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Archives for January 2009

Mortgage Rates Surge Upward – Is The Refi Boom Over?

January 23, 2009 by Leave a Comment

Mortgage Rates Up Sharply Over Past Week

Mortgage rates increased again today as the sell off in the long treasury market continued.  The all time lows in the mid 4% range have quickly disappeared.

A short week ago the best borrower could obtain a par rate of 4.5% – see All Time Low Mortgage Rates.   Today that same borrower  is looking at a rate of 5.25%.    Borrowers who have applied for a refinance and did not lock the rate are in for a payment shock.  On a $250,000 loan, the payment increases by $1368 per year on an increase from 4.5% to 5.25%.  Higher rates and tougher underwriting standards are beginning to stop the mini refinance boom dead in its tracks.

Despite the large recent increase in mortgage rates, keep in mind that the Federal Reserve is determined  to do whatever it takes to bring mortgage rates lower.  Whether or not the Fed will succeed in lowering rates is unknown.

Lower Rates Still Possible

Factors that may ultimately bring mortgage rates to 3.5% or lower include the following (See –  Is 3.5% Possible?)

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates.   The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates.  There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support.  Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range.  Something to think about for those contemplating a mortgage refinance.

The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant.  The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates.   If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge.  Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range.  Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction.   At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.

If rates do move into the mid 3% range or lower, the benefits will arguably go to those who need it least.  Based on present underwriting standards, those with poor credit, late mortgage payments, no equity or insufficient income need not apply.  The sad irony here is that the Fed’s costly efforts to reduce rates may do little to benefit the economy or the majority of homeowners.  (See All Time Low Mortgage Rates for A++ Borrowers Only)

Filed Under: Federal Reserve, Interest Rates, Mortgages Tagged With: , ,

‘Atlas Shrugged’ – Banned in Washington

January 21, 2009 by 3 Comments

Equality Through Poverty

Ayn Rand’s 1957 classic novel, Atlas Shrugged, depicts how governments ultimately destroy the most productive sectors of a society, leaving everyone equally poor.

‘Atlas Shrugged’ : From Fiction to Fact in 52 Years

Stephen Moore – Wall Street Journal – No One Explains It Better – (Highlights)

Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read “Atlas Shrugged” a “virgin.” Being conversant in Ayn Rand’s classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only “Atlas” were required reading for every member of Congress and political appointee in the Obama administration. I’m confident that we’d get out of the current financial mess a lot faster.

[Atlas Shrugged] Getty Images

The art for a 1999 postage stamp.

Ultimately, “Atlas Shrugged” is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand’s political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear — leaving everyone the poorer.

Many of us who know Rand’s work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that “Atlas Shrugged” parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated “Atlas” as the second-most influential book in their lives, behind only the Bible.

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

The current economic strategy is right out of “Atlas Shrugged”: The more incompetent you are in business, the more handouts the politicians will bestow on you. That’s the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies — while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to “calm the markets,” another trillion of national wealth is subsequently lost. Yet, as “Atlas” grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate “windfalls.”

The full article is well worth reading, not to mention the book itself.    Unfortunately, this book is more likely to be banned than read in Washington.

Filed Under: Bailout, Economy, Stimulus Plan Tagged With: ,

The Stimulus Plan Condemns Us To Further Wealth Destruction

January 21, 2009 by 1 Comment

Will Spending Borrowed Money Create Wealth?

There seems to be near universal agreement at all decision making levels of government that we can borrow and spend ourselves into prosperity.  Let’s consider some worthwhile contrary opinions.

Leave the New Deal in the History Books

When Barack Obama takes office on Tuesday, his first order of business will be a stimulus package estimated to be close to $1 trillion.   Sages nod that replicating aspects of FDR’s New Deal will help pull the country out of a recession. But the experience under FDR largely provides a cautionary tale.

