Today...the Federal Reserve exits the train station and ends their 15 month long buying spree of mortgage backed securities (MBS).  This purchase program helped bring some stability to the housing market since its inception in January 2009.

Looking back to late 2008, mortgage rates were in the 6.5% range and housing was on a fast downward spiral.  The government wanted to bring rates lower to stimulate housing, thus making it cheaper to buy or refinance homes.  In order to bring rates down, there has to be an appetite for buying MBS.  At that time very few investors were buying MBS, so the government stepped in as a buyer. 

The Fed's entrance into the MBS market accomplished two things.  First, their massive purchases drove yields higher and rates lower.  Second, they brought some confidence into the market for other potential investors.  How?  Well, a purchasing investor has confidence he has a seller (the Fed) in case he wants to make a fast exit.  It lowered the risk of getting stuck holding the bag...or bond in this case.

The result was exactly as the Fed hoped...rates moved lower.  While there were periods of upward trends and intra-day volatility, mortgage rates have remained historically low.  As we wrap up today, the Fed has purchased $1.25 trillion in MBS since the beginning of this program.

The Fed began unwinding there purchase program back in the fall of 2009.  Originally scheduled to exit the program at the end of 2009, the Fed extended the exit date to today, March 31, 2010.  They did not increase their dollar commitment, just extended the deadline.  Purchases of MBS have declined from around $30 billion/week to lately about $5-$6 billion/week. 

What happens after today?  Where will rates go?  As the Fed gravy-train pulls out of the station, it leaves a void in the market which will push interest rates higher.  Think about it...less buyers means prices move lower.  Lower prices on bonds mean higher interest rates for home buyers. 

Another dynamic I will be watching is the Fed changing their role from being a buyer to being a seller.  This could add additional pressure to the bond market.  Dallas Federal Reserve President, Richard Fisher said that "the Fed must sell back those Mortgage Bonds to the market, but it is not yet time to do so."  There is growing sentiment among the voting members of the Fed to start trimming their balance sheet over time.

Remember, rates are historically low and although the trend will likely be higher...rates will still remain very attractive.  That combined with deflated home values continue to make this a great time to be a home buyer!

There's plenty of chatter to go around regarding Shadow Inventory?  And it has been defined many different ways, some of which are incorrect.  So let's get our arms around it and see if we can make some sense of this.  Shadow inventory is housing units that are not making it onto the public market for one reason or another. 

Much speculation has taken place as to "why" these properties are not coming to market...

• Lenders are overwhelmed and don't have the staff to handle the glut?  Wrong answer.
• Lenders are simply don't have an efficient system in place to handle this mess?  Wrong again.
• Lenders are arrogant and just don't care?  Well, there may be some truth to that...but in this case, wrong again.

So what's the deal with lenders?  And why might this Shadow Inventory be lurking about...in the shadows?

It all starts with the Banks capital ratio requirements.  First - what is Capital Ratio?  Banks are required by the Fed to maintain certain capital ratio's - meaning they are required to maintain a level of cash in relationship to the dollars they have loaned.  The requirement is about 16-1, so they can lend 16 x the amount of cash on the balance sheet.

As a bank, if they take a loss in the form of a foreclosure, that loss goes against the capital account, reducing the amount of capital...so the bank has to raise more capital to stay in compliance, or call some loans due.  And let's face it...with all the pre-foreclosures, that could be a very sizable hit to a capital account.  It is easier for them to suck it up and take the monthly payment loss and carry the home a while rather than write it off and have to raise boatloads of capital.

Here is an example of how it works:

Let's say we decide to open a bank with $1,000,000 cash.  That is our capital account.  But we don't lend that out.  We encourage people to bank with us and open a deposit account (maybe we'll pay 1/2%)  and we take that money and lend it out at... say 8%.  Our Bank makes the spread of 7.5%, called arbitrage.  We take in as much in deposits and lend out as much as possible and keep increasing that spread.  But we are limited though...we can only loan out 16,000,000 (16 x our capital account).

