks, depending on how much they have on deposit, to hold a 10% reserve ratio to deposits on hand. This means that for all the deposits the bank must hold 10% of that in its account at the FED or in conjunction with the FED and its vault. Now if the bank has more than the 10% reserves its considered to have "excess" reserves on which it can loaned out in new money. Now we go back to the $1,000. The bank must hold $100 (10% of $1,000) on deposit and loan out the other $900. Now that customer takes that check and deposits it into their bank. They hold 10% ($90) on deposit and then loan out the other 90% ($810). This cycle repeats until you've multiplied that $1,000 into $100,000.

Mind boggling huh? That means for every deposit the banking system can "create" out of thin air 9 times that amount in new money. Not only that but banks charge interest on that nothing. Not a bad deal huh? Well here's where it gets even more interesting. The FED has made these massive purchases, which really all they've done is printed money that we (YOU and ME) have to pay back AT INTEREST! This is because the government is borrowing indirectly through the FED to make these purchases. Not only that but we'll pay higher prices due to inflation because the FED is inflating our currency away, meaning, the purchasing power is eroding due to the massive inflation of the money supply. The 1.8 trillion dollar deficit is REAL! What's going to happen when interest rates begin to go back up and we have to pay higher interest on our national debt? You've got it! This doesn't even take the cake compared to what it will be like when that happens or even worse....the dollar collapses.

At any rate, the MBS buying program isn't even on the radar to most people but its really more DEBT that has to be paid back and its just another 1.25 trillion on top of the trillions already spend in stimulus, currency swaps, and loans made by the FED to people we don't know and the FED refuses to disclose to us. Now from the agency who is NOT a government entity and is frankly unconstitutional, is taking OUR tax dollars and lending 2 Trillion dollars to somebody and we cant' find out who that is. INSANE!

We need to wake up and fight back. Write your senators and representatives and tell them to support Congressman Ron Paul's HR 1207 bill that requires and audit of the Federal Reserve. This is the first step in pulling away the veil of secrecy surrounding this entity that seems to have no limits to its unconstitutional powers. Then spread the word about the FED. Only through education and understanding can we eventually turn the tide by taking action against the corruption that surrounds the government and the Federal Reserve.



Check out this video - amazing.

If you like this blog, check out my other one.  www.livingwithnolimits.net

New Mortgage Rate Lows

Well how about those mortgage rates? Right after Thanksgiving mortgage rates plummeted to new lows driving up refinance volume to new highs. How did this happen? Why the sudden drop? What is going on and how long will it last?

Readers what we're seeing is yet more government intervention trying to stimulate the housing market, which is roughly 16% of the U.S. economy. Starting in 2007 we started to see home prices drop and record foreclosures pulling home prices down even further. Yes i know it sounds so horrible and people are losing their homes and causing banks to lose billions and billions of dollars, but, home prices must come down to restore equilibrium.

You're probably thinking I'm crazy right now. Dustin what are you talking about? Well its simple. Home prices were artificially inflated and rose too high for incomes to catch up. We're not seeing incomes rising in America and with home values and prices sky rocketing into double digits, people couldn't afford to purchase homes. Not to mention the very lax regulatory initiatives from the government to keep predatory lenders at bay. If anything they promoted it.

The Community Reinvestment Act provisions in 1995 set off a chain of events that led us to the current sub-prime, Alt-A meltdown. Guess what? We're not finished. So what has the government been doing lately to promote growth in the housing sector? Well first the Treasury, and now the FED - also known as the Federal Reserve - has been buying up billions of dollars in mortgage-backed securities issued by Fannie and Freddie. Without going into too much detail, mortgage-backed securities are bonds issued by Fannie Mae and Freddie Mac - which are government sponsored enterprises known as the Federal National Mortgage Association and the Federal Home Loan Corporation - aka Fannie/Freddie.

These companies buy mortgages from banks and mortgage lenders, and promote the funding of mortgages by providing liquidity to lenders, through their purchases, freeing up lender capital to continue to fund these loans. Fannie and Freddie then package these loans into securities and sell them to investors worldwide while providing a specific guarantee to investors for any losses and receipt of timely interest payments. When money flows into this secondary market, it drives the price of these bonds higher, resulting in lower yields, thus lower mortgage rates.

Well before the Treasury and Fed stepped in, this market was unstable and had little confidence from investors, and for good reason. Our country was seeing rapid foreclosure with no end in sight. So steps were taken to try to subsidize mortgage rates in hopes that it would make mortgages more affordable thus bringing buyers back into the market, stabilizing home prices, and stimulating the economy.

Its worked in generating business but very few realize what had to be done in order to do this. The Treasury, in order to pay for this, has been issuing billions of new bonds, which is debt, in order to achieve its goal. Now for many of you, this may not send off red flags in your head. Not because you're unintelligent, but because nobody explains it to you. Believe it when I say, if it doesn't want to be known, it won't be told, but that doesn't mean you can't find out or learn.

The government is expected to run a 1.2 trillion dollar deficit in 2009. YES YOU READ THAT RIGHT, 1.2 TRILLION DOLLARS. This means that we are spending 1.2 trillion more than we're taking in and on top of that we are borrowing this money from the Federal Reserve and foreign countries. If Obama gets his stimulus package through Congress it'll turn into 1.6 trillion dollars.

So while I'm very happy to be busy behind keeping up, I'm very concerned about our countries debt load, and the burden it will place on my children and their children for years to come. This debt must be paid and if interests begin to rise again, and they will, this debt will become harder and harder to service putting an even greater burden on the government and leave them to no other option but raise taxes on EVERYTHING they can.

Be very aware of what our government is doing and speak out against actions that will jeopardize the well being of our economy, families, country, and our civil liberties. We are spending our way into bankruptcy leaving us at the mercy of foreign countries who, some of them, don't like us very much. Think your dollar is worth something? Think again. Since the inception of the Federal Reserve in 1913, our dollar has lost 96% of its value and it continues to drop.

WAKE UP AMERICA, its time to be heard!

God Bless!

Copyright © 2008 by Dustin Swigart