December 21, 2024

No Mortgage Payments For A Year Would Stimulate Spending

February 9, 2009 by 3 Comments

Experts Predict Depression

Are we in a depression?  Jon Markman of MSN Money eloquently explains the world’s financial dilemma.

Too Late To Avoid A Depression? – MSN Money

Policymakers are quickly running out of time and room for error. And even a brilliant plan — which we haven’t seen yet — could fail without some good luck.

The problem is that the models often fail to accurately forecast human behavior, and politicians regularly screw it all up by ignoring the data and diverting funds to pet projects.

Over the past week, the world’s intellectual, business, government and philanthropic elite emerged from World Economic Forum meetings in Davos, Switzerland, with grim faces and warnings of financial doom.

Credible economic analysts now say there is still a narrow window of time in which policymakers in the United States, Europe and Asia can avoid a meltdown over the next year by immediately coordinating the injection of real financial adrenaline to banks, companies, households and local governments — not just rhetoric and indiscriminate spending. Yet that window is closing fast, and if the right steps are not taken soon it may be shut for years.

The Stimulus Money Could Pay Every One’s Mortgage Payment For A Year

The experts are predicting a possible depression and the economy needs major monetary stimulus.

The government could provide a massive shot of adrenaline to consumer spending by eliminating the consumer’s biggest monthly payment – the mortgage.  The one  trillion dollars that Congress wants to spend can cover the interest due on every residential mortgage in the country for a year.  Here’s ten reasons why the plan would work.

1.  According to the Federal Reserve, total home mortgage debt as of the second quarter of 2008 was $10.6 trillion.   Assuming an average interest rate of 6.5% the interest payments would only be $689 billion for one year.  Equivalent payments could  be made to homeowners without mortgages and renters.  The total cost would roughly equal the one trillion in stimulus spending that has been proposed by Congress.

2.  Eliminating the mortgage payment would allow consumers to strengthen their balance sheets by paying off some debt.

3.  Many consumers would effectively have a substantial pay increase since the average mortgage payment can easily consume up to 40% of gross monthly income.  It is inevitable that a significant part of the extra cash would be spent.  The increased spending would increase demand for goods and services and reduce further job losses.

4. The mortgage payment is the biggest monthly expense for most people.  Not having to pay the mortgage for a year would greatly boost consumer confidence.  Restored confidence could stimulate future spending after the one year mortgage holiday ends.

5.  Homeowners who are in arrears on their mortgages would be given an opportunity to catch up.

6.  The default problem for the banks would be temporarily eliminated since the mortgage payment would be made by the government.   Not having a mortgage payment for a year would strengthen the consumer’s finances thereby lessening the number of defaults after the mortgage holiday is over.

7.  The American consumer knows how to spend – he just does not have the money right now.  Give it to him and let it be spent with no strings attached.

8. Millions of individual consumers will spend or invest the money more wisely than bureaucrats in Washington.

9. Those homeowners who have lost their jobs and are now struggling to pay their mortgages will be given immediate financial relief.

10. This plan would allow renters to save their stimulus payments for a down payment on a home, thereby providing support to the housing market.

If the Congress wants to borrow one trillion dollars that the American taxpayer will eventually have to pay back, then put that money directly into our pockets with a Mortgage Holiday.    We do not need Congress to spend our money for us.

Filed Under: Confidence, Mortgage Holiday, Mortgages, Stimulus Plan Tagged With: , ,

Fannie and Freddie – The New Subprime Lenders

February 2, 2009 by Leave a Comment

Fannie and Freddie Impose Huge Fees On Borrowers

Freddie Mac last week announced additional fees for condo owners who refinance, effective April 1, 2009.  The fee mirrors a similar charge imposed by Fannie Mae last year.  Both Fannie and Freddie now assess a wide variety of fees to borrowers based on loan to value, credit and type of loan.  The fees are euphemistically referred to as “Postsettlement Delivery Fees for Mortgages with Special Attributes”. Translation – we need the money and are now charging huge fees to reflect lending risks that we never recognized prior to the housing crash.

