December 29, 2009
December 29, 2009 by admin
The winning streak for the stock market finally came to an end today as the Dow closed down slightly. Mortgage interest rates continue to move higher as the end of the year approaches. Yields on the ten year bond are now past 3.8%, driving fixed interest rates for thirty year home loans well past 5.25% and sending fifteen year loan rates closer to the five percent level. The uptick with interest rates began in early December as inflationary pressure is beginning to surface in the economy. The overall improvement in equities are brining in more investors, pulling cash out of the bond market and into the stock market. The normal supply and demand correlation between bonds and stocks has been relatively mutated this year as interest rates have been heavily influenced by the FOMC to keep mortgage rates attractive for homebuyers. The low interest rates helped to push home values up for the fifth straight month according to a report released today from Case Schiller.
Volume in the markets is always a concern during the holidays. The lower volume can influence the market to rise or fall in greater swings during this period. The market has shown resiliency despite the fears that the recovery could take significantly longer than previous recessions. Job growth remains one of the largest concerns for the economy heading into the new year. The non farm payroll report which is due to be released at the end of next week will certainly set the tone for the economy in January and the first quarter. Following a month in which the market improved sharply for the November as job losses decreased, escalating pressure for the market to start adding jobs in the near future.
Fannie Mae and Freddie Mac are back in the news as both firms will require additional capital injections into 2010. The companies were given further financial leniency with their capital ratios that were intended to keep their loan portfolios in check. The controversial decision to eliminate the caps on the agency lenders comes at a time when both lenders are playing a critical role in helping to stabilize the real estate market. The agency lenders are being relied in conjunction with FHA to provide the necessary secondary financing in the market. There role has been heightened due to the failure of the mortgage backed security market as investors in MBS have been reluctant to reenter the secondary lending marketplace.
Look out for inflation driving rates up in 2010
December 26, 2009 by admin
The new year is right around the corner and with it brings renewed expectations of economic improvement and a greater possibility for inflation to be a key factor in the economy. Traditionally in a healthy economy, the rate of GDP is relatively contained and inflationary pressure is balanced through the Fed raising and lowering the rate on the Fed Funds and Fed Discount rate to keep inflation in check. The past twenty four months have been anything but normal as the Federal Reserve reacted aggressively to drop the Fed Funds rate down to zero attempting to stabilize the financial market and limit the economic recession. The zero percent Fed Funds rate has been a critical element that has helped stabilize lending. Banks have had the luxury of borrowing money from the Fed and lending it to the public with great margins, helping to improve their profit margins and provide some critical sources of revenue.
The month of December has been great for the stock market which again surpassed its high point for the S&P500 as investors are increasingly shifting into equity positions. The stock market has had minimal impact on the bond market for the greater part of the year, as long term yields have been near historic lows for most of the year, benefitting home owners and home buyers with great interest rates for home mortgages the entire year. This trend is starting to see a larger shift to traditional supply/demand equity and bond market swings. The improvement in the equity markets and the economy has left many investors of the opinion that inflation is going to become an issue into 2010. The threat of inflation in the market has one resounding effect, it pushes interest rates to move higher. This evidence of inflationary pressure in the market has been a key factor in driving the yield on the ten year treasury bond from 3.3% in late November, up to nearly 3.75% to end the month of December. Many experts are now predicting that the ten year treasury will likely surpass 4% in early January and could easily reach 5% in late 2010. The higher the ten year yield rises, the larger the spread between long term and short term rates will become until the FOMC addresses this area in the market. The short term potential for a large discrepancy between long and short term interest rates is certainly likely as investors are more likely to bet on an economic recovery, forcing long term yields, versus the FOMC which is likely to cautiously address the increase of short term rates as a measure to be certain the economy is firing on all cylinders. The likelihood of an increase in short term rates in the first quarter is fairly uncertain with most experts predicting the FOMC to raise interest rates in the second to third quarter of next year.