Mr. Obama’s policy plans are driven by the conventional economic wisdom that the New Deal economic programs ended the Great Depression. Not so. In fact, thanks to New Deal policies and programs, the U.S. economy faltered for years longer than it might otherwise have done.

President Roosevelt came to office much as Barack Obama will, shouldering an economic crisis that began under his predecessor. In 1933, Roosevelt’s first year, unemployment hit nearly 25%, as people lost jobs and homes in towns across the country. Believing that government played a key role in restarting growth, FDR, within his first 100 days as president, created an alphabet soup of new agencies that mandated actions or controlled public spending and impacted private capital flow within the U.S. economy.

At first, it seemed to be working.  Then things turned for worse again: By the fall of 1937, the U.S. entered a secondary depression and unemployment began to rise, reaching 19% in 1938.

By 1939 Roosevelt’s own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. “We have tried spending money,” Morgenthau wrote in his diary. “We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!”

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been correctly focused on shoring up financial institutions to prevent a collapse of the financial system, and stave off a severe decline in the general price level. If that were to occur, the unspoken fear has been that the U.S. and global economy could go into a deflationary death spiral that would cause the collapse of the international financial system.

As a short-term matter, the moves of the Fed and other central banks have been correct, but in the long term a return to growth will depend on dynamic job creation by American business — not the U.S. government.

As a result, the New Deal forced the allocation of money away from the private sector. As economist Henry Hazlitt wrote back in 1946, New Deal programs prevented the creation of the types of jobs which have the multiplier effect of successful businesses. Creating “work” prevented innovation and new jobs that would create other jobs.

Governments cannot create wealth by taxing and borrowing to fund make work jobs.  The expenditure of massive amounts of money on politically inspired spending will simply deprive the private sector of needed capital.  Central economic planning has never worked nor will it work now.  The fact that there appears to be near unanimity in Washington that we need to borrow and spend our way to “prosperity” is enough to cause grave concerns since at a minimum it implies that there will be little constructive debate on the merits of the consensus view.

The Obsession With Government Spending

Despite adverse experience, the Keynesian stimulus idea has a viselike hold on policymakers

The U.S. is enacting a “stimulus” program of gargantuan peacetime proportions to rejuvenate our recessed economy. We are not alone in this. Japan, China, Europe and numerous other nations are doing the same–not yet as big as our program but based on the idea that governments can rekindle growth.

It’s all mostly wasted effort.

Despite its sheer size, the impact of the new President’s fiscal program, after the initial euphoria, will be painfully limited. Instead of a jolt like from downing a six-pack of Red Bull, we’ll get the economic equivalent of a tepid cup of decaffeinated tea. In fact, the waste and misuse of much of the money–inevitable in any quick, massive government-managed or -directed program–will negate much of the good in parts of this infrastructure-spending package.

The blunt truth is that government spending is a poor substitute for private business and consumer investing and spending. Were it otherwise, the Soviet Union would have won the Cold War, and Japan, which had numerous Obamaesque stimulus packages in the 1990s, would have boomed instead of remaining dead in the water in what was a 12-year recession.

Why this belief in government spending? After surveying the wreckage of the Great Depression, British economist John Maynard Keynes posited that markets left to themselves were inherently unstable and that government intervention could prevent debilitating economic slumps.

So why did such an approach fail so miserably in the 1930s?

What about Japan’s spending binge in the 1990s that still left its economy stagnant?

What about western Europe, which has had a massive government presence during the last 30 years but has created only a small fraction of the private-sector jobs that the U.S. has?

Despite adverse experience, the Keynesian stimulus idea has a viselike hold on policymakers, pundits and academics.

Events can also roil economies, as we experienced after 9/11. But most often, bad government policies bring on the most damaging downturns. The Great Depression was ignited by trade wars, high taxes and bad monetary policies. The great inflation of the 1970s was caused by the Federal Reserve’s excessive money printing. The current crisis was brought on by the weak dollar, the reckless extravagances of Fannie Mae and Freddie Mac and regulatory errors, such as mark-to-market accounting.