Many borrowers are finding out that the Fannie and Freddie fees are resulting in mortgage rates far higher than the rates they see advertised.  See All Time Low Rates For A++ Borrowers Only.   The fees imposed are too large to be absorbed by the lending institutions that sell their loans to Fannie and Freddie.  Therefore the fees must be passed on to the customer in the form of closing costs and/or a much higher interest rate. The total fees imposed by the agency lenders are cumulative for each special attribute. The end result is that the fees and rates are so high that most borrowers are unable to refinance.

Here is an example of the fees that Fannie and Freddie would charge on a routine mortgage refinance with the following “special attributes”.   The borrower is attempting to refinance at 80% loan to value, has a 675 FICO score and needs to take cash out.    This is a routine type of refinance and the credit score of 675 is considered good.  The borrower is applying for the prevailing rate of 5.5%. Three years ago, this borrower would easily have qualified under a conforming Fannie or Freddie loan with a minimum of agency fees.  The same borrower today, if approved, would be facing very steep fees as follows in a $250,000 loan example.

Delivery Fees Effective April 1, 2009 Based on 80% Loan to Value

1. 675 FICO score fee 2.50%
2. Cash out fee 1.50%
3. If the property is a  Condo add additional fee .75%

The total fees imposed by Fannie or Freddie on this example loan would total 4.75% of the $250,000 loan or $11,875. In addition, there are various lender and legal fees involved in a refinance that could easily total another $2,000.   These Fannie and Freddie fees make the defunct sub prime lenders look like good guys.

Rates Are Low – Don’t Bother Applying

In real life, here’s what would happen. The borrower refuses to pay $11,875 in fees to get 5.5%.  The lender could not provide that rate in any event since the total of fees involved are so high that they would violate predatory lending rules. The rate cannot be raised enough to absorb all of these fees based on current pricing structures.  The best this customer could get would be a rate of around 7.25 and agency fees of $7,000, plus regular closing costs.  Several years ago, this customer could have gotten a lower fixed rate with much lower fees from a sub prime lender.

For a borrower to get the “low rates available” today, you usually need to show up with a credit score of 740 and a loan to value of 70% or less. Most borrowers who need to refinance today do not possess this loan profile.  While the Fed strives to lower mortgage rates, Fannie and Freddie are effectively telling all but the highest quality borrower to get lost by pricing them out of the market.  Compounding this ridiculous situation is that the Federal Housing Administration (FHA)  does not charge many of these fees, even at higher loan to values and lower credit scores.

By the way, did I mention that the Government has effectively nationalized the mortgage industry?

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

New Federal Standards For Mortgage Industry Largely Irrelevant

January 26, 2009 by Leave a Comment

Obama Plans Fast Action to Tighten Financial Rules

WASHINGTON — The Obama administration plans to move quickly to tighten the nation’s financial regulatory system.

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.

Broad new outlines of the administration’s agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obama’s economic team.

Timothy F. Geithner, the nominee for Treasury secretary, made similar comments in written and oral testimony before the Senate Finance Committee.

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

More Effective Regulation Was Necessary Years Ago

Anyone familiar with the type of mortgage lending that occurred during the housing boom and lending mania should applaud the actions of the Obama administration.   Mortgage loans werer granted to all takers, no questions asked.  Every party involved in the lending lunacy bears responsibility –  this includes the Fed, Congress, Wall Street, major banks, sub prime lenders, and the multitude of mortgage brokers who fed the food chain above them.

The unanswered question is why weren’t these regulations passed and enforced 5 years ago?  Apparently, Alan Greenspan’s encouragement to borrow by keeping credit easy and rates low lulled all of us into complacency.

Too Little, Too Late

Enacting legislation now to control the excesses of the mortgage industry is largely for public relations consumption.

Stricter regulations won’t help much now –  the disaster has already occurred.  The sub prime lenders are out of business, most of the major banks are insolvent, the Wall Street firms are largely bankrupt, borrowers no longer qualify, buyers are too afraid to buy a home and most of the mortgage brokers are out of business.  Who is left to be regulated??

The mortgage industry has effectively been nationalized.  The only lenders that remain are government owned or sponsored – Fannie Mae, Freddie Mac and the FHA.  It’s great to have these new financial regulations but it is largely irrelevant at this point.