Inflation will be a hotly discussed topic over the upcoming months. Home buyers and owners should consider locking into mortgage rates quickly as there is little reason to believe that rates are going to move lower into 2010. The balance of short term lending should be safe as the prime rate has been unaffected by the recent increase in Treasuries. A key weapon to combat higher inflation is with higher interest rates, a scenario that could become a reality in the near future.
December 22, 2009
December 22, 2009 by admin
Mortgage rates are moving up sharply to finish the month of December. Interest rates for thirty year mortgage loans have gained well over .375% during the past thirty days as the bond market has seen a sharp rise with yields. Treasury yields, surged past 3.5% late last week as they surpassed the sixty day ceiling and quickly set eyes for a target of 4%. Most national mortgage lenders are now offering thirty year home loans at 5.25%, a historically great interest rate, but up sharply during the past month. The rate for fixed fifteen year mortgage loans remains in the high four percent ranges, but the momentum is quickly driving long term rates to move higher.
The stock market has held relatively steady over the past two weeks. Economic news continues to send mixed messages as to the speed the economy is likely to recover in 2010. There remains little doubt that the global economy has turned the corner, the larger question become will the recovery be a V shape or a U shape. Today investors and economists had the opportunity to review critical economic reports. The first major report of the day was the revision downward of third quarter GDP. The rate of growth for the economy was lowered from three percent down to two percent. This had the potential to derail the market, but the existing home sales report for the month of November was released later in the morning, showing a surge of nearly eight percent with existing homes sales last month. The real estate market continues to offer a ray of hope as home sales have been better than expected almost every month since June. The month of November was a strong recipient of buyers who rushed to lock in contracts prior to the end of month tax rebate deadline, which was later extended into early 2010. In addition, buyers benefitted from a drop in long term rates in early November as fixed mortgage rates flirted below five percent for both thirty and fifteen year loan terms. The real estate market has been showing signals of a recovery, but there remains a large gap in keeping homeowners in their properties and avoiding bank foreclosures. To date the governments push for refinancing and home loan modifications has had little success in helping to slow down the rate of bank repossessions. CNBC featured a great interview with financial expert, Suze Orman, who was pushing for the government and banking industry to apply a universal principle balance reduction, lowering mortgage balances inline with today’s market valuations. This universal approach would not discriminate against homeowners who have continued to pay their mortgage on time and would work towards reducing the possibility of homeowners from simply walking away from upside down real estate investments. To date, most lenders have shied away from the forbearance concept of addressing the mortgage crisis. This approach if adopted would have a wide appeal to everyone except the mortgage companies as it would be a fair system that benefits property owners who have maintained their payments, despite a record drop to their net worth through there home value deterioration.
Insurance bill hits the home stretch
December 20, 2009 by admin
The Senate is nearing a vote on what promises to be amongst the most controversial pieces of legislation since the TARP program was unveiled late last year. This weekend, rumors started to swirl that a key Democratic Senator, Ben Nelson would consider supporting the legislation in exchange for more input in the bills language as well as additional funding to his state. As with almost every piece of government legislation, this type of political jousting adds in extra pork driving up the overall cost of the proposed legislation in order to secure votes from party members who have been riding the fence.
The hotly debated topic of public health care is now directly in the hands of the Senate who are promising to have a bill in place prior to the holidays beginning. The push for health care reform was a key part of the platform President Obama ran on in the past election and is likely to be one of the key parts of his legacy if it becomes a reality in the near future. The prospects of health insurance coverage for millions of Americans who are have no coverage or can’t afford their current coverage could be a welcome holiday gift to start the New Year. The economic tsunami of the past year as resulted in over three million job losses, further straining the health system with yet more people without health care coverage.
The key areas of contention with the proposed health care reform bill are centered around the public health care option. The impact of covering thirty million uninsured Americans is one that is driving legislators to work overtime in pushing the bill through before the new year. Health care insurance companies will no longer have the option of denying coverage for pre existing conditions, a key component of the new legislation. In addition, the new proposal will open up the option of consumers to shop for insurance companies across state lines, one of the areas that limit the coverage options and drives up the price in today’s private market.
