So the government says that they are going to stop buying mortgage-backed securities sometime inthe first quarter of 2010.
Then what?
Let’s consider what the Fed’s influence has been – are rates artificially low currently?
The historic rule-of-thumb has been that you could count on conforming mortgage rates to be approximately 1.75% above the 10-year treasury yield. The chart below shows that in recent months we’re about back to the norm:
Friday 10-year yield was 3.356% + 1.75% = 5.106%, which is about where conforming mortgage rates are too, or slightly lower, so the Fed’s help is keeping rates in line with historic spreads.
Jumbo rates were usually about a half-point above conforming rates. On Bank of America’s website today, their 30-year fixed jumbo rate is 5.50% with 0.75% points.
When it comes to the mortgage industry, you can predict the future with great certainty. Once we get into 2010 and the Fed’s MBS pullback is all over the news, lenders will seize the opportunity to bump mortgage rates at least a half-point, if not more, regardless of the ten-year yield. Look at the history – it’s just like gasoline prices, they prey on the fear created in the headlines.
If conforming rates end up in the 5.5% to 6.5% range, the homebuyers will likely tolerate it, especially if prices ease up a bit. Throw in the housing tax-credit and buyers will forge ahead during the first four months of 2010.
But who is going to fund these loans without a guaranteed secondary market?
Apparently our usual suspects; B of A, WFB, JPMChase, etc., are willing to fund jumbo loans and keep them in their portfolio today at 5.50% with 20% to 30% down payments. Wouldn’t they be willing to fund conforming loan amounts with those terms too? Probably, especially if they could get rates into the mid-6’s without the ten-year yield going up much.
The conspiracists will figure that the Fed will be back-door funding a portion of the business anyway, backstopping the whole business all along.
Would there be a market for MBS yields around 6%?
I’m not sure, but I wouldn’t be surprised if Angelo’s private-label MBS machine gets cranked up again. But this time they should do it right.
Sell private mortgage-backed securities on Wall Street or elsewhere with full transparency. Pool the loans with identical terms, and rank/rate accordingly.
Would there be investors interested in buying a batch of mortgages that had 20% down payments, full-doc qualifying and FICOs over 720 if they could get a yield in the high-5-percent range? Let’s break them up into safer 30% and 40% down payments, for a slightly lower yield.
What do you think mortgage rates would need to be to attract an ample pool of investors?
I did a little research on the topic of multiple property offers on short sales.Basically throw out a bunch of offers hoping one sticks.I found this information on a trulia message board:
“What I would suggest is that you get yourself a knowledgeable buyer agent who can help you. You can probably write something into each contract which indicates that you are making offers on more than one property and that if one of your offers is accepted then the other offers are null and void. You might also want to put something to the effect that if more than one offer is accepted, then you (as buyer) have the option to select which offer you wish to pursue.
Yes, you can write multiple offers. The deposit check shouldn’t be going to any escrow company until you have an accepted contract.
I suggest to all my buyers that they write multiple offers. The catch is you must submit a separate earnest money deposit with each offer. You have 17 days, by CAR contract default, to cancel any number of acceptances without recourse. Bear in mind that once your deposit has been cashed (meaning the offer was accepted and your deposit was submitted to the bank, ordinarily within 3 days of offer acceptance), it could take 30 days to get it back”.
It seems like there is a lot of discrepencies out there on this subject.Some agents say it is unethical.I think a lot of agents dont mind the practice and use the 17 day contingency period as an out for the contract.
Any thoughts from anybody?
Buyer and seller beware, it is a scuzzy, slimy, unethical business everywhere you go. Proceed with caution, and be ready to fight.
Making multiple offers on behalf of buyers is the opposite tact to short-sale listings that you can only flirt with, but can’t buy today.
Non-committed sellers, meet your counterpart, the non-committed buyers.
I don’t think there is any conspiracy to it.
Fannie and Freddie loans are the most liquid part of the mortgage market. FHA conforming loan limits went from 460k to over 700k.
When a commercial can ‘underwrite’ a Fannie / Freddie-type loan and resell it onto the US govt, isn’t the US govt backstopping a bunch of loans against a declining base of assets?
How is this not a bailout?
The low rates of today are an outright subsidy of the housing market along with all the other outright subsidies of the housing market. Keep in mind that a rate increase from 5% to 6% reduces affordability by roughly 20%. I predict if that happens the “urgency” to buy will be greatly curtailed. At least until prices come down another, oh say 20% ? I further predict little effect on the bottom end and a great effect on the high end.
CR just covered this topic and stated his belief that rates will only rise at most 50 basis points. I beg to differ.
I wrote a very long comment but chose to pull it. Suffice to say that there is no market for MBS beyond the Fed. If there were, we’d see existing MBS actively trading at that discount to face value. Isn’t happening.
I wonder if there will be more “move up” buyers giving up soon? I am.
After a YEAR+ of looking for a “bargain” in La Costa/Encinitas, I’m officially calling it quits. We’ve made several offers, had several deals fall through, and even made an offer a few weeks ago (I’m embarrased to admit) $25,000 over list and STILL didn’t get the house. We have credit scores of 800, stable income, 20% down. and now we’re done. We decided to stay put in our gorgeous (and inexpensive) Oceanside house and just deal with the crummy schools when the time comes. We’re going to save our money and see what happens when the tax credit ends and rates increase (?).
I’ve been told that we should be praying for interest rates to skyrocket because then home prices drop to compensate. That makes sense, but is that how it works out in the market?
Sorry, but that is not the way it works out historically.
Interest rates tend to go up when the economy recovers. An economic recovery implies higher employment and improved economic optimism. In other words, you will have a lot more qualified buyers to compete with for the house in Encinitas/La Costa if interest rates go up.