Even though we have tough lending practices, we still realize that some loans will lose money, some will default.  When that happens, we cannot risk customer deposits, so our capital is at risk.  As these losses occur, we must raise more capital.  So let's assume that we have 16,000,000 outstanding and we lose $500,000 in foreclosures.  That $500K comes out of our $1MM capital account...so now our capital account only has $500K and we must raise an additional $500K to be in compliance.  OR...we can only lend out $8MM versus the $16MM we have outstanding.  Which means we don't make as much in arbitrage because we can't have as much loaned out. 

Well, as Board members of our Bank, we decide it would be easier, smarter, and cheaper to carry the loans on the books longer...maybe it cost a couple thousands per month and we can unload slowly.  And maybe we get lucky while we wait, and the market turns and we unload them at a better price. 

So it is safe to anticipate the banks will unload slowly instead of all at once. 

Another thing to keep in mind with a potential foreclosure...The Bank is typically going to unload properties with the most amount of immediate equity.  For instance, let's say a bank has 2 properties that go into foreclosure on the same day....both are $200K homes (market value today).  One has an outstanding mortgage for $180K ($20K in equity), the other has an outstanding mortgage of $150K ($50K equity).  The latter will be processed more quickly than the former.  They will dump the mortgage for $150K and grab as much of the $50K equity sitting there, and be a little more patient with the home that has only $20K equity.  So people who have 100% financing or are upside down in their homes are the safest bunch from a speedy foreclosure.

Need more info?  Just give me a call or email me! 

Last night many American's tuned in to Obama's first State of the Union Address.  With concerns of jobs and the economy on our minds...it was impossible to miss this statement, "Jobs must be our No. 1 focus in 2010, and that is why I am calling for a new jobs bill tonight."  For most of us...after air, food, and water...having a job is pretty important.  It's nice to hear that Obama may turn his attention from his healthcare objective and give a little attention to jobs.  However, what struck me as odd is I could have sworn the primary objective of the 2009 Stimulus Plan was to create jobs.

Many experts would agree that the Stimulus Plan isn't working.  What troubles me a little from the address is Obama's use of the term "jobs bill"....because if history is any indicator, this means more spending, more pork, more special interest...and I'm just not sure where the everyday person looking for a job will fit in.

Hopefully Washington will realize that Jobs must be created in the private sector to sustain and grow the economy.  Adding new government jobs just doesn't help us much, if at all.  We need ease taxation on small and mid size businesses to encourage growth and hiring.

When Obama took office in January 2009, he inherited a total Job loss of 2.6 million jobs from the Bush Admin, of which 1.9 million were lost in the last 3 months of Bush's term.  Most of this loss was attributed to the financial meltdown.  During the Bush years, overall job creation was 5.2 million jobs, or an average of 58K jobs per month (http://budget.house.gov/doc-library)

Fast forward to today.  Unemployment has risen to 10.5%...but wait...that's not the whole story!  We must factor in U6 Unemployment.  U6 Unemployment a broader measure and includes discouraged workers and individuals currently accepting PT waiting for FT opportunities, and the severely underemployed person (like a CEO flipping burgers).  Add those people in and now we have 17.3% unemployment.

Continuing claims as of this morning - 4,602,000 people are receiving unemployment benefits...whoa!  But that is only half the story...

Late last year, an extended and emergency unemployment benefit was snuck into the Home Buyer Tax Credit bill.  Now, I'm not saying that it is a bad thing we are providing extended and emergency benefits to people out of work...actually, it is one good thing we are doing.  But it is interesting how Congress slipped it into another bill.  Anyway, individuals receiving the emergency extension are omitted from the headline number and there are an astonishing 5,600,000 people in this hidden category.  Add that up and you have a shocking 10,202,000 people receiving unemployment assistance....RIGHT NOW!  And this does not include people who have fallen off the rolls completely.

Needless to say, there is much work to be done. We must keep in mind that 125,000 Jobs must be created each and every month to keep up with population growth.  What will it take to return to lower unemployment levels? If we were to put on 300,000 jobs per month...it will take about 5 years to get back to the 6% unemployment rate from September 2008.