The new health insurance program will be financed in part by the elimination of the payroll tax benefit currently in place. Currently, when an employee receives health insurance coverage, the payment amount is not taxed. The government will look to reduce this benefits based on the taxpayers income bracket and their family exemptions, in addition insurance companies that have higher rates would be subject to additional surcharges and levies to help fund the legislation.
Rates remain unchanged as FOMC seeks to reassure the markets
December 16, 2009 by admin
The announcement of Ben Bernanke receiving the Time person of the year had little impact on the FOMC’s decision to leave interest rates unchanged. The Fed is not likely to raise interest rates in the near term, and almost all economist predicted there would be no change with monetary policy this week. The news out of the FOMC today was in like with most experts predictions, the real news story is the verbiage of the policy statement and not the rate decisions. It appears from today’s policy statement that the FOMC is content that inflation remains very much in check and they don’t see much inflationary pressure in the markets, despite a surprising PPI report earlier in the week. The dramatic meltdown the economy experienced over the past 18 months has brought most commodity prices down, eliminating a large portion of the inflationary pressure in the markets. The near term inflation pressure could arise from energy, although it is hard to imagine oil prices climbing sharply prior to next summer.
The policy statement today also reflected the significant improvement within the non farm payroll report for the month of November. The slight drop to unemployment has fueled a broad based equity market rally and provided the Fed with some assurance that the economy is headed in the right direction. Critics are quick to argue that the true level of unemployment U-6 remains extremely high and the slight improvement with the recent figures could reflect an improvement from the retail industry and may not be self sustaining. The Fed appears content with the recent improvements and will have the benefit of reviewing and additional two employment reports prior to their next policy meeting. The long term outlook for interest rates is going to become clearer as we head into 2010, but there remains little doubt that interest rates are going to be moving up sooner rather than later. The news out of the FOMC was well received in the finance sector, where banks will continue to have the luxury of borrowing money at a zero percent rate and lending with a hefty margin. Lending profit margins are at their highest levels in years and could help bring back some profitability to struggling banks as early as next year. The overall equity markets did not enthusiastically greet today’s policy news as the Dow dropped in late trading. Long term interest rates remained relatively unchanged as the ten year moved down slightly from 3.59% to 3.57% today. Mortgage rates remain above their thirty day moving average with little reason to expect a retreat in the future. The FOMC is going to play a pivotal role in the housing and mortgage markets over the next six to twelve months as they reduce their key supporting role of the MBS markets. This transition is likely to raise long term rates and will be heavily monitored by investors and consumers. The time to buy real estate is very much over the next four months as the governments tax credit extension will also be ending in April of 2010.
December 15, 2009
December 15, 2009 by admin
The stock market sold off sharply on Tuesday following another major bank announcing they would be exiting the TARP program ahead of schedule. Wells Fargo follows fellow industry giants Bank of America and Citigroup with early repayment of TARP funds in move designed to distance itself from government oversight and position the company for long term growth opportunity. The company announced they would be issuing common stock among other avenues in an effort to raise billions of dollars in new capital. The banking and finance industry are coming under heavy criticism from the government for a failure to lend to the smaller and medium sized markets. Speculation over the last two weeks that big banks would pay back the TARP funds ahead of schedule in order to free up funds to pay bonuses is only adding fuel to the fire. On Monday, President Obama summons key banking executives to the Whitehouse to stress a renewed urgency to improve lending and the role of the banking markets with helping to pull the country out of the recession. There remains a large divide between Main Street America and corporate level bankers and the President is adamant to try and bridge this gap.
Mortgage rates remain in a state of uncertainty today. The drop in the market has had little impact on long term bond yields, which have risen almost forty basis points in the past thirty days. National mortgage lenders are offering thirty year loans well above five percent as interest rates have risen by over .25% during this period. Fixed rate fifteen year home loans are being offered in the high four percent range, but there remains selling pressure in the bond market as investors are growing more confident over the long term prospects of the equity markets.
