Thursday, March 6, 2008

You Don't Understand Mortgage Rates....

unless you are a seasoned Wall St professional, a mortgage banker or a CNBC junkie. Repeat after me:The FED doesn't move mortgage rates. This widely held belief came about over the last decade when the FED's moves would cause other debt instruments to move up or down.




Mortgage rates are set by the investors who buy the debt. Fannie and Freddie Mac who handle the conforming market repackage mortgages into 1 billion dollar pools. These pools are bid on and purchased by pension funds, insurance companies, banks, mutual funds, and foreign investors. Basically, any entity with a need to invest in safe debt instruments.


The investors are having a bit of a revolt right now because of inflation(out of control), the falling dollar, an ineffective FED that can't cut it's way out of the deflation and deleveraging that is happening in every sector of the credit markets. Credit is the life blood of the economy. Credit is dramatically contracting because investors are losing faith in the debt and US government policy in general. As an easy example, the FED is at 3.00% right now, since they cut, the national average rate on a 30Y conforming mortgage has moved up to 6.75% from 5.875%. On the jumbo mortgage side the rates for a 30Y fixed jumbo have moved from 7.00% to 7.875%. The adjustable mortgage products continue to be much more attractive.


Be careful in wishing for FED cuts. They are trashing the dollar, creating hyper-inflation and investors aren't stupid. They see the FED can't do anything to stop the credit/leverage meltdown. The easy days of having an 800 FICO and confidently knowing you could get a loan have passed. Credit is tightening daily. Until the losses stop we expect guidelines to get tighter. I encourage you to explore your loan options now if you need to refinance anytime in the next 2-3 years. The investors may not be around when you need them to fund your loan or the rates will be well north of your expectations. The money comes from somewhere and that money is running scared.
Here is the Bloomberg piece that inspired this lecture.


Agency Mortgage-Bond Spreads Rise; Markets `Utterly Unhinged'
By Jody Shenn
March 6 (Bloomberg) -- Yields on agency mortgage-backed securities rose to a new 22-year high relative to U.S. Treasuries as banks stepped up margin calls and concerns grew that the Federal Reserve may be unable to curb the credit slump.
The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 21 basis points, to 237 basis points, the highest since 1986 and 103 basis points higher than on Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less.
The markets have become ``utterly unhinged,'' William O'Donnell, a UBS AG government bond strategist in Stamford, Connecticut, wrote in a note to clients today. A lack of liquidity has ``led to stunning air-pockets in price levels.''
Investors are realizing that banks have little room to make new investments amid rising losses and a flood of unwanted assets, said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. The world's top banks have reported more than $181 billion in asset writedowns and losses, been stuck with $160 billion of leveraged buyout loans, and bailed out $159 billion of structured investment vehicles.
``Everything is telling you the financial system is broken,'' Simon, whose Newport Beach, California-based unit of Allianz SE manages the world's largest bond fund, said in a telephone interview today. ``Everybody's in de-levering mode.''
Agency mortgage securities outstanding, which are guaranteed by government-chartered Fannie Mae and Freddie Mac or federal agency Ginnie Mae, total almost $4.5 trillion, about the same size as the U.S. Treasury market
No Savior
The widening spreads prompted speculation the government may step in to support securities guaranteed by Fannie Mae and Freddie Mac, said Tom di Galoma, head of U.S. Treasury trading in New York at Jefferies & Co., a brokerage for institutional investors. The Treasury Department said the rumor isn't true.
``The Fed can't really save the mortgage market,'' di Galoma said. ``As they keep cutting, mortgage rates aren't going lower.''
The spread of current-coupon fixed-rated securities guaranteed by Ginnie Mae against 10-year Treasuries has climbed 55 basis points this month to 205 basis points, also the highest since the 1980s, according to Bloomberg data. Debt guaranteed by Ginnie Mae is explicitly backed by the U.S. government, and based on loans already insured or guaranteed by its agencies. A basis point is 0.01 percentage point.
Carlyle Margin Call
Carlyle Group's publicly traded mortgage bond fund, which raised $300 million in July and used loans to buy about $22 billion of agency mortgage securities, failed to meet margin demands and has received a notice of default. In margin calls, banks demand more collateral on their loans because of falling prices. Lenders have been imposing ``additional collateral requirements'' outside of margins call, Carlyle said today.
``The capital issues at commercial banks are making them, in general, reluctant to lend, so lending is either harder to find or when you do find it, it's more expensive or the other terms are more-limiting.'' Steven Abrahams, an analyst with Bear Stearns Cos., said in a telephone interview yesterday.
``If there's less money to finance positions and less balance-sheet available to warehouse positions, the markets are going to become more volatile,'' he said.
Carlyle Capital Corp. missed four of seven margin calls yesterday totaling more than $37 million, the Guernsey, U.K.- based fund said today in a statement. Thornburg Mortgage Inc., the Santa, Fe, New Mexico-based owner of ``jumbo'' mortgages and securities backed by adjustable-rate loans, said yesterday it received a default notice from JPMorgan Chase & Co.
Next to Blow Up
``The single biggest concern right now is who's the next hedge fund to blow up, and how big are they,'' Arthur Frank, the New York-based head of mortgage-backed-securities research at Deutsche Bank AG, said in an interview today. ``The more the market widens, the more likely it is that another leveraged player has to sell, so it does feed on itself.''
Bloomberg current-coupon indexes represent the average of yields for the two groups of bonds with prices just above and below face value, the ones that lenders typically package new loans into.
Prices for agency securities backed by adjustable-rate mortgages with five years of fixed-rates fell 0.63 percent this month through yesterday, according to Lehman Brothers Holdings Inc. index data. Fixed-rated securities fell 1.66 percent, according to the New York-based company. The various classes of collateralized mortgage obligations used to repackage agency bonds collectively have fallen 0.9 percent, according to Merrill Lynch & Co. index data.
``Traders are putting their phones down and backing slowly away from their desks,'' O'Donnell said today in a telephone interview. ``Relatively little'' agency mortgage-backed securities are being traded, Pimco's Simon said.