Financial markets remain under duress, even as (or perhaps due to?) the government pledges trillions of dollars in economic supports for various facets of the economy. New programs have been unveiled one after the other, joining the expansion and/or resurrection of older ones. At this point, the success of exactly none of them can be predicted with any certainty, and the values of others remain unclear.
Several venerable financial institutions have required new infusions of cash; AIG and Citicorp are the latest, requiring more billions of dollars to keep them afloat. “Stress tests” are now underway for the collection of banks which hold the majority of the nation’s assets, and it has become all too clear that “too big to fail” more likely means “too big to manage effectively and requiring government support no matter the price tag.” For some institutions, some form of quasi-nationalization is surely on the way, if temporarily, but the long-term future is much less clear.
The markets — particularly the stock markets — have not reacted well to these incursions over the past few months. For example, the Dow Jones Industrial Average shed about 15% in the period between Election Day and Inauguration Day, and since the new team has taken over Washington another 18% decline has occurred. This is not sign of confidence in the new administration’s plans or any inkling of optimism about the near-term prospects for recovery.
It would seem that a rough road lies ahead.
Our last forecast expected overall interest rates to wander in a range of perhaps 5.5% to 6% over the two-month period, and we came pretty close. The period’s high-water market for HSH’s FRMI was 5.94%, while this indicator’s low was 5.66%. The FRMI’s 5/1 Hybrid counterpart was forecast to trend between 5.6% to 5.95%, and we managed a 5.51% to 5.80% range instead, still fairly on target. During that time, rates for 30-year conforming loans moved upward off flight-to-quality panic levels to settle around 5.25%, while 30-year “true” jumbos have generally improved in price. In fact, rates for jumbos are holding at about one-year lows, a signal of somewhat improved liquidity for those products.
The “expanded conforming” program — designed to make jumbo mortgage money cheaper for certain borrowers in certain marketplaces — saw its “maximum maximum” loan amount re-lifted to $729,750, after the original end of the program (at the end of 2008) saw it reduced to $625,500. When talking about these products, the discussion often turns to how “high” true jumbo mortgage rates are, but it’s difficult to buy argument that some of the wealthiest homeowners and homebuyers need interest rate subsidies to promote better affordability
After all, and irrespective of their relationship to government- influenced (read: artificially lowered) conforming interest rates, jumbo mortgage rates have been at or above — sometimes well above — present levels in the last nine years. These borrowers seem to have found those rates to be quite acceptable over time. Regardless, and for the most part, rates were pretty stable during the forecast period.
As noted above, a slew of new spending initiatives are coming soon to an economy near you. A $787 billion stimulus plan — derided by many as nearly devoid of any actual private market stimulus incentives — will start hitting the streets fairly soon, as will the Fed’s new $1 Trillion plan to goose auto, student and credit card lending (and perhaps other asset-backed markets) too. Then there’s the regular Federal budget, bloated out to $3.55 Trillion dollars, plus the new HASP, with $200 billion in support for Fannie Mae and Freddie Mac, another $75 billion in refinancing chances and outlines to modify possibly millions of mortgages with certain tax-funded incentives to borrowers and homeowners alike.
With regards to the HASP, there is probably some value for borrowers who are lucky enough to have a Fannie/Freddie held mortgage to refinance even if they are mildly underwater. However, we think that claims of 4-5 million homeowners leaping at the chance to be put through today’s mortgage underwriting wringer is wildly optimistic, even if a better interest rate can be obtained after all the “adder fees” and all the hurdles can be overcome to obtain financing.
As well, prospects for 3-4 million loan modifications also seem outlandish, even if there are new incentives to participate for various parties. We’ve heard too many claims already about how concept A or concept B will save the housing market: anyone remember last summer’s much ballyhooed Housing and Economic Recovery Act (HERA)? Or how about the $300 billion Hope for Homeowners, which has only completed about 25 loans since it began in October? (We note that the Congressional cramdown bill will revise and extend the HOPE program.