The major economic news of the day was the release of the PPI (Producer Price Index) for the month of November. The wholesale inflation report rose nearly two percent, driven by a sharp increase in energy prices. Inflation has not been a significant factor within the economy since the start of the recession over one year ago, and low levels of inflation help provide the FOMC time to keep monetary policy friendly. There is a strong sentiment that the Fed will need to tighten its monetary policy beginning in early to mid 2010 to help fight the risk of inflation and potentially strengthen the dollar.
FHA reforms could derail the real estate recovery
December 13, 2009 by admin
Why the government is dropping the ball as they plan alter lending guidelines, further challenging the real estate and mortgage markets. The phrase, “you got us into this mess, know get us out of it” is something that the government is straddling the fence on. The dramatic decline in the real estate industry can be credited to a number of failures in the checks and balance system that should have been in place safeguarding the mortgage and finance industry. On every level, the government failed to properly regulate the process, and the end result led to one of the worst financial catastrophes and recessions in the past fifty years.
From the consumer level, the creation of “liar loans” were simply to hard to pass up. Purchasing homes with zero down with debt to income ratios often exceeding fifty percent were commonplace for a number of years in the mortgage markets. Consumers were financing the entire transaction, including all of the closing fees as lenders became more creative in finding loan programs to further lower house payments, ultimately driving the demand cycle higher and pushing home prices up sharply across the country. The economics of supply/demand left few investments with a better return than real estate for a better part of the last decade. Home owners grew accustomed to annual appreciation gains of ten percent a year or better, often refinancing their mortgages to pull this equity back out and reinvest in the economy, further spiraling the growth of the market and consumer goods industry.
The cycle seemed almost too good to be true as lenders lined up by the dozen to create new loan programs more creative than aggressive furniture deals where consumers are not required to make payments for months at a time. All along the industry was relying on the appreciation factor to hedge their risk bets and capitalize on the quick bucks. The secondary mortgage market, where the original loans were bought and bundled to be resold to investors and equity firms, jumped on the real estate bandwagon extremely hard. These lenders often borrowed money to further invest in the mortgage market, drinking the too good to be true cool aid and adding more fuel to the fire, all the while regulatory oversight from the government was asleep at the switch.
The end result was a major collapse that has caught everyone from Main Street to Wall Street in the cross hairs. The collapse of the finance markets, brought on major financial commitments by the government to stabilize the real estate and mortgage markets. Through subsidization of the mortgage backed security market, home loan rates have been at or below fiver percent for almost the entire year. Tax incentives aimed at bring first time buyers back into the market have been a key catalyst that the real estate industry is touting aided over 300,000 buyers to purchase this year alone. The real estate market is like every other commodity market in the world. Home prices are a direct reflection of the supply versus demand equation. As more buyers become eligible with attractive financing alternatives, inventory is eliminated helping to stabilize prices. Sounds like a plan to fix the markets and help bring an end to the economic recession of the past two years is finally working, especially when you consider the market has reported better than expected home sales for five out of the last six months. The largest trade organization was successful in lobbying the government for an addition six months of tax credits for both first time buyers and move up buyers. You might assume that the real estate market is poised for a major rebound in 2010 with all of the parts working in sync to help reduce inventory, stabilize prices and provide some certainty to Main Street. But the latest news from the Governments largest financing entity FHA a division of HUD should be sending shock waves to the economy and real estate markets.