The fed will be buying mortgages for at least 5 years at least, the sell crap to the world and wall street is over!I remember the early 90s and all the money was FHA till 97.Only people with good credit and cash stable jobs can buy as it should be,we are back to traditional money standards for quite awhile.So those dreeming to buy a 5000 sq ft house as a first time buyer with marginal income credit and down payment welcome to reality! Buy a cheap house in Oceanside and fix it up and build sweat equity as us old echo boomers did it and stop whining you cant get beachfront on 100 k salary and 20k in savings.
Sorry, but that is not the way it works out historically.
This time will be the exception that proves the rule.
Paid off ho-moaner.
I find your post offensive. From all Gen-xers everywhere who DESERVE a paid-for house from our parents, I think you underestimate our ability to wait out for what we want. Remember, you’re going to die before us.
[/snark]
To be completely honest… your post is laughable at best, but at least mildly humorous. From the group that brought us “buy term and invest the difference”, I think you have invariably shown your generation’s bias that housing prices go up in the long run. You might want to rethink that.
I also believe that they will go up in the long run, but probably not for the same reason, and my version of “the long run” may not quite match yours. Getting the right answer for the wrong reason was still wrong when I went to school, as I hope it was for yours. Luck does not bring success “in the long run”. Housing has been ridden hard and put up wet for 40 years. At this point, that pony is looking a bit haggard and likely to keel over at the next FED meeting.
I’d recommend the book “Pushing on a String” by Mansard Ruuf or “Deflation’s a Bitch” by Jill Tedin Vester. Very good reads and quite useful.
It might be useful to see what happened in Japan after the double-bubble of the 1990s. I think I’m turning Japanese!
Chuc
Would there be investors interested in buying a batch of mortgages that had 20% down payments, full-doc qualifying and FICOs over 720 if they could get a yield in the high-5-percent range? Let’s break them up into safer 30% and 40% down payments, for a slightly lower yield.
What do you think mortgage rates would need to be to attract an ample pool of investors?
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IMHO, there is no one right answer. It would greatly depend on what fixed-income investors believe will happen WRT inflation and interest rates going forward. If they strongly believe that interest rates and/or inflation will move up quickly, then the longer-dated bonds would see much higher rates, and the yield curve would steepen (IMHO). It would also depend on what the future of the job market looks like. Also, the rates and risks of other fixed-income investments might affect rates both positively and negatively (if municipal bonds start to default en masse, then Treasuries rates **might** go down as investors flee to “safer” investments). There are so many variables that can affect mortgage rates.
The issue isn’t just the Fed’s purchases of MBSs, but their purchases of Treasuries as well. I believe the Fed is sitting hard on long-dated Treasuries, and that the 10-year yield would be somewhere around 5-7% if not for the Fed purchases. Mortgages would probably be in the 6-9% range (wide spread, but just a guess here) if all rates were determined by the free market.
With 30%-40% down payments and 720+ FICO scores, secure jobs, etc…if the Fed stopped buying MBSs, I think the private market would be willing to buy them in the 6-9% range.
Without the FED rates will climb significantly higher IMHO. The risk of default is much higher as priced in (considering high housing prices). Plus investor will ask for an additional risk premium after the experience they made during the crisis (It will be difficult to pursuade Investors, who got a bloody nose, to get involved again)
RE: “Buy a cheap house in Oceanside and fix it up and build sweat equity as us old echo boomers did it and stop whining you cant get beachfront on 100 k salary and 20k in savings.”
Well guess what? That’s what we did. We bought a fixer in Oceanside and completely remodeled it ourselves tills our fingers bled. We have 200K in equity. So I don’t think I’m whining… Just complaining. 🙂
I’ll give my 2 cents as a money manager on the: “What do you think mortgage rates would need to be to attract an ample pool of investors?”
With the current environment, the answer is not much, especially with any kind of gov’t guarantee (implicit or explicit). I’m looking at my price list for 8-10 year A rated paper and yields are 4.0-5.5% depending on the issuer (issuers include BofA, Dominion Resources, PG&E). If I originate a 30 year for 5% and repackage it to yield 4.5%, there’d be PLENTY of demand for it, especially with the additional safeguards Jim mentioned. Sounds crazy, but your typical GNMA pools now are yielding sub 4%(!)
Again, this in an environment with a 6 Mo T-Bill at .15% (yes, 0.15%) and a 10 year at 3.4%ish.
PS – Jim – keep up the good work!
Would there be investors interested in buying a batch of mortgages that had 20% down payments, full-doc qualifying and FICOs over 720 if they could get a yield in the high-5-percent range? Let’s break them up into safer 30% and 40% down payments, for a slightly lower yield.
What do you think mortgage rates would need to be to attract an ample pool of investors?
Yes, 7% range would bring back investors to the MBS market.
Yes, Investors will re-enter MBS market given the straightened up conditions you describe – solid money down, documented borrowers, even the same ones that got burned before I bet…
What rate? — Whatever is competitive. When inflation gets kicking all bets are off, but for 2010 I bet 5% investor yield and 6% mortgage rates sounds reasonable. (i don’t know enough to know if this 1% is fair margin to cover earned fees and profits associated with originating and pooling and selling the loans)
The big problem that I see for the MBS market and just the overall market is so many competing sources need funding. The US treasury probably needs to sell another 1-2 trillion of US treasuries next year. The Commercial real estate market needs to sell 500-700 billion in refinancing. Municipal Governments and States need to sell bonds for deficits. There’s only so much money available out there to fund all these acquisitions. Who do you want to loan your money to and at what terms? The competition is going to push rates higher across the board, unless they tank the equities market and push people into the perceived safety of bonds.
It might attract US investors but with a falling dollar foreign investors will stay away for at least another year. Look for another dip in housing prices next summer.