The fact that policy makers best solution is nothing more than a continuation of past failed policies reinforces the intellectually bankrupt theory of a borrow and spend solution.   Hurry up and do something, anything, would best describe the stimulus plan.

Final Steps To Insolvency?

Can Obama Make Government Solvent?

Mr. Obama has been handed an opportunity. He will put the welfare state on a path to solvency or he won’t, and we’re likely to find out soon. His stimulus spending plans will blow up in his face unless the bond markets (which will be called upon to finance them) are convinced the dollar will remain sound and spending under control.

Sadly, to those from whom much is expected, sometimes not enough is given. FDR can have been a great leader who sought the best for his country, and the ’30s still have been a succession of political disasters. Both things can be true. Presidents ride the tiger. Without apparent cognitive dissonance, Mr. Obama already has taken to denouncing Washington’s “anything goes” culture while simultaneously outlining plans to borrow perhaps $1 trillion to distribute to anybody and anything that happens to fit the wish list of some Democratic Party constituency group (and a few GOP ones too).

He certainly will meet with a gratifying success in the spending portion of his plan. The revelation will be whether he can deliver anything else.

Government solvency now has to be considered by serious minds as we see numerous countries headed down that path. The rush to spend  massive amounts of borrowed money is a sign of fiscal insanity.   Large government programs are always instituted in haste after a crisis has occurred.   Invariably, the government solution only makes the original problem worse.  Let us hope that at a minimum, any major government initiatives are properly debated before enactment and sharply curtailed.

Filed Under: Bailout, Economy, Stimulus Plan Tagged With: , ,

Insolvent Banking System Eludes Government Containment

January 20, 2009 by 2 Comments

Denial Of Reality Becoming Impossible

The game of pretending that the world banking system and national governments are solvent becomes more difficult by the hour.

The true magnitude of the write downs that the banking industry needs to take to reflect the reality of asset impairment was highlighted by the Royal Bank of Scotland.   Pretending that the losses do not exist is no longer worth the effort since no one is fooled anymore.  There can be no recovery in bank lending unless impaired assets are written down and sufficient amounts of new capital are raised.  This is the point at which things get interesting since the capital markets are not open to the banks; the lender of only resort to the banking industry are the world’s central governments.  The really scary question now is whether the central governments have the financial capacity to recapitalize the banking industry (along with everyone else) without resorting to printing money on a grand scale.

Far from being contained, as some have proclaimed, the banking crisis continues to expand.  The debate is no longer focused on whether the banking industry is solvent.  The real question is whether central governments can contain the economic meltdown.

Consider the size of losses reported by Royal Bank of Scotland and the excuses and comments by RBS Chief Executive Stephen Hester.

RBS Expects Huge 2008 Losses

LONDON — Royal Bank of Scotland Group PLC said Monday that tough market conditions in the fourth quarter and mounting impairment charges could push it to a 2008 full-year loss of as much as £28 billion ($41.29 billion), the U.K.’s biggest ever corporate loss.

The government currently owns just under 58% of RBS after last year underwriting a £15 billion rights issue that saw little take-up by existing shareholders.

The move means RBS will now have to pay back less to the government, but it has also to agree to boost lending to consumers and businesses. The Monday update comes ahead of the announcement of its 2008 results on Feb. 26.

RBS Group Chief Executive Stephen Hester said: “The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks.

“We are making progress in recognizing excess risk and dealing with it. Significant uncertainties and risks inevitably remain.

“In this context, the support we are receiving from the government benefits all our stakeholders and enables us to provide more customer support in return.”

“With enhanced core capital, removal of the preference share dividend and the prospect of further asset and liquidity measures, RBS is able to continue its strategic restructuring purposefully,” he added.

What Chief Executive Hester is really saying is that he managed RBS poorly and took ridiculous lending risks; no one will buy our shares or debt securities and we need a government bailout to prevent closing the bank.  Nonetheless, we now recognize “excess risk” and are ready to start lending again once we receive government funding.