Filed Under: Banking Industry, Federal Reserve, Mortgages Tagged With: ,

Fed Struggles To Lower Mortgage Rates

January 23, 2009 by 1 Comment

Fed Determined To Lower Mortgage Rates With Unconventional Methods

Mortgage rates started dropping late last year after the Federal Reserve announced that it would be purchasing mortgage backed securities (MBS) in an effort to lower mortgage rates.  As recently as January 13th, Fed Chairman Bernanke again attempted to talk down mortgage rates in his speech at the London School of Economics by discussing the potential purchase by the Fed of longer dated treasury securities.  Bernanke noted that “In determining whether to proceed with such purchases, the committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets.”

Shortly after Bernanke’s London speech, Charles Evans, Chicago Fed Chief, reiterated the Fed’s determination to lower rates by stating that “With the United States in the midst of a serious recession, it could be useful to purchase significant quantities of longer term securities such as agency debt, agency mortgage backed securities and treasury securities.  We stand ready to grow our balance sheet even more should conditions warrant.  At the current time, the biggest concern is deflation and the Fed can worry about inflation later.”

Given the Fed’s determination to lower mortgage rates, why have mortgage rates jumped 75 basis points over the past week?

Most of the Fed’s current and potential purchases of MSB and long dated treasuries may already be substantially discounted by the market.  The larger question is does the Fed have the resources to force mortgage rates lower given the competing demands for funding by virtually every major sector of the economy? Although mortgage rates have declined , they have not dropped to the extent necessary to give homeowners truly significant savings, especially after the recent run up in rates.

The Fed views lower mortgage rates as crucial in stabilizing a collapsing housing market.  However, if the Fed could have brought mortgage rates down to 2%, they would have, which implies constraints on their ability to manage rates.  These constraints are becoming visible on the Fed’s ballooning balance sheet.  The world is discovering that there are limits on the ability of Governments to bail out every sector of the economy.  (See  Insolvent Banking System Eludes Government Containment.)

Lower mortgage rates may become a sideshow to the larger issue of the solvency of nations, with Britain being the latest example . (Gordon Brown Brings Britain To The Edge Of Bankruptcy) The demands on the British treasury to rescue the entire banking system and economy are so large that the British pound has crashed and the very solvency of Britain is now being questioned.  This unfolding financial disaster in Britain puts a serious dent in the theory that Governments have unlimited financial resources.  The implications for the US Treasury, by extension, are ominous.

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

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: , ,

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: , ,

Congress Proposes Cram-Downs As New Mortgage Solution

January 7, 2009 by 2 Comments

The plight of homeowners delinquent on their mortgages has been the focus of much debate lately.  There have generally been two major lines of thinking:

-The best course is to let free market principles apply.  If homeowners cannot afford the mortgage payment, the old fashioned remedy of foreclose should take place, turning an overburdened homeowner into a renter.

-Those more inclined to assess the loss of a home in terms of human suffering rather than as an economic equation have sought to provide relief to struggling homeowners by modifying the terms of the original mortgage.

As the number of mortgages in default grew, the situation attracted the attention of politicians.  Their viewpoint seemed to focus on helping the homeowner stay in the home, regardless of cost.

The governments’ efforts to encourage the banking industry to cure the foreclosure problem through voluntary participation in loan modifications was a failure.   For a variety of reasons the loan mods were not working.   Data from the Comptroller of the Currency shows that over 50% of modified loans re-defaulted within 6 months.  With many loan mods, payments went up for the borrowers and principal was hardly ever reduced.  The loan mods actually left many borrowers in a worse position than when they started.  In addition, most of them had negative equity before and after the loan mod.  The negative equity position locked them into the house, unable to sell or refinance.

Today, from Washington, a new solution – giving bankruptcy courts the power to alter the terms of the original mortgage.

Lawmakers Set New Mortgage Bankruptcy Bill

WASHINGTON (Reuters) – Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday, and hopes are high that it will pass after a similar plan failed last year.

“Economic conditions have only worsened since we last debated this plan,” said Rep. Brad Miller, a member of the House Financial Services Committee who plans to introduce a bankruptcy reform bill on Tuesday. “Until we stop the slide in foreclosures and falling home prices, the economy will get worse still.”

The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt.

The lending industry has said that allowing bankruptcy judges to modify mortgage obligations would change how they weigh risk. Currently a lender knows that it has recourse to foreclosure if a borrower fails to meet mortgage payments, but the lender does not have to factor in the possibility that the payments it receives could be decreased by a judge.

