by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
May Day in the mortgage rates market is over. The market got spooked by triangulated opinions about the viability of the US Treasury as a going concern. In response, mortgage traders sold off mortgage-backed securities, some 3-4%, in 4 days, to drive mortgage rates from 4.75% to the 5.375% current level.
Tom Vanderwell thinks mortgage rates could bounce as high as 5.75%, in the next 30 days unless there is MASSIVE intervention by the Fed.
MOTIVE: It helps to understand that Ben Bernanke is a disciple of financial activism as a means to combat a potential economic depression. Aware of his activist philosophy, scrutiny of the April, 2009 FOMC minutes would lead you to believe that the Fed is targeting retail mortgage rates to be under 5%. Mortgage rates north of that number are counter-productive to the fiscal policy designed to deleverage the average American.
MEANS: The Fed has another $700 billion at the ready to stabilize the mortgage-backed securities market and artificially lower retail mortgage rates to under 5%.
METHOD: The Fed would have you believe that not only are they going to purchase those MBS for the consumers but for the viability of the Central Bank (this is spin, plain and simple). In short, the Fed is saying “the financial institutions are so healthy that we must direct our attention to the consumer if WE are to remain a going concern”. I’m exaggerating a tad but that’s the Fed “spin” to justify the massive intervention I expect.
My opinion about the Fed’s actions are irrelevent to the near-term home buyer and mortgage shopper; my analysis is not. Expect the Fed to drive mortgage rates lower into June.
Tom Vanderwell says:
Brian,
We agree that the Fed is going to try to drive rates lower in June. We don’t agree on whether they’ll be successful in doing so. I have yet to come up with an intervention that they could do which would really help without driving up the federal deficit and raising more fears along the lines of what caused this week’s bomb to go off.
Any ideas on what they could do that won’t raise debt challenges?
Tom
May 28, 2009 — 9:47 am
Brian Brady says:
“Any ideas on what they could do that won’t raise debt challenges?”
$700 billion earmarked and a philosophy of Central Bank activism. I wouldn’t be surprised if the Fed earmarked more. The end goal is a deleveraged consumer and reinvigorated interest in home buying; both fiscal and monetary policy are aimed at those two objectives.
Tom, you will eventually be correct; hyperinflation is highly probable. It ain’t gonna happen until Ben fires all of his bullets.
May 28, 2009 — 9:58 am
Tom Vanderwell says:
But that’s my point. The market has essentially repudiated their “earmarks” and has said, in one giant blow, that we don’t buy the idea of borrowing our way out of a a need to deleverage. (Am I the only one who sees borrowing our way out of debt as a failure?) You’re right, Ben will fire all of his bullets, but unless he uses a different gun than he has right now, the result won’t be what he wants…..
Tom
May 28, 2009 — 10:04 am
Brian Brady says:
“Am I the only one who sees borrowing our way out of debt as a failure?”
You’re confusing opinion with analysis, Tom. I agree with your opinion but not your analysis. One of the first rules of investing is “Don’t Fight the Fed”; the Fed’s activism is but in the 4th or 5th inning.
May 28, 2009 — 10:24 am
Kevin OBrien says:
This is an excellent discussion. I think the market has tried to speak with the raising of rates but I think Ben will attempt to use everything possible to keep the rates down.
I think if he attempts to keep rates down in spite of the market, eventually the Fed will be the only buyer which makes the possibility of “hyperinflation” become very real.
I think we would be much better off if Ben wasn’t considered a scholar on the Great Depression. He appears to be directing us to a currency crisis instead of a market correction.
May 28, 2009 — 12:04 pm
Tom Vanderwell says:
Don’t fight the Fed, but when they run out of bullets, we’re all screwed……
A government intervention in the bond market (particularly MBS) right now is going to come back to bite us big time……..
May 28, 2009 — 12:57 pm
Joe Loomer says:
Brian, understand you’re speaking to folks a lot more articulate in the finance sector than I am, but would you mind either hitting me up via email or just posting a quick note here about what you meant by “triangulated opinions?” If you’re speaking of the Chinese, Bill Gross, and Congressman Mclintock, then I get it – must confess to “Dammit Jim, I’m a Realtor, not a Magician!”
What do you foresee for the remaining outs? Hopefully we’re not talking softball and seven vs. nine innings here.
Navy Chief, Navy Pride
May 28, 2009 — 1:19 pm
Brian Brady says:
“would you mind either hitting me up via email or just posting a quick note here about what you meant by “triangulated opinions?” If you’re speaking of the Chinese, Bill Gross, and Congressman Mclintock, then I get it”
Don’t sell yourself short, Chief. That’s EXACTLY what I meant
May 28, 2009 — 1:35 pm
Kevin OBrien says:
Brian,
“One of the first rules of investing is “Don’t Fight the Fed”; the Fed’s activism is but in the 4th or 5th inning.”
What are the late inning Fed moves? I thought them working to force the rate low again, was going to be bad enough.
May 29, 2009 — 4:07 am
Brian Brady says:
“What are the late inning Fed moves?”
I have no clue, Kevin. The only intent of this post was to address the near-term implications of the MBS crash last week.