Hester should be fired for incompetence –  he dissipated investor money and bank capital and now wants to try his hand with government supplied funding.

The question of how the British Government will raise the funds to bail out RBS is answered by The Telegraph.

Bank of England Edges Closer to Printing Money

Under the scheme’s terms, the Bank will be able to buy assets including corporate bonds and commercial paper, a move which Mervyn King, the Bank’s Governor, called “an important additional tool to improve financing conditions in the economy”.

The asset purchase facility does not in itself amount to quantitative easing or “printing money”, because the scheme initially will be financed by Treasury Bills and does not involve an increase in the money supply.

However, the Treasury has given the Bank’s Monetary Policy Committee the option to go down that road by extending the scheme at a later date and paying for assets with what amounts to newly created money and not Treasury bills.  Quantitative easing is a more unconventional tool available to the Bank beyond interest rates as it attempts to halt the pace of economic decline in the UK.

“This does not mean that quantitative easing will definitely happen, but does allow the MPC to move fairly quickly if they want to,” he said.

Ross Walker, economist at Royal Bank of Scotland, said: “This framework could readily evolve into full-blown quantitative easing – we would expect it to do so given the proximity of Bank Rate [to zero] and deteriorating economic conditions, perhaps as soon as March/April.”

I agree with Ross Walker – full blown money printing will occur as demands on the British treasury continue to explode in size.   The British Government, approaching the limits of their borrowing capacity, will come to the rescue of RBS and others by printing money.  At this point, no one is even trying to pretend that RBS is solvent or that the British government can bailout every failing enterprise.  The end result will be a catastrophic destruction of confidence world wide.  When governments’ last resort is to print money, one can sense that the end of the old order is near.

Half of Europe Trapped in Depression

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece’s social fabric is unravelling before the pain begins, which bodes ill.

This week, Riga’s cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia’s finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.

“Trust in the state’s authority and officials has fallen catastrophically,” said President Valdis Zatlers,
who called for the dissolution of parliament.

Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year’s end.

Private economists fear 25pc before it is over. Spain’s wage inflation has priced the workforce out of Europe’s markets. EMU logic is wage deflation for year after year. With Spain’s high debt levels, this is impossible.

Italy’s treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome’s throat. Italian journalists have begun to talk of Europe’s “Tequila Crisis” – a new twist.

Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up “roll-over risk” for later in the year. Hedge funds are circling.

Printing money, a self destructive tactic is the last option left to the governments mentioned above.  Expect major social unrest in these countries as their governments collapse the national wealth through the printing press.

Depression Ahead, Prepare for Stock Rout

LONDON (Reuters) – Societe Generale said on Thursday that the United States’ economy looks likely to enter a depression and China’s could implode.

In a highly bearish note, veteran cross asset strategist Albert Edwards said investors should now cut equity exposure after a turn-of-the-year rally and prepare for a rout.

He predicted that the S&P 500 index of U.S. stocks could be set for a fall of around 40 percent from recent levels.

“While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere,” Edwards wrote.

“It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.”

Edwards has long been one of the most bearish analysts in London, first with Dresdner Kleinwort and then with SocGen.

The world Central Governments are resorting to the nuclear option – printing money – in a last attempt to hold the financial system intact.   Had they allowed selected major bankrupt institutions to fail, severe financial pain would have been inflicted on many.   The strategy of attempting to save all bankrupt industries with printed money will result in worthless currencies worldwide,  thereby guaranteeing financial ruin for all.

Filed Under: Bailout, Banking Industry, Confidence Tagged With: , , ,

All Time Low Mortgage Rates For A++ Borrowers Only, Fed’s Efforts Futile

January 15, 2009 by 5 Comments

As discussed on December 31, 2008 many homeowners attempting to lower their mortgage rate apply for a refinance, only to discover that they do not qualify for the “low advertised rate” (Few May Benefit From Lower Mortgage Rates).