What will be the impact of allowing bankruptcy judges to discharge (cram-down) mortgage debts?  Some of the issues and questions to be considered include the following.

1.  Interest rates are correlated to risk – that’s the way things work in a free market.   If a mortgage loan is made with the risk of principal impairment by bankruptcy, this risk has to be priced into the loan rate.  Reducing mortgage principal by legislative fiat may bring unintended adverse consequences.

According to The Mortgage Bankers Association “It is our position that if this proposal were to become law, mortgage rates would increase by at least one and a half points. In addition, lenders will be forced to require higher down payments and charge higher costs at closing. All these increased costs would be necessary to account for the new risks that lenders will face when judges decide to change how much borrowers owe on their mortgages.”

2.  Since total mortgage delinquencies are less than 10% and not all of these cases will wind up in bankruptcy,  cram downs might help less than 5% of mortgaged homeowners.   If the MBA is correct and mortgage rates rise significantly due to cram downs, expect a significant backlash from the other 95% of mortgaged homeowners who will wind up paying for the losses through higher interest rates.

3.  According to The Housing Wire, 50% of Americans oppose bailing out troubled homeowners. “These findings indicate that there are significant political barriers to proposals now being drafted in Congress”

The bankruptcy discharge of a mortgage balance will be viewed by many as the ultimate bailout.  The final compromised bill may result in contorted regulations that ultimately benefit few homeowners.

4.  The free market has a solution for “troubled homeowners” which is known as foreclosure.  Does the free market solution lose all merit merely because the number of foreclosures increased dramatically due to imprudent borrowing and lending?

5.  According to Rep. Brad Miller, “Until we stop the slide in foreclosures and falling home prices, the economy will get worse still.”   Rep. Miller is confusing a symptom of the disease as the cause.  Falling home prices did not cause our economy to weaken.    The housing asset bubble that burst was due to reckless lending, fueled by a government providing easy credit and obsessed with making everyone a homeowner. Political interference in economic matters usually delays a solution by impeding the free market forces that will ultimately prevail anyways.

6.  If the mortgage cram down bill is passed, it will drive many homeowners to bankruptcy, lured by the promise of wiping out mortgage debt.   The loan modification program allowed the banks to pretend that the amount they were owed would still be repaid over time.  When the loan gets reduced in bankruptcy, this illusion will be gone.  More write offs by the banks could lead to a self defeating cycle of tighter credit, stricter mortgage underwriting, weaker housing prices and further bailouts.

7.  How many homeowners that are incapable of handling the burden of home ownership will be allowed to remain in their homes, only to face foreclosure again at a later date?

8.  Continued massive government support of the mortgage market will be necessary since investor demand for mortgage securities is likely to remain low due to collapsing housing prices and the risk of mortgage debt being discharged by bankruptcy. How does an investor properly price a mortgage security where the asset value underlying the security is declining and also face the risk that the principal investment may be impaired by court decree?

9.  The Fed is now expected to absorb virtually all of the new mortgage backed securities this year.   With the Fed extending its purchases into virtually every asset class, a question comes to mind.  As the Fed assumes the losses of all failing economic entities in the country, at what point does the US Government begin to share the credit quality of those being bailed out?

Filed Under: Bailout, Banking Industry, Housing, Interest Rates, Mortgages Tagged With: , ,

Home Ownership Turns Into Nightmare For Many

January 5, 2009 by 1 Comment

The government’s obsession with making everyone a homeowner, regardless of qualification, has resulted in misery for millions and trillions in financial losses.  Here’s another example of our failed social experiment.

Housing Push For Hispanics Spawns Wave of Foreclosures-WSJ

California Rep. Joe Baca has long pushed legislation he said would “open the doors to the American Dream” for first-time home buyers in his largely Hispanic district. For many of them, those doors have slammed shut, quickly and painfully.

Mortgage lenders flooded Mr. Baca’s San Bernardino, Calif., district with loans that often didn’t require down payments, solid credit ratings or documentation of employment. Now, many of the Hispanics who became homeowners find themselves mired in the national housing mess. Nearly 9,200 families in his district have lost their homes to foreclosure.