We need to keep in mind that the actual, recent experience for loan mods isn’t good at all, with some 55% re-failing after just six months. Call us skeptics, but we’d prefer proof — or at least some well-thought analysis — which shows that this is a better avenue to explore than previous attempts or even allowing foreclosure. Perhaps the only thing of actual value is that HASP allows innocent investors to have a chance to share their losses with the Federal government. Contrary to many reports, investors aren’t all big, bad banks, but ordinary people putting money into bond funds, 401K and IRA plans who rightfully have been resistant to taking all the blame and all the loss, simply for having been nice enough to lend their money to people who wanted to buy homes. If anything, this is where the real value of HASP may lie.
The $787B stimulus plan may or may not provide much stimulus, and if it does it may be a ways down the road before its effect is felt. Many feel that its government-heavy spending program comes at the expense of private (especially small) business by removing immense amounts of capital that investors could otherwise use to spur new companies.
Still, the only program which can claim actual tangible benefit to a wide group of consumers is the Fed’s and Treasury’s program of buying Fannie and Freddie debt and mortgage-backed securities (MBS purchases are running at about $4B per day at the moment) which serves to keep interest rates low at a time when the government is literally flooding the market with new debt. Certain of their other programs — the commercial paper facility — are working to improve liquidity, but are well upstream of producing any direct consumer benefit. As these are interest-bearing investments, they may actually have no ultimate cost to the taxpayer… but the verdict for that may be years away.
With all the spending and grandiose plans of the new administration, we can help being struck by a line from Creedence Clearwater Revival’s “Who’ll Stop the Rain”:
Caught up in the fable
I watched the tower grow
Five year plans and new deals
Wrapped in golden chains…
The plans and deals are coming, but the golden chains will be our tax obligations, as well as the continuing tax burdens of our descendants in the generations ahead. May they look with a favorable eye toward the decisions being made today.
The country remains mired in recession, and we have a pretty deep hole to climb out of before we’re in any recovery mode. Fourth-quarter 2008 GDP came in at an alarming -6.2%, the biggest contraction in about 27 years, so we’re even a long way from breakeven at this point. Thankfully, inflation pressures have flattened out, even if a fair portion of the benefit of declining energy prices has already occurred.
We remain perhaps more optimistic than many with regards to housing.
Provided there are no more rumors to distort market activity (like those promising 4% or 4.5% mortgage money, or huge tax credits) the combination of low mortgage rates and low prices is creating perhaps the best buying opportunity in decades. To realize that opportunity, we’ll need to see some firming in the labor market and consumer confidence, which will hopefully start to happen in time for the traditional spring homebuying season, now just weeks away. Certain markets — those with high volumes of foreclosures, and thus very low prices — are already responding (notably markets in California), and sales are firming.
Home prices have not yet stopped declining, according to the most widely published indicators, but that is serving to enhance affordability, if at the expense of the property’s present owner (bank or individual). New home sales remain tepid, competing as they are against low cost (and often recently built) homes available. Builders still have too much hard-to-sell inventory on hand and few solid prospects for new developments to become viable anytime soon.
All that said, the current environment should again promote fairly stable mortgage rates. Overall, rates really shouldn’t be expected to go too far, too fast, as the private mortgage market continues to try to crawl its way back to health, while the government-backed market is probably supported to extent its going to be, absent any new crisis. Prospects for economic recovery aren’t yet coming into view, but at the same time, signs of _some_ solidifying in certain financial markets make a new panic somewhat less likely. The slew of debt supply coming into markets is of some concern, as it might serve to lift interest rates somewhat, but fortunately concerns about inflation are tomorrow’s problem.
For the next nine weeks, we think the overall cost of mortgage money as gauged by HSH’s FRMI should trend between 5.55% and 6%, while the overall 5/1 hybrid ARM should range between 5.37% and 5.85%. True (up to $417,00) conforming loans probably remain below 5.5% for the period, perhaps dipping to as low as 5.18%, while true jumbos seem likely to drift lower in a gap between perhaps 6.85% and 6.5%.
Check back mid-late May and we’ll see where we’re at.
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