FHA loans have picked up market share at an unprecedented clip over the last twelve months. The mortgages are the loan of choice for first time buyers as they provide an opportunity to finance with minimal down. The loan guidelines have been consistent for the better part of the last ten years and FHA has never offered a stated income or liar loan program. Unfortunately, FHA mortgages have fallen victim to the plight of the real estate industry in that home foreclosures have skyrocketed upward. HUD is scrambling to find ways to stabilize the agency and has announced underwriting guideline changes that at first glance would make sense. A common reaction to struggling loan portfolios is to say the future loans need tougher guidelines, this theory could not be further from the truth on FHA loans. Its fair to say that FHA loans have performed much better than mortgages where the borrowers simply created their own job title, salary and bank information. FHA has traditionally always been a process that requires full documentation underwriting as well as stringent appraisal standards. The current loan performance is a reflection of the real estate market collapse, brought on by the failed liar loans, and the residual impact this has had on driving the national unemployment rate well past ten percent. The short sighted decision by the government to make FHA mortgage loans harder to obtain simply eliminates more buyers (simple economics) which further distances the market from recovery. The real estate market is setting itself up for a huge decline in the second half of 2010. Without the government tax incentives, FOMC commitment to subsidizing interest rates and now even more challenging underwriting guidelines, there appears little hope that the economic recovery will sustain. The government should be focusing on strengthening FHA role to help ease the transition of tax rebates and rate subsidizes, helping to support the demand equation.
December 10, 2009
December 10, 2009 by admin
Stocks moved higher today following a strong day of news and testimony from Secretary Treasury Timothy Geithner on the hotly contested repayment of TARP funds. The stock market has been moving significantly higher following last weeks news of the improving job picture. The finance markets have been mixed with news that Bank of America, Citigroup and Wells Fargo looking to repay their TARP funds. The early repayment of monies to the government is being viewed with mixed results from analyst, investors and the general public. Perception that the worlds largest banks are hoping to escape the scrutiny of the government so they can enhance their pay packages and issue new bonuses is drawing heavy criticism. The perception that these companies have magically fixed their balance sheets and core capital ratios, despite a continued stream of rising unemployment is a major red flag for critics of the move. The companies decision to repay borrowed TARP funds comes at a time when the companies have seen a health bounce to their share prices from early March lows, upwards of 300% for each company have provided them with some cushion to dilute common shareholders through new equity offerings.
The banking industry is drawing further criticism from the government today as results from the making home affordable program have been extremely disappointing. Despite promises to modify hundreds of thousands of distressed mortgage loans, banks and lenders have fallen short of their goals. The lenders have quickly piled up extra revenues with huge surges in volume in their lending departments thanks to government aided low mortgage rates. These same companies have performed poorly in helping existing homeowners restructure their loans to avoid home foreclosure, despite promises to the contrary. Renewed discussion today from Congress could further pressure lenders to step up their aid to homeowners. There are two areas the government is looking to become involved with including allowing judges to modify mortgages through bankruptcy as well as exploring principal balance write downs with delinquent mortgages. The latter seems to be the most logical battle against new foreclosures as a good percentage of property owners simply are walking away from properties that are tens to hundreds of thousands of dollars underwater.
Home loan interest rates have moved up since the release of the non farms payroll report. Fixed loan rates for thirty year home loans are being marketed at or above five percent with major national lenders. The yield on the ten year Treasury bond is hovering just below 3.5%, closing at 3.49% on Thursday a key thirty day moving average that the mortgage industry should be closely following. All indications in the near term are that December mortgage rates have little opportunity to move lower and the possibility of higher rates is significantly larger.
jobs report sends interest rates up sharply
December 6, 2009 by admin
Home loan rates are moving higher, jumping sharply at the end of the week following a much better than expected non farms payroll report for the month of November. The key economic report which measures unemployment rate as well as the number of unemployed within the market had its best showing for the last 18 months and sent a jolt of optimism through the economy and into investors last week. Yields on bonds were up sharply following the news released early Friday morning. The yield on the ten year Treasury bond was up nearly twenty basis points for the week following the labor news, moving from the low 3.2% range earlier in the week to close on Friday at 3.48%. The sharp spike in bond yields carried over into mortgage interest rates, which jumped between .125-25% for thirty year loan terms with most national mortgage lenders on Friday. Long term rates for thirty year loans are now back above five percent, following a stint where they had dropped below five percent and reached their 2009 low mark, according to a report from Freddie Mac, released earlier in the week. The mortgage industry has been relatively immune to pressure from changes in the equity markets in 2009. The sharp increase in yields on Friday was a bit of a suprise as the equity market sold off almost all of its gains in late trading and finished the day up well below session highs. Long term rates are generally sensitive to changes in the equity markets, but 2009 has been a strange year to follow and predict the direction interest rates are heading. One thing that is almost 100% certain, is rates will be heading up in 2010.
