The Mortgage Manifesto

Who's Gonna Buy Mortgage Paper?

In the topsy-turvy world of mortgage finance these days one of the questions on my mind is just that;  "who's going to buy mortgage paper?"

Jump back a few years and every financial institution around was hungry to buy mortgage-backed securities and/or companies in the space.

The go-go real estate market fueled new ideas and new models of risk that are proving to not match the reality of human behavior when real estate prices turn south.  I'm sure you've caught the stories of rising foreclosures.  Of course foreclosures rise when people who were able to purchase a home with 0% or even 10% or 20% down now find themselves owing more than the home is worth.  Add on top of that a forecast that it might take 10 years for us to get those homes back to the price they paid for them and you can see why people put the home back on the bank.

Back to our question on who is the buyer for mortgage debt these days.

We are in the midst of a massive tightening of underwriting guidelines and back to realistic pricing for all the various scenarios under which a new mortgage is originated.  In addition, Fannie Mae and Freddie Mac are getting a green light to open up more funds.  AND, the Federal Reserve is creating new credit facilities to move current, "questionable" mortgage-backed securities to the Fed during this time when no one wants them.

During these recent days I see how the credibility of mortgage-backed paper is beginning to heal.

However, let's remember simple economics.  There will be fewer buyers in general going forward and that means higher prices.  Higher prices on mortgage debt translates into higher rates.  That means that on any given day, mortgage rates will be pricing higher than they would have a few years back when there were SO many other buyers.

We all benefited from the massive buying interest with lower rates than otherwise would have been available.  Now, we move back to more normality and we  need to recognize these structural changes of the marketplace.

That means, don't keep rates of the past as target rates to act.  Opportunities will be dictated by our new future.

www.BrettGrendahl.com

Moving Markets & the Fed

Big day today.

For about 2 hours I was able to find 5.5% on the 30 year fixed rate program with no points but only with one investor.

Well, my guess is they took in a lot of new loan registrations as they've repriced back up to 5.625%, where the other lenders were sitting this morning.

At 1:15 PM the Fed makes their announcement.  Whatever they do, mortgage rates can go either higher or lower on the news.  It's all in how the bond markets react.  Given the highly volatile nature of the markets these days, a roll of the dice can predict as well as anyone else.

Keep in mind, lenders are not as aggressive for new loans as they were in years past.  If you see a rate that works, DO NOT GET GREEDY.  This market changes on a moment's notice.

What's the Fed to Do?

Whoa!

What is up with financial institutions these days?  Can you really believe one word they say?

Last year it was all the "the subprime crisis is contained."  Now, an 84 year-old institution gets sold for pennies on the dollar, just a few days after they told us they were fine.  What!?!?

Now, the Fed meets tomorrow and the markets are clamoring for more rate cuts.  Doesn't it seem like each month the Fed's actions are showing more desperation than control?

This week should be alive with market moving news as everyone tries to figure out "are we at a bottom" and "where is the end of this crisis?"  Unfortunately, we haven't crested the hill yet to see that horizon.

One sidebar, here it is 10 am as I type this post and I haven't seen one ratesheet get posted from our wholesale investors yet.  Hmmm?  That is quite an unusual event.  That tells me there is extreme caution as those lenders try to price out where the market should be on the Bear Stearns collapse and the upcoming Fed meeting tomorrow.

What makes this even more interesting is that bonds are trading at their best levels since late January.  However, the spread between Treasury bonds and mortgage bonds is quite large.

I think we will see lower fixed rates appear on the table during the next 2 weeks but keep in mind the market is highly volatile so anything can truly happen. 

We live in historic times.

www.BrettGrendahl.com 

Bear Stearns Bursting

The bubble bursting today is Bear Stearns.

One of the largest financial institutions in our country, Bear Stearns made pocketfuls of cash leveraging up with derivatives and financial alchemy based on mortgage-backed securities.  Well, while leverage is great when the market is going with you leverage eats you alive when the market turns.

Case in point today as the news is breaking regarding the dire situation for this company to survive.

This news, to me, indicates that we are moving into the second phase (of 3) of the whole subprime debacle & credit crisis.  This second phase will be when major financial institutions go under.  Bear Stearns appears headed that way, so does Countrywide, and a few other names will likely follow in the next couple of months.

The end of this mess is still a LONG way off, in my opinion.  That opinion however is based on front-line knowledge with what built the mess.  Unfortunately, every one of us is in the path of this storm and we have little in way of evacuation routes to afford us some safety.

www.BrettGrendahl.com

The CPI, Fed Meeting, and When to Lock a Low Mortgage Rate

Hey there,

This morning's CPI number was tame and does not show rising inflation (at least for this month).  The bond markets are trading positively off this news as I type.

Now what?

Well, we finally have pricing on the benchmark 30 year fixed-rate mortgage below 6% again.  It's been a few weeks since we've seen that occur.

Straight ahead of us is the next meeting of the Federal Reserve Open Market Committee on Tuesday, March 18th.  What will they do?  The markets are pricing in a possible 0.75 cut in their Overnight Rate.  If that happens and they make remark about inflation pressures moderating we should get a short-lived dip in fixed mortgage rates. 

Such a dip will likely only last for a few days, possibly a few weeks.

In general, insititutional investors have no appetite to purchase mortgage backed securities and by default that pushes mortgage rates you and I can find higher.  However, there is a silver lining to be found.  What is it?  Well, as Fannie Mae and Freddie Mac continue to tighten underwriting guidelines the end result is that mortgage-backed securities that are of a 2nd half 2008 vintage or later or going to be better received by institutional investors.