For years, immigrants to the U.S. have viewed buying a home as the ultimate benchmark of success. Between 2000 and 2007, as the Hispanic population increased, Hispanic homeownership grew even faster, increasing by 47%, to 6.1 million from 4.1 million, according to the U.S. Census Bureau. Over that same period, homeownership nationally grew by 8%. In 2005 alone, mortgages to Hispanics jumped by 29%, with expensive nonprime mortgages soaring 169%, according to the Federal Financial Institutions Examination Council.

An examination of that borrowing spree by The Wall Street Journal reveals that it wasn’t simply the mortgage market at work. It was fueled by a campaign by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos.

The full article is well worth reading as it details how reckless lending and borrowing by numerous players, some corrupt and others simply stupid, helped to cause the greatest housing crash in history.

The country has now learned the hard way that home ownership is not the best option for many people.   See Long Term Housing Stability Based On Strong Borrowers.

If sound underwriting guidelines had not been abandoned over the past 10 years, the rate of home ownership would have been marginally lower and we never would have had a housing boom or a housing bust.  We would have all been better off without either.

Filed Under: Housing, Mortgages Tagged With: , ,

The Risk Of Higher Mortgage Rates

January 4, 2009 by 4 Comments

Mortgage rates again ticked higher Friday as the treasury market continued its sell off.  Most of the good news may already be priced into the treasury market that mortgage rates are based on.

Reasons why mortgage rates may increase:

1.  As the Fed’s efforts to stabilize the credit markets succeed, frightened money is moving out on the risk curve, selling treasuries and purchasing much higher yields on corporate debt, preferred and common stock and municipals.  To the extent that the Fed is calming the credit markets, their actions are  counterproductive to lower mortgage rates.

2.  The Fed’s announcement in late November of their intention to buy half a trillion dollars of mortgage backed securities is what kicked the mortgage rate decline into high gear.  Most of this may now be fully discounted.  The actual announcement of the purchase schedule of the MBS’s did nothing to lower rates.

3.  Without the backing of conventional mortgages by the government, mortgage rates would be much higher.   This can be seen from pricing in the jumbo fixed rate mortgage market where rates are as much as 2 to 3% higher since Fannie and Freddie do not purchase or guarantee these mortgages.  Many banks effectively do not offer jumbo mortgages since there is no secondary market for them.

4.  Continued massive government support of the mortgage market will be necessary since investor demand for mortgage securities is likely to remain low due to collapsing housing prices and the risk of mortgage debt being discharged by bankruptcy and loan modifications. How can an investor properly price a mortgage security where the asset value underlying the security is declining and also face the risk that the principal investment may be impaired by court decree?

5.  The question of how much financial support the government is able to continue to provide to subsidize mortgage rates becomes important, especially as bailout demands escalate.  There are reports today that the State governors are seeking $1 trillion in bailout support as their deficits grow.  Unless the funding ability of the US Treasury is infinite, price support for mortgages may be reduced.  The Fed is now expected to absorb virtually all of the new mortgage backed securities this year.  Meanwhile, the debt of the US Government continues to explode, possibly beyond the point where the debt can ever be repaid.  This scenario implies higher rates on all government backed debt.

Many investors expect the eventual outcome of the Fed’s quantitative easing campaign to result in much higher inflation.  Some very astute investment managers, who had correctly predicted the financial meltdown now view the treasury market as overpriced.

  • Jeremy Grantham of GMO describes the 30 year treasury bond as “ridiculously” overpriced and effectively forecasting only a 1% annual rate for the next three decades.  Mr Grantham sees the scenario where there could easily be a large surge in inflation.
  • Bob Rodriquez who runs the FPA New Income Fund and was up on the year in 2008 also sees a “massive bubble in treasurys”.  He is not buying treasurys since “We will not lend long term money to a borrower that capriciously erodes its balance sheet.”
  • Peter Schiff of EuroPacific Capital also sees a substantial risk of massive inflation and sharply higher interest rates at some point.   Eventually foreign investors will refuse to buy US Government debt based on concerns about the US ability to repay its debts.

The above scenarios may not be imminent but they do become more probable as the US Government depletes the Treasury with endless bailouts, guarantees and borrowing.

Filed Under: Bailout, Interest Rates, Mortgages Tagged With: , ,