Unless a borrower has perfect credit (at least a 720 FICO score), adequate income (debt ratio of 32% or less) and substantial equity in the home (loan to value of 75% or less), the rate will be higher due to adders.  Adders are fees imposed by Fannie and Freddie if the applicant does not fit into the little box of a perfect borrower.  Adders are imposed for higher loan to value, lower credit scores and cash out refinances.  The adders can easily amount to 2% of the loan amount, or $2,000 on a $100,000 loan.   If a borrower is applying for cash out with a FICO score below 680 many lenders will turn the loan down.

This is the reality of the mortgage market today.  Many borrowers applying for a refinance with visions of a 4.875% rate and a payment reduction are finding out that they do not qualify.   There is much in the news about the “mortgage refinance boom”.   Expect to see stories in a month or two about how few borrowers actually benefited from the lower rates.

The stories of how few borrowers actually benefit from the lower rates did not take long to be noticed.

Rates Fall, But Refinancings Are Limited – Wall Street Journal

Interest rates on fixed-rate mortgage loans for prime borrowers have fallen to below 5%, the lowest level since the 1950s, triggering a wave of mortgage-loan inquiries from borrowers eager to refinance. But lenders and mortgage companies say that as many as half of the people who want to refinance can’t meet the credit hurdles and won’t get approved.

Only about a third of U.S. mortgage debt outstanding is likely to qualify for refinancing, said Doug Duncan, chief economist of Fannie Mae. Nearly 70% of borrowers don’t make the cut, he said, most often because their credit isn’t good enough or they don’t have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being “under water.” Others can’t profitably refinance, often because they hold jumbo mortgages, those above the $625,000 limit for loans that can be bought or guaranteed by Fannie Mae or Freddie Mac in the highest-cost areas.

Since December 31st when I warned that only the best borrowers would be getting approved, rates have continued to decline.  The best borrower can now obtain a par rate of 4.5%.  On an after tax basis, mortgage money  now costs around 3%.  (I remember when savings bonds used to pay 6%.)  The good news is that for those who handled their financial affairs properly, the reward is the lowest mortgage rate ever.  The bad news is that your home has crashed in value, your stock retirement account is 40% lower and your hard earned savings yield zero interest if you prefer to invest in government treasuries.   On my scoreboard, we are all losers here, regardless of lower mortgage rates.

Borrowers Who Take Cash Out On Refinances Are Not Spending The Money

Mortgage refinances being approved show a pronounced borrower preference for frugality.  Many borrowers refinancing are doing so only to lower their payments, not to take cash out.  Those taking cash are mostly paying off other high rate debt or putting the money into savings.   This is not surprising since an A+ borrower does not happen by accident – they are frugal by nature and do not run up large amount of debt for frivolous reasons.  Those most inclined to maximize cash out and immediately spend the proceeds are largely no longer qualified for loan approval, either because of income, credit or equity restrictions.

Fed’s Efforts Futile

The Federal Reserve has spent hundreds of billions of taxpayers’ dollars buying mortgage backed securities to artificially suppress mortgage rates.  If the Fed’s intention was to spur more debt and spending by consumers, they have largely wasted their time and our money.   See Fed’s Asset Purchases Continue To Expand.

Filed Under: Federal Reserve, Interest Rates, refinance Tagged With: , ,

Satyam’s Phony $1 Billion – How They Did It

January 12, 2009 by Leave a Comment

One would think that with the number of business frauds, Ponzi schemes and other financial deceptions exposed over the last decade that auditors would have a more skeptical and cautious attitude.

The Satyam case is particularly perplexing when considering one of the major fraud aspects of the case.  Satyam reported cash balances of approximately $1.11 billion when in fact they had 94% less, or only around $66.6 million.

What makes this fraudulent reporting of cash balances so strange is how the auditors could possibly miss over a billion dollars.   Verifying cash balances is a routine step in the audit process.   In addition, routine “topside” analytical procedures are usually employed to verify that a large number on the balance sheet makes sense.