The stock market could play havoc on long term rates over the next few months. Investors could dramatically shift their capital out of the bond markets if they believe a further equity market rebound is likely to occur in 2010. The job market and unemployment are traditionally lagging indicators for the health of an economy, as witnessed by improving GDP numbers despite unemployment continuing to expand. The future test will certainly be focused around job creation. Fridays report was a great signal that corporations may finally be done with rightsizing their way back to profitability, but provides little guidance to the probability these companies will again start to hire workers back into their companies and provide meaningful job growth for the future.
The short term prognosis is that interest rates do not appear likely to retest November lows anytime soon. The economy will likely continue to produce economic reports which meet the satisfaction of the investment community, which has shifted its focus to long term growth opportunities, realizing the worst of the recession is now likely over. Interest rates will be under pressure further into 2010 as the Federal Reserve exits out of the MBS market and more attention is placed on tightening the monetary policy. The free market equity/bond markets could lead to sharp move in long term mortgage rates, a challenge the real estate and mortgage industry is likely to closely monitor. Buyers who are on the fence should start to react with a greater sense of urgency if they are hopeful to take advantage of incredibly low interest rates.
Investors get nervous ahead of employment report, despite B of A news
December 3, 2009 by admin
Investors got cold feet ahead of Friday’s critical non farm payroll report. The market sold off sharply in late trading on Thursday as investors looked to hedge their positions prior to the critical report. The market has been riding a wave of good news over the last week and was up sharply to start the day as news from Bank of America lifted the global markets. Less than nine months after receiving $45 Billion dollars of emergency loans from the government through the TARP program the company announced it would be paying the loan back to the government. The company indicated they have the potential to realize up to four billion dollars worth of annual savings by eliminating interest and dividend payments on the current loans. The savings was deemed significant enough that the board of directors will allow the company to pursue a capital raise of nearly $18 Billion dollars through a common stock offering and the balance of the funds to come through cash and other readily available equivalents. The company has been in the process of searching for a replacement to CEO Ken Lewis, and speculation that the governments oversight on potential compensation may deter potential candidates may have been a residual impact on their decision to pay back the loan early.
Bank of America was forced to borrow money from the government to shore up its core capital ratios last year. During the panic that followed the collapse of Bear Stearns and Lehman Brothers, the capitals markets were in complete disarray primarily as investors lost confidence in the financial system and their accounting standards. The impact of diminishing loan portfolios (Bank of America being one of the largest) thanks to their earlier acquisition of Countrywide Home Loans put the company in a perilous position with the markets. Investors and counterparties lost confidence that the company would be able to adequately weather the upcoming financial recession as their capital positions were called into questions. Large banks have traditionally been able to operate with core capital ratios of 8 to 1, thus leveraging their deposits and assets with future lending. As the values of their assets diminished, the banks were forced to write down these assets by billions of dollars, further straining the markets and raising doubts to their viability. Over the last year over one hundred banks in the U.S. have been forced into receivership by the FDIC, including IndyMac Bancorp, which resulted in a three billion dollar charge to the agency.
Declining home values and bank foreclosures have been extremely challenging to the banking industry. The real estate markets have shown signs of stabilization over the last six months as buyers have started to regain confidence in the markets. Historically low mortgage rates, combined with government tax credits have been a major boost to buyers confidence. The banking industry still faces a significant challenge with the rise in foreclosures as unemployment has yet to show signs of stabilizing. This weeks non farm payroll report, combined with the news from Bank of America could help provide further stability and lead to another push in the equity markets.