Mortgage Rates Have Bottomed

This was one wild week as I detailed before. It was so wild in interest rates, that a flurry of refinancing calls kept me on my toes.

The good news is that it brought some much needed business in this, the traditionally slow time of the year.

The bad news was, rates this Friday were the EXACT same as what they were last Friday.

The rates are still very good, still the best that we have seen in the last couple of years. But they are now about a half percentage point higher than what they were on Wednesday. If only for a very small window of time.

If you tried to lock on Wednesday on your mortgage rate, you had roughly three hours window to hit the best rates. Most borrowers decided to wait because of the Fed's "promise" to cut rates next week. And that is the most common mistake I have seen when trying to time interest rates. Too many hopes are pinned to the Fed, when long term mortgage rates are indirectly influenced by what they say.

But the title of this post says, "Mortgage Rates Have Bottomed". I have 3 reasons why.

1) The treasury markets over-reacted to the emergency rate cut and futures markets that started to price in another .50% rate cut next week. Combine this with the rush for a financial stimulus package by the government sent traders looking for quality as if the sky was falling. To some extent, this has now reversed itself as the treasury markets have had a little time to digest the news and happenings. And finally came to their senses.

2) The European Central Bank kept rates steady. No one seems to really be talking about this, but I feel this is a big deal. If the ECB is standing pat trying to stave off inflation while the world's largest economy is slashing rates like it was a knife manufacturer doesn't hold some weight, you're nuts. A slowdown here will have a global impact, no matter what the ECB thinks. So either things aren't as bad as they seem or inflation is really a major, major factor. In reality, I think it is a healthy dose of both.

3) The result of these rate cuts and the government stimulus package will equal one thing and one thing only....inflation. Higher prices for goods and services. We all know it's there. Go to the pump, the grocery store, your cable bill, health care, and whatever else you want to name. Inflation, even though the Fed says it's not, is a major player right now. And inflation is the mortal enemy of treasuries. With the good job numbers we have seen and are forecast to be seen next week, treasuries will continue to sell off and push mortgage rates higher.


And here is my own personal take based on what I have seen in the past. When the "boom" was happening in the first part of this decade there were multiple "refinance booms" within it, driven by falling rates. Each of these refinance booms had a bottom rate which borrowers tried to gamble and predict. They all had similar characteristics at the bottom. One, was a swift drop in rates over a period of a couple days based on news, mostly from the Fed. Two, rates declined to a point where everyone's guess, even those who know how rates are effected predicted that they would fall further. Three, the real bottom for rates were market by an extremely low rate that was offered for a only a few hours time. Four, once the rates hit this short-term bottom they would rise as swiftly as they had fallen as the treasury markets reversed themselves.

This is exactly the action we saw this week. It was eerie. I thought to myself, "I have seen this before." And I had. I predict that if or more likely when the Fed's cut the rate next week, you will see a muted or negative response in the treasury market. Rates are going up for the time being. Don't be surprised.

Killing Countrywide

<-------Scumbag, Angelo Mozilo


So, you know by now how much I like Countrywide. It's not a lot for those of you new to my blog. And I have again and again mentioned how surprised I have been that the company has not suffered from larger lay off numbers. Last month the company shed 500 jobs and Wednesday cut another 900. But this is/was a company of 60,000 employees. If Countrywide was going to originate mortgages to Fannie Mae and Freddie Mac guidelines, there just wasn't going to be enough work to go around. For all intents and purposes the company was going to basically cease doing all their sub-prime lending. This is/was the largest sub-prime lender in the country. How could they not be cutting more jobs, if they were changing the way the do business? The other shoe finally dropped today. The company announced it was laying off 12,000 workers.

Now, I'm not saying this makes me happy. As much as I dislike Countrywide's business model & CEO, it is sad to see a large employer announce reducing staff by over 20%. But if Countrywide wants to survive, it is what had to happen. It is amazing that it didn't happen sooner. The company was actually adding staff up until July when the wheels fell off and people started to wonder if the company would have to seek bankruptcy protection.

It is still to be seen as to what extent the company is really damaged. They reduced their own origination outlook for 2008 by 25% (which makes sense when you are cutting roughly the same percentage of staffing) but I think those estimates are still too rosy. I wouldn't be surprised if Countrywide drops originations by 40% next year. Most people seeking a mortgage, either for purchasing or refinancing, will likely seek out other lenders because of all the negative press Countrywide has received in the last few months. Impressions linger.

And you know what? I can't remember seeing one of those, "Nobody can do what Countrywide can," in a at least a week. If that commercial is dead. I would be happy.

Fannie & Freddie Can't Help Either

If you haven't already done so, check out my nesteggr post Bush, FHA, & Pipe Dreams to get an idea of how I feel about the modernization of FHA and the "help" it will render.

Here, I will focus on Fannie Mae & Freddie Mac, the two cousin government sponsored enterprises (GSE) and how some democrats are still calling for Fannie and Freddie to be allowed to increase the size of their portfolios and increase the conforming loan limit which is currently at $417,000.

My issues are as follows:

1) Uh, did anyone notice that Freddie Mac released their earnings yesterday? And that those earning reports were not good? Revenue was down 45% and provisions for loan losses increased by $320 million. I was shocked yesterday that this did not cause a bigger stir than it did. Ok, so their overall portfolio comparable to others in the mortgage market is good but the $320 million was an increase of over 400%. How is that no big deal?

If Fannie or Freddie run into liquidity problems due to defaults...you want to talk about a credit crunch? Nobody will be doing loans. Many people believe the government would bail them out. While that is most likely true, it isn't a fact. Fannie or Freddie could fail.

2) Raising the conforming loan limit only helps a small portion of homeowners. The conforming loan limit is $417,000. That means this is the biggest loan amount that Fannie or Freddie will invest in (buy). Anything above $417 is considered a "jumbo" loan. Raising the conforming loan limit only helps a small portion of the mortgage market. The current median home price in the United States is 223,800 (half of homes are above this price, half below). Most homes, in most parts of the country, should comfortably fit into the conforming loan limits.

Outside of the costs, and some large cities, if you have a $500,000 home (for example), you are considered "well off". If you are indeed "well off", you should have enough money to handle adjustments in your payments. If not, you over extended yourself, you didn't plan, and I don't feel sorry for you.

3) Fannie and Freddie are also pulling in the reins on their financing options. Both recently increased their pricing for their flagship products the MyCommunityMortgage (Fannie) and Home Possible (Freddie). Fannie also announced that they are discontinuing some of their Expanded Approval (EA) products on higher loan to value loans. Not only that but Fannie has raised their pricing on all EA loans regardless of loan to value. Fannie Mae has touted their EA program as an alternative to sub-prime lending. So much for that.

Consider those facts, along with neither company has fully recovered from their accounting issues in the past couple of years to earn the responsibility of expanding their portfolios. I think President Bush said it best a few weeks ago, "Fannie and Freddie are Fannie and Freddie." That is really all you can say.