For example, if a company reports a cash balance of $1 billion dollars, does that cash balance look reasonable compared to the interest income reported?    A quick check on what rate of interest the company was earning should have resulted in determining if the interest income the company reported from its cash holdings was reasonable.  Perhaps Satyam fraudulently inflated the income earned on their phantom cash as well, in which case this procedure may not have lead to suspicion.  A routine financial audit is not conducted with the intention of discovering management fraud.

Verifying cash balances , however, is an entirely different matter.  Cash balances are easily verified by sending a balance confirmation request directly to the banking institutions in which the cash is held.   Cash confirmations are a simple and routine audit procedure.  A company holding over $1 billion in cash and conducting business worldwide would have accounts with many different banks.  The odds of having someone at many different banks intercept and falsify a bank confirmation is highly unlikely; so how did the auditors miss $1 billion?

The most plausible explanation is that the auditors did not comply with standard audit procedures.   Once the bank confirmations are prepared by the auditors, procedure requires that they be taken directly to the postal service by the auditors.  Instead, I suspect that a very cooperative and friendly staff at Satyam offered to take care of mailing the bank confirmations, thereby saving the auditor the extra effort of independently mailing the confirms.   This breakdown in a routine audit procedure most likely resulted in the bank confirms never being mailed to the banks. The confirmations were retained and fraudulently completed by Satyam, and then mailed back to the unsuspecting auditor.  The doctored confirmations examined by the auditors matched what the company said they had in cash and everyone was satisfied.

Result: simple audit rule violated and huge fraud goes undetected.

Filed Under: Auditors, Corruption, Fraud Tagged With: , ,

30 Year Mortgage Rates At 4.5% – Is 3.5% Possible?

January 12, 2009 by 5 Comments

How Low Can Mortgage Rates Get?

According to Freddie Mac, the average 30 year fixed rate mortgage dropped for the 10th consecutive week to a new low of 5.01%.   This is the lowest rate reported by Freddie Mac since they began keeping track in 1971.

Rates have moved sharply lower over the past two weeks to all time lows despite the fact that the 10 year treasury bond did not move to new lows.  The traditional rate differential between the 10 year treasury and the 30 year fixed rate mortgage has disappeared due to the mortgage crisis and other factors.   Risk is now priced higher across all credit markets, including mortgage backed securities (MBS).

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates.   The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates.  There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support.  Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range.  Something to think about for those contemplating a mortgage refinance.

Last week, a borrower with excellent credit, necessary income and home equity was able to obtain a par rate of 4.5%.   The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant.  The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates.   If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge.  Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range.  Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction.   At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.

Filed Under: Federal Reserve, Mortgages, refinance Tagged With: , ,

Inflation – The Real Long Term Threat To Financial Survival

January 9, 2009 by Leave a Comment

Concerned with the preservation of wealth and purchasing power?

The US Government Will Not Choose Deflation
by Rich Toscano and John Simon

Conclusion

We in the United States have been dumping our dollars into the world for years and we continue to do so. We owe a staggering amount of foreign debt denominated in dollars and we are gearing up to borrow even more. Our legislators and the stewards of our currency are rabidly hostile to deflation — they are hostile, in other words, to the idea of the dollar gaining purchasing power. They have shown via word and deed that they will do whatever it takes to prevent deflation from taking hold. When deflation is viewed as even a remote possibility, there are effectively no limits to the amount of money the government can create nor to what they can do with that newly minted money.

Under these circumstances, we just don’t believe that the dollar is going to gain purchasing power in any sustainable way. The current deflationary storm could continue for a while yet, but the longer it goes on, the more violent and severe its reversal is likely to be.

Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure — but deflation isn’t one of them.

The writers construct an excellent case in explaining why the government must and will chose inflation.   A must read.