Why?

Because they know that these securities have been underwritten by time-tested guidelines, not the fleeting insanity of low-documentation & lax appraisal valuation procedures of recent years.

As those buyers come back we should see the economics improve for mortgage rates.  But.  And that is a big but, what was once A credit grades is now harder to obtain.

To sum it up, near future promises a dip in fixed rates while the longer term picture for mortgage finance continues to face historic challenges.

I'll be posting post-Fed announcement analysis and predictions next Tuesday.

www.BrettGrendahl.com

Feds Knocking on Countrywide's Doors

I am not shocked at all to see the headline, "FBI probes Countrywide for possible fraud" on CNN Money this past weekend.

Countrywide's past slogan, "No one can do what Countrywide can," sure was true.  They didn't become the nation's largest mortgage originator by following conservative lending guidelines.

In fact, I can recall several deals I lost in 2007 where the only reason I lost them is that Countrywide chose to either omit pertinent information regarding a property's appraisal or not accurately represent the occupancy type of the borrower. 

I posted a comment about these underwriting practices back in July of 2007, "This does not surprise me as I've been first-hand witness to Countrywide making deals work by overlooking normal underwriting guidelines.  Short-term "get the deal done" thinking brought on loans that never had the proper risk assessment and appropriate finance rate on them."

No wonder investors that purchased mortgage-backed securities built on Countrywide mortgage originations are getting ticked off as these portfolios experience higher defaults and delinquencies thant they anticipated.

I anticipate that this news story will continue to heat up and has not come anywhere near its crescendo.  As the truth comes out, watch for the Bank of America purchase of Countrywide to falter, SEC heat to come down on CEO Angelo's Mozillo stock sales & misinformation given to shareholders and the public, and what looks more likely with every passing day, the collapse on one of the country's largest companies.

Enron.  Long Term Capital Management.  WorldCom.  Now, Countrywide. 

History sure does repeat itself!

www.BrettGrendahl.com 

Fewer Jobs & Higher Mortgage Rates

If you want empirical evidence of the funk that is mortgage finance these days let's just examine the reaction of mortgage rates to this morning's weaker than expected Jobs Report.

February's Jobs Report showed a loss of 63,000 jobs during that month.  Normally, that sort of weak economic news would incite a rally in the bond markets and bring lower mortgage rates.  Not this time.

So, why?

The main driver is that banks are trying to stop their bleeding and hold onto cash so they can weather the current storm.  I'll repeat it, they are trying to keep as much cash as possible.

When keeping cash is your priority there is NO incentive to get aggressive in the rates you offer some to take your cash and repay it over three decades.  Very little incentive, in fact.

So, we find the benchmark 30-year fixed rate mortgage without points or origination fees sitting at 6.375% this morning.  That is a full-point higher than where that rate bottomed out just less than two months ago, a big movement in such a short amount of time.

I am picking up chatter about the possibility of the Fed cutting their Overnight Rate by a full point when they meet on March 18th.  As I mentioned many months ago, the Fed was WAY behind the curve on the upcoming challenges facing the financial markets.  My read on their actions and words of late, they are getting very, very worried.  They should be.

The one silver lining in the current spectrum of mortgage programs & rates is the widening of the spreads between the ARM programs and the 30 year fixed rate program.  As the Fed continues to cut their Overnight Rate it will bring the short-end (the ARM rates) lower.

This widening is changing financing strategy.  A new strategy that many should explore is this:  use a convertible ARM program now (or in the months ahead) to get the low rates driven by the Fed cuts but still give yourself a hedge of being able to convert your adjustable rate into a fixed-rate.  In the past, most people didn't select such an ARM program.  As with any loan program, you need to understand ALL of its components and the strategy behind its application.  Don't just focus on rate.  That single-mindedness of attention isn't a prudent approach.

I've been in mandatory continuing education this week (per the new Minnesota laws that went into effect last August) and will have some interesting observations to share in the coming days.

Have a nice weekend.  When the heck is it going to warm up?

www.BrettGrendahl.com

The Gravity of the Monthly Jobs Report

Here we are again, in the never-ending cycle of the monthly economic reports, with the monthly Jobs Report on deck for this Friday AM.

Don't expect much movement in mortgage rates (if anything they might edge higher) before this all-important report is released Friday morning.

If the Jobs Report comes in weaker than expectations, mortgage bonds are poised to rally and that should help add some fuel to another run lower in mortgage rates.

I'll post again on Friday with some analysis and read on the bond markets reaction to the Jobs Report.

www.BrettGrendahl.com

Update on Mortgage Rates for Today

Quick post to share rates I've been pricing out today.  Even though the stock market is falling we are not seeing much movement in the bond markets today.

Here's a snapshot of some current rates I've priced out recently:

• 30 year fixed at 6.0%
• 15 year fixed at 5.5%
• 5/1 ARM at 5.25%
• 1 year ARM at 4.25%

I anticipate a pop lower in the coming weeks that might move these rates 0.5 lower for a short window of time.

www.BrettGrendahl.com

Is Your Cash Safe?

Remember months back when I postulated that moving your assets to CASH was a prudent move?

Well, one news item over the weekend that jumped out at me was a story about how the FDIC was ramping up staff in their division of resolotions & receiverships.  In fact, they are ramping up to the tune of 40% increase in staffing.  They are also bringing back experienced retirees that dealt with the high number of bank failures from the 80's and 90's.

Hmmm?

Me thinks it be wise to not have more than the $100,000 FDIC insured limit in any one financial insitution these days.  Cash is good, just make sure even your cash is safe.

www.BrettGrendahl.com