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This page is a collection of my notes regarding the mortgage industry (MOrtgage BLOG) that I post and update from time to time.  I hope you find this information beneficial to you.  If you have any comments or suggestions or if you would like to enter into further discussion regarding any of the topics presented here, please let me know by emailing me at



  June 11, 2005


Risky Bubbles:  Has The Business Cycle Fermented Too Long?


Discussion about real estate market "bubbles" has become a popular pastime in recent months. However, prominent observers and market participants are always quick to point out that while there has been no national devaluation of property prices since the great depression, there have been periods where certain markets -- or kinds of properties -- have suffered adverse conditions.


Federal Reserve chairman Alan Greenspan is among those who avow that due to the nature of the market, national bubbles in real estate prices are unlikely to form. A short while ago, however, he noted that there is " a minimum, a little froth in this market." Greenspan said that while the Fed doesn't "perceive there is a national bubble... it's hard not to see that there are a lot of local bubbles" in housing, and that current property price gains represent "an unsustainable underlying pattern".


We're left to ponder which markets the Fed believes are in 'bubble mode,' although following those with the strongest or longest price increases should provide some indication. As well, if there are acknowledged bubbles, what might their nature be? Are they sporadic and isolated bubbles which, like those from a child's wand, exist individually and harm only themselves when they pop? Or are those bubbles connected more like those on a glass of soda, where the popping of one changes the tension and structure of another, causing them all to ultimately burst? A lot of isolated bubbles might fare well in adverse conditions, but a mass of interconnected bubbles might not.  The situation reminds me more of the type of bubbles that form in the bloodstream and cause divers to get the bends.


If nothing else, more froth was evident in the latest reports detailing record levels of home sales with sharply rising prices. The National Association of Realtors noted that in April, the annualized rate of sale for existing homes was 7.18 million, a new record, and prices on a national basis jumped by 15% year over year. New Home Sales also powered ahead, if only modestly higher than March, with a 1.316 million annualized rate of sale.  This is more, much more, than mere foam.


Arguments about fundamentals aside, demand for homes is being fueled by cheap and easy mortgage credit. Since incomes aren't rising by 15% year over year despite decent job growth, the only two ways to offset those costlier monthly payments is with lower interest rates or more favorable lending terms and conditions. At the moment, fixed mortgage rates _are_ about three-quarters of a percent lower this year than last, but most ARM prices are somewhat to considerably above last year's levels.


But lower FRM prices aren't sufficient to compensate for a 15% price rise. The monthly payment for a $600,000 30-year fixed at 6.41% last year would have been  $3,756; the monthly payment at today's 5.82% for $690,000 (the effect of that 15% increase) would be  $4,057, so the borrower would still need an additional boost in order to qualify -- unless the qualification terms were liberalized or otherwise expanded... or unless the borrower selects a product with an even lower available interest rate, such as those found on an ARM. Of course, accepting that ARM exposes the borrower to certain risks not found in the terms of a 30-year FRM.


In any discussion of housing bubbles talk ultimately centers around risk. In particular, the question is whether lenders and borrowers are accepting too much risk in the kinds of loans they make available -- and which borrowers select -- weighed against the market climate which exists today. It should be noted that, if the market is functioning properly, a lender's role is to act largely as a kind of conduit between investor and borrower, with any risks theoretically passed along to the ultimate investor. That's not to say that a lender might not also be an investor in this case, but usually mortgages are packed up into securities and sold to others as investments.


So, why all the big push into ARMs in the last year or so? And who are these investors, anyway?


About five years ago, an unsustainable stock market imploded, taking with it a lot of money. Perhaps more significantly, it also wiped out the desire of many individual investors to invest in equities. A sizable number of them took at least a portion of their holdings out of stocks and instead put their funds into bonds, either directly, or via money managers seeking any form of positive returns in an adverse investment climate.


As a result, that money came to be invested in Treasuries and mortgage-backed securities, as well as real estate investment trusts, or REITs. Coupled with a difficult economic climate and a Fed slashing rates, this helped produce some of the lowest interest rates in over 40 years, causing a historic tsunami of first mortgage refinances.


That wave had two effects: First, most of those refinances turned many outstanding loans into fairly low-yielding 30-year FRMs. Since most lenders don't want to hold long-term low-yielding paper, the vast majority of these were sold off to the secondary markets, bloating their mortgage holdings (a major contributor to Fannie Mae's current woes). Worse, those refinances decimated portfolios made up largely of adjustable rate mortgages (ARMs), leaving investors with yawning holes in their portfolio but handfuls of cash to re-invest -- hopefully in ARMs.


Originating ARMs is always a challenge, as borrowers prefer FRMs in nearly all circumstances. Worse, investors needed to originate ARMs in an interest rate climate which, even now, still sports some of the lowest rates in at least a generation. How to attract borrowers to products whose interest rates are most certain to rise in coming years, bringing budgetary risk? You start adding and/or combining features rarely found on FRMs.


For starters, you can bait the hook with an interest-only payment feature. Then, reduce or eliminate down payment requirements; offer more-generous qualification ratios for good (or perhaps not-so-good) credit scores. Toss a "minimum payment" feature into the mix, but downplay the negative amortization component of such an arrangement. Then, promote the monthly "savings" of these products knowing that those savings are fleeting at best, and that ultimately, the bills will come due.