Filed Under: Dollars, Federal Reserve Tagged With: ,

We Are All Keynesians Now

January 9, 2009 by Leave a Comment

Do Deficits Matter?

In the short term, it may not matter what anyone thinks.  There is a near universal political consensus that spending is the only solution that will save the economy.  This consensus is backed by a long list of economic experts; the same people who in the recent past had been predicting clear skies and strong economic growth.

Will borrowing and government spending bring back happy days and prosperity?   We will not know the ending to our grand Keynesian experiment for a number of years.   What we may discovery sooner is the borrowing limits of the US Government.

In the long run, deficits do matter.

For those inclined to consider this matter further, the following links are good reads.

FOMC saw specter of depression, deflation

Minutes show members grappling with fresh approach to monetary policy

WASHINGTON (MarketWatch) – Members of the Federal Open Market Committee at their mid-December meeting saw increasing risks of depression and deflation as they grappled with employing new tools to stabilize an economy that was rapidly weakening, according to truncated minutes of the meeting released on Tuesday.
“The overwhelming message gleaned from the minutes of the meeting is one of fear — fear of a deep recession, and fear of a debilitating deflationary spiral that would capsize a debt-laden economy,” wrote Joshua Shapiro, chief economist for MFR Inc.
Some participants at the meeting saw “the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome,” the minutes said. Inflationary pressures were likely to dissipate, and “some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels.” Read the Fed release.

The Deficit Spending Blowout

But there’s more. None of that includes the new fiscal “stimulus” that President-elect Obama has promised to introduce upon taking office in two weeks. The details aren’t known, but Mr. Obama and Democrats have been talking about at least $800 billion, and probably $1 trillion, in new spending or various tax credits and reductions over two years. Toss that in and add more expected bailout cash, and if the economy stays slow the deficit could reach $1.8 trillion, or a gargantuan 12.5% of GDP. That 2006 Democratic vow to pass “pay as you go” budgets seems like a lifetime ago, which in political terms it was.

Obama on Stimulus: Details To Come

So, who then determines what’s an infrastructure project? The infamous “Bridge to Nowhere” was “infrastructure.” Plans were drawn up for it. Workers would have been employed to build it. What’s the difference between pork, a boondoggle and useful infrastructure?

U.S. projects the biggest deficit since World War II.  Can the country borrow its way back to prosperity?

Reasons abound for the ballooning deficit, including a 6.6% decline in tax revenues compared to 2008; more than $180 billion in transaction costs associated with the Troubled Asset Relief Program (TARP), the Treasury Department’s bailout fund for the U.S. economy; the $240 billion price tag of the government’s takeover of mortgage buyers Fannie Mae (nyse: FNM – news – people ) and Freddie Mac (nyse: FRE – news – people ); and increased spending on unemployment compensation.

Stimulus may spur jobs – abroad

NEW YORK (CNNMoney.com) — President-elect Barack Obama this week proposed a massive economic stimulus program with a lofty goal amid a deep recession: create 3 million jobs.

How many of those jobs will end up in China, South Korea or other countries?

Crisis and plan to fix it unprecedented

“I know the scale of this plan is unprecedented, but so is the severity of our situation,” he said. “As the economy recovers, the deficit [will] start to come down. We cannot have a solid recovery if our people and our businesses don’t have confidence that we’re getting our fiscal house in order.”

German auction fails and Britain debt hits danger level

There are fears that the next crisis in the global financial system could prove to be a rebellion by the bond vigilantes, already worried by talk of a bond bubble. This would push up rates used to fixed mortgages and corporate bond deals. Central banks can offset this for a while by purchasing bonds directly — “printing money” — but not indefinitely.

The US alone is expected to issue $2 trillion (£1.3 trillion) of debt this year, and the Europeans are not far behind. Italy alone must tap the markets for €200bn as it rolls over its huge stock of public debt and meets the cost or recession. Fitch Ratings said Ireland, Greece, the Netherlands, and France face a heavy calendar of auctions as maturities fall due.

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