Hopefully we will see some of the burden lifted from small and mid size business owners.  Over half of all jobs created come from this sector.  Until we have jobs, the economy will continue to drag.

Like David Bowie's lyrics..."changes are taking the pace I'm going thru" and the mortgage world is going thru changes that take the pace to a whole new level.  It seems every time we turn around, there is a new rule, new legislation, new guideline, new something or other.

On July 30^th a new ‘something or other'  became effective.  It's called the Housing and Economic Recovery Act (HERA).  This act requires all mortgage lenders and mortgage brokers to help prevent deceptive lending practices and protect customers by helping them become more informed."  Sounds smart on the surface, right?

With the government stepping in everywhere to manage our lives, it seems that once again in their effort to protect us from ourselves, they are going to bog down the process and make it a paperwork frustration...not just for the bankers and brokers...but for the consumers too.  This paperwork frustration may also make the once common 30-day closing become more difficult to meet. 

Here are a few things you can expect:

No fees may be collected for the transaction other than those for running a credit report at the initial time of application. Additional fees may be collected only after four business days.

Should the APR change by more than .125% on a fixed rate loan or .250% on an adjustable rate loan, the lender must disclose the new APR and the borrower must have a minimum of three business days to review the information before the transaction may proceed.

Items that can trigger re-disclosure requirements include a change(s) in the loan amount, closing date, loan program, any fees that impact the APR or interest rate from the rate indicated on the original loan application.

In cases where documents are sent by mail to the borrower related to re-disclosure of APR and/or providing a copy of the appraisal, anticipate six business days (three to allow for mailing and three to allow adequate time to review them) before a closing can occur. 

Keep in mind, if something should change prior to closing (like the seller finally agrees to roll in closing costs so you want to adjust the purchase price), if it affects the APR by 1/8^th then re-disclosure is required and then the waiting period kicks in again. 

For more information on this and how it might affect you, send an email to Elizabeth@ElizabethRoseOnline.com.

The Home Valuation Code of Conduct (HVCC) became effective on May 1^st in an effort to insulate the appraisal process from influence by any of the parties that may have an interest in the outcome. So...what is wrong with that?   

Recently, the National Association of Realtors (NAR) conducted a survey...and...well, the survey results weren't so good, however they came as no surprise to realtors, lenders, and mortgage originators.

Here's just a few of the results:

• 76% report the time to obtain a completed appraisal has increased an average of 8 days.
• Lost sales are reported by 37% of respondents
• An increase use of out-of-area Appraisers was reported by 70% of those surveyed
• Approximately half of appraisers reported a reduction in fees received and 70% of appraisers reported an increase in costs to the consumer
• 55% realtors surveyed reported a perceived decrease in appraisal quality.

Talk about adverse effects! (Maybe that is why you should care?)

Yesterday, NAR President Charles McMillian sent an email to members stating his recent meetings with the NY Attorney General's office, Federal Housing Finance Agency (FHFA), Fannie and Freddie, have led to new guidance to all lenders on HVCC.  Here are is sampling of their "new guidance" -

They stated, "Contrary to some suggestion..."

• The code does not require the use of AMC's (Appraisal management companies) over independent or in-house appraisers. 
• Closing costs have risen in some instances, but that has not been a function of the Code.
• The Code may have initially slowed appraisal time as it was being implemented.  However, there are other reasons for turnaround time changes
• Contrary to some suggestions, the Code provides for communications with appraisers about errors, additional needed information and unprofessional conduct
• Contrary to some suggestions, the Code does not lead to lower appraisals for property.  The Code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations

Well, now that has been resolved, we can go back to wondering how this is really helping our housing market - and buyers and sellers.

But decide for yourself, read the report here: http://www.fhfa.gov/webfiles/14611/hvcc_NOTICE_7_22_09F.pdf

Better than expected earnings from Corporate America, higher Retail Sales and a hot Producer Price Index has moved our 30 year Mortgage Back Security from the cheese platter to....the waste basket?  Oh no....