Such a lender might also consider expanding the definition of who might be able to get a loan with low- or no-documentation, or otherwise fit more people under the umbrella (known as 'Alt-A') who couldn't otherwise obtain credit at such favorable terms. You help people "stretch" into homes fetching increasingly outrageous prices at a time of perhaps record valuations, and you do it while the economy is in pretty fair shape. Demographics aside, you've helped fuel what could be considered excess activity -- in a market which should need no help -- by artificially stimulating demand through the use of cheap and easy credit.


Of course, this is a simplified explanation of how we got to where we are at the moment: talking about risk. There are a number of other factors promoting today's market, but the concentration of investment assets into narrowly defined (and perhaps related) investments -- Treasuries and mortgages -- is where at least some of the fuel is coming from. As well, hoping to spread those risks over a broader spectrum may be the reason behind the Treasury's recent trial balloon of offering 30-year Treasury Bonds again. However, as long as investors keep pouring money into these kinds of mortgages, or until those formerly-decimated portfolios are re-filled -- or until losses in these products begin to show (probably not this year, at least) -- this housing boom will continue to press onward, even if the underlying mortgages are "risky".


Higher levels of employment will help keep these loans from becoming a greater risk. The report on U.S. job growth in May, however, showed a paltry 78,000 jobs created where 175,000 was expected; by contrast, we saw 274,000 new jobs in April. (In a separate report, the unemployment rate improved slightly to 5.1%, the best showing since late 2001.) The labor market is notoriously volatile, but the May report caused a big selloff in longer-term Treasuries, pushing the 10-year Treasury yield down to 3.8% for a short time before recovering to close just shy of 4%.


Of course, it would be a good thing if the economy continues to grow. However, a spring "soft patch" has put a downward bent in growth as we head toward summer, especially in such things as manufacturing. There is another dip in the index of activity in the manufacturing sectors even though the 51.4 reading for May was still on the positive side of the ledger, however it also represents the lowest mark in about two years revealing a continuation of an overall continuing decline.


Long-term mortgage rates have generally followed the "soft patch" on the way down since their peak in early April, and  May's lower employment report served to reinforce that pattern. There are certain practical limits on how low a 30-year rate can go in light of a 3% (and likely higher) Federal Funds Rate, so the downside for rates is probably limited to minor declines. The relationship between the 30-year FRM and the 10-year Treasury may become wider or decouple somewhat in the weeks ahead, and declines in the Treasury Yield may not be fully reflected in mortgage rates as a result.


In the meantime, lets keep a keen eye out for any signs of upward pressure that we all know are inevitable as the business cycle continues to ferment and effervesce.



Friday, July 15, 2005: 

More foam...


Stocks seem to be getting more investor attention lately, and that's translating into rising equity prices. That, in turn, is lifting the yields on longer-term Treasuries, and that lift has dragged fixed mortgage rates along. The average 30-year fixed rate mortgage (FRM) rose by three basis points this week (.03%), ending the period at 5.84%. Among Hybrid ARMs, the popular Five-one Hybrid ARM rose 13 basis points to 5.46%, according to the nation's largest survey of retail mortgage pricing.


Despite minor rate increases of late, long-term FRMs remain inexpensive by historical standards. The nonstop rise of home prices, however, has pushed loan payments beyond the means of many borrowers; many have been turning to ARMs as a more affordable option. That option is slowly becoming less palatable, though; as the Federal Reserve's "measured" campaign of raising short term interest rates has progressed over the past year, rates all along the mortgage yield curve have grown closer and closer to one another. It's becoming more difficult to find payment relief by selecting an ARM.


While the shortest of the short-term ARMs promise starting rates as low as 1%, that rate typically lasts no longer than a few months, followed by a jump to "current market conditions," which lately means interest rates in the mid-fives, at best. In fact, 3/1, 5/1, 7/1 and 10/1 Hybrid ARMs are all averaging in the mid-fives; only one-year ARMs still manage to average in the high four-percent range, and those continue to trend higher. Those higher rates will typically deter some people from buying homes, but ironically, these borrowers may instead turn to somewhat riskier interest-only payment plans in order to create some budgetary breathing room. If the yield curve continues to flatten, we'll need to see how this plays out.


Will long-term rates finally press higher for real? No one knows for certain, but if inflation returns in a meaningful way, they surely will. The Consumer Price Index was unchanged for June; the "core" measurement of prices, which excludes highly volatile food and especially energy costs, rose a scant 0.1%. Core prices are important to the Fed, as they reflect somewhat more intransigent inflation pressure.


Mortgage rates have been ticking higher along with underlying Treasuries. As the 10-year Treasury yield broke out of its recent range this week (on the high end, this time) it stands to reason that fixed mortgage interest rates may continue to drift higher.


Here's the latest 3 month tracking of the 10 Year Treasury Bond


And here's the graph tracking 30 Fixed Rate Mortgages




If you are thinnking about purchasing or refinancing, then I want to help you find the best rate on a fixed rate product. If a fixed rate product won't fit your needs then

be sure to call me for a quote.  I am associated with dozens of lenders carrying hundreds of mortgage products.  My job is to find you the best fit for your needs. 

I'm looking out for your best interest! 

My office phone is 510.243.2754






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