Face-off! Mortgage Interest Rates

In “Face-off” my mission is identifying and writing about the best sources on a topic. I seek out expertise and explain the arguments. This is in sharp contrast to most others who purport to be experts on nearly everything. By comparison, my claim is quite modest!

Background: The Fed Ends Purchases of Mortgage Securities

After the fall of Lehman the market for mortgage securities evaporated. Much to the surprise (and dismay?) of the bearish punditry, the Fed stepped into the gap. It was pretty obvious that there was a temporary need to support mortgage lending.

This set up a debate. Was the Fed merely delaying the inevitable or was it sound public policy?

Since housing is crucial to the economic recovery, this is an important issue. Since the home buyer’s tax credit is also ending, the threat to housing is even greater. However, homebuyers still have a chance if they can find the right mortgage to help them. It can be difficult finding the right mortgage for anyone interested in buying a new home, whether it’s one of these New Homes in Greenville SC or somewhere more local. A lot of planning and thought not only goes into buying a home but also time and effort looking into mortgage deals and paperwork that is needed for the final purchase. Researching on sites like Money Expert where you can compare different mortgages might be a helpful place to start. You might also want to get into touch with a good real estate agent who may be able to help you to find the right property for you to purchase. There are many great real estate agencies, similar to Megowan Realty that could help you to find your dream home. Investing in a mortgage is a big step for anyone. But there may come times where handing this was not as easy as you once thought. Saying this, many people go through financial struggles, so even if you are considering using home equity line of credit to consolidate debt, if this will help get you out of this hardship, then go ahead with it. But with anything, find out all you need to know first and take it from there.

The Protagonists

Readers
should understand that the protagonists in “Face-off” do not know that
they are participants. They have not seen the commentary of their
putative opponent. This is a device for making stark contrasts in
opposing viewpoints about issues. Anyone who is cited is most welcome
to join in the discussion. I guarantee a complete opportunity for
rebuttal. In fact, that would be helpful to everyone.

The Pessimist

Mortgage specialist Barry Habib, in this April 5th commentary featured by John Mauldin (and the bearish blogging network) raises a number of key points:

  • The Fed has $1.25 trillion in mortgage securities. If these were $100 bills, the stack would be 850 miles high.
  • Fed purchases pushed down rates, perhaps by 0.5%.
  • It is all part of a carry trade.

Check out the full article, but the basic theme is that it will all end badly. The conclusion from the article refers to the movie Dumb and Dumber.

The Optimist

Brian Wesbury and Robert Stein of First Trust have been aggressively bullish on the economy and the stock market. Anyone with this perspective should be worried about the withdrawal of stimulus and other government programs.

Here is their take on the end of the Fed purchases:

  • The Fed will not be buying, but it is not going to “dump” existing positions.
  • A calculation of net new borrowing (new purchases minus debt retirement) shows only a need for $15o billion or so — nowhere close to the bearish number.
  • Housing prices and the labor market are coming around.

Check out the entire analysis here.

Conclusion

Our initial take was an advantage to Brian Wesbury, mostly because it was the careful marginal impact analysis that we favor.

There is now more information, enough for a “round one” verdict.

Bespoke Investment Group has been tracking mortgage rates since the end of the Fed purchases. In stark contrast to the predictions of disaster, the market has shown significant interest in this debt.

Spread between mortgage yields and US Treasury Yields

Readers should check out the full article for the typically excellent analysis from Bespoke.

There is another positive sign, the possible resumption of securitized jumbo mortgages. The inability to get mortgages for expensive homes has paralyzed potential buyers in that market. With the cap on government lending, these borrowers need a private market.

Securitization of mortgages now has a bad name, of course. My view is that it was a good idea, but was poorly implemented. There are many investors who would now happily embrace sound mortgage securities supported by those with good credit scores buying expensive homes.

To summarize, the early round in the mortgage debate goes to the bulls. Needless to say, we should all watch very carefully.

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One comment

  • m.revy@yahoo.com April 29, 2010  

    It seemsto me that if the FED bought mortgages once – they will probably continue to do it again – especially if they deem their strategy failing.
    Reminds me of FDR and what happened after his 1933 bank holiday http://www.newyorkfed.org/newsevents/news/research/2009/rp090615.html
    Too bad that post crisis – Government never relinquishes power. FDIC should have been shutdown and banks mandated to get insurance away from the government.
    Similarly – these purchases of mortgages can be thought of as quasi FDIC 100% insurance .. if it continues taxpayers and our currency are more and more at risk.