Posts Tagged ‘Mortgage Backed securities’

Mortgage that Matters: COULD RATES ACTUALLY GO LOWER?

By Rick Soukoulis | July 21st, 2010 0 Comments

The past several months seem to prove that you shouldn’t always trust conventional wisdom. Most recently, conventional wisdom was that in March, the Federal Reserve would have finished buying the $1.25 trillion in mortgage backed securities they were authorized to purchase, and when this heavy buying activity ended, mortgage rates would shoot up in April, May and June.

It was simple economics. If the Fed was in there every day buying up mortgage securities, this heavy buying would drive MBS prices up and rates would go down.

This did work, and the low rates were precisely what the Administration hoped would happen to get the housing market back on its feet.

The 800 pound gorilla was the fear of what would happen when all this buying activity by the Fed ended.

Basic economics would seem to indicate that rates would have gone up and perhaps significantly.

Even worse was what would happen when the Fed started selling these securities. If they were to dump even a few billion a day, the constant selling would drive MBS prices down and mortgage rates up.

Almost everyone predicted this scenario, and many housing economists thought it would be devastating to the housing markets.

But in an economy with so many moving parts, things often turn out differently than expected.

Rates not only didn’t go up, they’ve actually gone down, and this has huge implications.

With rates dropping toward 4.5%, we are seeing a whole new wave of refinancing, and many of these loans being refinanced are in mortgage securities owned by the Fed! As a result, this $1.25 trillion in MBS the Fed owns is gradually being paid off on its own. And the more people re-finance, the more will be paid down.

The implications of this are huge. If the $1.25 trillion pays down through refinance activity to, say, $750 billion, that could open up the Fed to buying another $500 billion to get back to the $1.25 trillion number.

If you think about it, a new round of Fed buying, as they replenish their holdings, could drive rates to a level no one could have ever dreamed of.

As hard as it is to imagine rates being as low as 4.5%, a new round of Fed purchases could drive rates to 4.0% or even lower.

As Yogi Berra once said, “Who’d have ever thunk it?”

Indeed.

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Intero Insider: A Delicate Balance

By Gino Blefari | February 10th, 2010 0 Comments

For the past two years or so, our nation’s economy has been floundering, doing all it could to get its head above water. The real estate industry has played — and continues to play — rather a large role in how the story pans out. But contributing to successes and failures in our own industry are untold numbers of mitigating factors, from fraudulent lending and sub-prime mortgages, to over-inflated sales prices, foreclosures, tax credits, and the some of the best sales prices in recent memory. When working together properly, these things can spur wonderful upward movement.

When something is knocked even slightly askew, however, that delicate balance can be thrown into a tailspin.

There has been great news of late, of course. Many neighborhoods across the nation have seen upticks in sales prices, many listings are, once again, seeing multiple offers, and interest rates are at astonishingly low levels.

Now, though, we are holding our collective breath, as several things that have helped spur the market along are poised to come to a halt.

First, the homebuyer tax credit. It’s been credited (no pun intended) with getting a lot of buyers into the market that wouldn’t have been otherwise. It was expanded in the Fall, but will expire this Spring.

Strike one.

Second, foreclosures. As we’ve reported already, the incidence of foreclosure continues to rise. Many homeowners in financial distress are simply making the decision to walk away from their homes, and their debts right along with them.

Strike two.

Third, we have another wrinkle. Those low interest rates that we just mentioned? They’re due in large part to Federal Reserve purchases of mortgage-backed securities. Thus far, the Fed’s purchases total almost $1.25 trillion dollars, but those purchases are due to stop near the end of March. This move will likely cause interest rates to turn upward. How much will they rise? That remains to be seen, but initial estimates have them climbing by more than a percentage point by year’s end.

Strike three.

These three factors coming together at roughly the same time could, potentially, throw the tenuous balance and modest signs of recovery we’ve seen thus far completely off kilter. The ever-changing conditions make the handling of a real estate transaction, whether for a buyer or a seller, all the more difficult. Intero’s real estate professionals stay up-to-date with the latest trends and will know which will affect you, and which won’t.

Negotiating the most important financial decisions of your life requires all of the information.  Your Intero real estate professional has that information and will help you keep things in balance.

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Mortgage that Matters: Happy New Year from the US Government

By Rick Soukoulis | January 8th, 2010 0 Comments

When I first got in the Business in 1981 I met someone wearing a little button on his lapel with these letters, EGBAR. He told me it stood for “Everything’s Going to Be All Right”.  At the time interest rates were 18.5 % and 4 points… That’s how I feel about the government’s latest policy pronouncements about Fannie Mae and Freddie Mac.

As you might know, the federal government on Christmas Eve made the announcement that the U.S. Treasury would essentially provide these two agencies with as much capital as they might need.

Originally, there has been a cap on how much money the government would provide, but the administration said that they will now do whatever is necessary to keep these Agencies alive and well.

There’s almost unanimous opinion by analysts that these two agencies won’t need additional monies, but housing experts still applauded the move.  And I’m one of them. Their view is that by saying they will stand behind Fannie and Freddie, even if such a statement is not necessary, it would provide a calming influence to investors in the agencies’ debt.

Let me explain something.  There are two types of securities at issue, (1) Fannie Mae and Freddie Mac Mortgage Backed Securities, and (2) bonds issued by these two entities.  The first category is and always has been backed by the full faith and credit of the U.S. government.  Investors know that if they buy a mortgage backed security they will not lose any principal.

The bonds issued by Fannie and Freddie are another thing, however.  They have never been backed by the U,.S. government.  Interestingly, many people thought so, but it simply wasn’t the case.  By offering unlimited support, investor around the world can safely buy Fannie or Freddie bonds.

People opposed to this support say it provides Fannie and Freddie with a blank check.  And from a literal point of view, they’re precisely right.

However, broader public policies are at play here, and the real issue is that such a “blank check” will probably never be cashed, but the fact that it exists will provide stability and predictability to our housing markets.

Right now, with such a fragile economy and difficult housing environment, stability and predictability are precisely what the market needs.

I applaud what the government did.

I think it will help get things back to normal.

EGBAR

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