The producer price index is a reading on wholesale inflation.  The headline number was hot and after stripping out energy and food, the core number was quite a bit better than expected.  Of course there still is no fear of inflation just yet, but today shows us that any suggestion of future inflation can ruin the day in the bond markets.  Tomorrow will get a better idea of the hint of inflation when the Consumer Price Index is released. 

The improvements seen in the market over the past 4 days have been completely erased and the market has lost almost 100 basis points in just those few days.  Today MBS opened below support at the 50-day moving average and is clinging on...

Late in the day Wednesday, the Treasury unveiled their plan to take up to $40 billion in so-called illiquid assets off bank balance sheets.  Nine investment managers have been chosen to bid for these illiquid assets.

The $40 billion is composed of $30 billion of equity and debt invested by the Treasury, along with an additional $10 billion by the private investor groups.

The programs goal is to enable the financial institutions to dispose of troubled illiquid mortgage securities and other packaged assets so they can provide new sources of lending to the economy.

Some analyst believe interest in the program has diminished and financial institutions might be a bit more reluctant to sell assets.  Could this have something to do with the easing of Mark to Market accounting...thus valuations have either improved already or are likely to improve as the economy strengthens?

Mortgage Backed Securities (MBS) are moving again!  Over the past several days, MBS have been improving as stocks continue their struggle.  Today's bond auction was well received which has helped fuel a beautiful rally today, giving Bonds the needed momentum to break above some tough overhead resistance.  The past few days gains have brought rates back...well, almost back...to the levels of one month ago.  

Rumors of a 2^nd stimulus plan hit the wires just days ago and the chatter continues.  The first stimulus plan was aimed at Banks, Automakers, City and State governments.  New reports indicate that it also put more money into the hands of the poorest American's thru monthly food stamp allocations.  Aside from that...it's a bit difficult to see the benefits.

We were promised with the first stimulus plan that it would create jobs.  That has not occurred as we saw another ugly jobs report just last week. 

Now, some insiders say that the first stimulus plan is having a positive effect, but the country is still sick and needs more relief.  While the chatter continues, President Obama said that the unemployment rate is something "we wrestle with constantly", but added that spending more borrowed money is "potentially counterproductive."  Imagine that!  (See blog post "Obama Says We Are Already Out of Money")  It sure would have been nice if they would have figured that out before they when on their spending spree.  (They have already spent 2 Trillion of taxpayer dollars).

As I mentioned in my previous post, this Spending...oops, I mean Stimulus plan will lead to inflation and higher interest rates all around.  Remember, we are auctioning Treasury securities to pay for this spending.  In order to attract buyers, these longer term instruments would rise in rates.  While Mortgage Rates are NOT tied to Treasuries, Mortgage Bonds and Treasury Bonds compete for the same investment dollar.  In order for Mortgage Bonds to compete, rates will rise. 

Today the Fed begins their 2 day meeting.  We know the Fed Funds Rate is not going to change, but there is speculation that the Fed will buy more longer-term Treasuries, which may provide a jump start to eventually bring Mortgage rates down.

So if you are still considering a refinance, it is important to be ready to pull the trigger should "Fed-speak" cause a rally tomorrow.  Be prepared to act quickly.

I've seen many people pass on saving $200 per month in the hopes rates might improve a bit more, helping them gain another $25 per month in additional savings with a lower rate that where we stand.  Now clearly we've seen many times this year, rate turn higher and this window of opportunity is lost.  Reminds me of the old saying, "if you snooze, you lose."

I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake.  If you think you might want to take action, let's talk further about your situation.  Just send a note to me at Elizabeth@ElizabethRoseOnline.com to see if I can help improve your current situation.

For more insight of what has impacted Mortgage Rates:

Since falling off the cliff on May 27^th, Mortgage Bonds lost 500 basis points (worsened) and have since regained a portion of those loses.  Still, Bonds are down 212 from May 27^th when they could no longer cling to the important support level of the 100 day moving average, then pummeled right thru the 200 day moving average.  After finally finding a support level, they bounced on June 11^th and are attempting to make a bit of a recovery.

While the Fed has committed to purchasing Mortgage Backed Securities in an effort to keep rates low and help stabilize the housing market, the added supply of paper is making this difficult.  This afternoon, the Treasury will auction off another $40B in 2 year Notes, part of the $104B that is hitting the markets in the next 3 days.  Recent history has shown that Bonds haven't performed well upon the announcement of the auction and during the auction.  So, why all the auctions?  We have to pay for all the stimulus plans.  This is how the Treasury pays the way.

This added supply has pushed Treasury yields higher in an effort to make the government's debt more appealing to be financed.  While Mortgage Rates are based on the activity of the Mortgage Bond, Treasuries will also compete for investor dollars.  A short while ago the most active Mortgage coupon was at 4%, while long-term Treasuries were just above 2%.  This made Mortgage Bonds very attractive to investors however, the massive debt that must be financed via Treasury auctions has pushed longer-term Treasury yields closer to 4%.  This has forced the focus coupon on Mortgage Bonds up to 4.5%, as to give investors a more attractive return on them.  And then lies a problem in seeing Mortgage rates move lower.  Aside from Mortgage Bonds having their own added supply come to market from refinances that are now closing, Mortgage rates can't move much lower unless longer-term Treasuries move lower first.  Which brings us right back to the Fed Meeting, which concludes tomorrow.  Again, should they announce more longer-term Treasury purchases, this could help the Mortgage Bond market.

Feel free to contact me for more information: Elizabeth@ElizabethRoseOnline.com

The Treasury has been going to town printing money...clear proof we are "already out of money".  The Treasury has literally been printing money at a record pace by way of Treasury auctions to pay for the massive spending.  How does that impact those attractive home loan rates you once were hearing about?  Let's break it down.

It's back to school with Economics 101.  Supply and Demand.  For months, our government has been trying to right the economy with various stimulus and bail out plans.  These plans cost money...money we don't have.  So how do we pay for it?  The US prints money so to speak by issuing Bonds which are purchased by investors. 

And these hundreds of Billions of dollars of new Bond SUPPLY have to be absorbed by the market, so the additional supply literally weighs on the entire Bond market (Treasury Bonds and Mortgage Bonds) and drags prices lower.  Lower prices means higher home loan rates. 

Also, when you think of supply, consider all the tons of refinances recently - and all those loans have been bundled, packaged and sold on Wall Street...and this additional SUPPLY has now started to hit the secondary market as those closed loans are now getting turned around and sold.  This supply also must be absorbed.

The Fed recently became a large purchaser of Bonds in an effort to help shore up the housing market and keep home loan rates low.  In January they made a commitment to invest $500B in Mortgage Backed Securities (aka Mortgage Bonds) over the six month period, ending June 30^th.  on March 18, they expanded that commitment by another $750B bringing the grand total to 1.25 Trillion and extended the time frame thru the end of 2009, possibly into 2010. 

While the Fed has been a buyer, they simply can't buy enough to balance all the selling...or all the new paper they are auctioning off to pay for the stimulus and bailout packages.  Anytime supply vastly exceeds demand prices will move lower.  And as prices move lower, yields rise - that rise in yield will attract new buyers as they get a higher return on their investment.  This is how the market finds balance.  It's like a see-saw.

More is coming...more Bond supply...as next week brings another enormous round of Bond auctions with three separate auctions scheduled to take place.  Seeing how badly Bond pricing behaved during last week's round it would seem Traders are likely getting very jittery thinking about how the Bond market will react leading up to and during these events. It can't be good news for home loan rates either.

Since falling thru important support levels on May 26, Mortgage Bonds have lost 256 points driving home loan rates solidly above 5%.  While we've had a few weak attempts to improve, the supply continues to weigh heavily on the market.  It could be tough from here to get much better.