I’m trying to understand how the doubling the money supply won’t result in hyperinflation. One theory I have is that we lost so much wealth in the stock market that we’ll have dramatically reduced spending; the added money might pair off that loss in consumer spending.
I’m a smart guy but this is beyond my comprehension right now. We sometimes hear from a really smart guy named “Joe Strummer”. If he shows up, he might be able to address my “theory”.
May 30, 2009 — 12:27 pm
Tom Vanderwell says:
Kevin,
As is Brian, I’m struggling to try to comprehend everything that’s going on. With that, let me throw in a couple of thoughts:
1. I think we are already in the late inning moves, maybe just in time for the 7th inning stretch right now.
2. Over time, the government’s policy of “patch and bail” is going to be shown that it won’t work. That’s part of what happened this week in the bond market.
3. So we’re going to need other unusual and drastic actions to eventually pull out of this.
What sort of actions? A couple of ideas:
1. Reducing the cost of borrowing doesn’t seem to be working. The market isn’t accepting manipulated rates and massive borrowing by the government.
2. The reason that the housing and credit markets aren’t recovering as quickly as people would like is because we are deleveraging. Car sales aren’t going to rebound quickly because people don’t want to borrow $40,000 for a car (or they can’t), so they’ll buy an older one and borrow $5,000. Housing won’t rebound because people aren’t comfortable with taking on additional debt.
3. I read a somewhat in “jest” proposal before that rather than spending $700 Billion on TARP, they should have taken that money and given it to all of the US citizens over the age of 21. What would happen? 1) Some would spend it and stimulate the economy. 2) Some would pay down debts and improve both their balance sheet and the balance sheet of the banks they owe money to. 3) Some would put the money in the bank and thereby increase the asset base of the bank and put it in better health and 4) Some would invest it in the “markets” and improve the stock market and help bolster corporate bottom lines and retirement account balances.
Oh and the “payouts” would be taxable so the government would get anywhere from 10% to 40% of it back immediately.
I used to think that was a facetious idea that wouldn’t work, but now I’m not so sure any more……
I’ve also heard the idea that what needs to be done is to reduce the debts that are outstanding. Both corporately and consumer debts are way higher than what is sustainable. If we as a government reduced the consumer debts by 10% of their annual income (or if they didn’t have debts equal to 10% of their income, give them cash), what sort of impact would that have? How much cash would that take? And how would we deleverage the corporate world that is currently struggling?
I think we’re going to find a lot more of those type of questions being asked because we’re going to see that, in my opinion, last week was a turning point in the market and the government starting to realize that their current plan doesn’t do it.
Tom
May 30, 2009 — 6:28 pm
Kevin OBrien says:
Brian,
The hyper inflation possibility is truly amazing. All that money creation has to have a consequence. More and more I find myself when it will happen and not if it will happen. Hope I am wrong though.
Tom,
The more unusual and drastic measures they try, the worse off I fear we are. After years of excess I can understand why people are afraid to take on more debt. The employment numbers consistently show that downsizing is continuing.
I think the only answer to deleveraging is to allow it to happen. If they would of let everyone fail it would of been immediate massive deleveraging. Bankruptcy is the best way to alleviate debt. Let those who are competent buy assets for pennies and use them effectively. Instead they have tried to patch over the bad investment.
I think the “payout” would of been one a much better idea. In effect it would be a tax cut for all of us. I think the best way to fix the economy would be to reduce all corporate and personal taxes 25-50%. Spur people to go out and make investment. Too bad it will never happen.
May 30, 2009 — 6:58 pm
Brian Brady says:
“More and more I find myself when it will happen and not if it will happen.”
I agreed with you forever (well, for the last 2-3 years which feels like forever). Printing money seems like a recipe for hyper-inflation. Everything I’ve been taught directs me to agree with you and Tom. The fact that we’re in agreement makes me seek other explanations (I want to see if we’re missing something). This is what I’m exploring:
1- A by-product of paper wealth is confidence in the future.
2-Confidence in the future inspires spending JUST a bit beyond your means.
3-The sum of that spending is a percentage of paper wealth, a factor if you will.
4- $6 trillion in paper wealth evaporated; even more in home equity.
5- The expansion of M1 may be far less than the spending lost (the factor of the paper wealth)
It’s pretty far-reaching but I’m trying to wrap my mind around this theory.
May 31, 2009 — 9:58 am
Greg Swann says:
> The fact that we’re in agreement makes me seek other explanations (I want to see if we’re missing something).
It is at least plausible that productivity gains may offset the consequences of our current inflationary spasm. This is Ray Kurzweil talking about the yearly doubling of any sort of capacity you can name:
May 31, 2009 — 10:21 am
Kevin OBrien says:
Brian,
This is what I’m exploring:
1- A by-product of paper wealth is confidence in the future.
2-Confidence in the future inspires spending JUST a bit beyond your means.
3-The sum of that spending is a percentage of paper wealth, a factor if you will.
4- $6 trillion in paper wealth evaporated; even more in home equity.
5- The expansion of M1 may be far less than the spending lost (the factor of the paper wealth)
It’s pretty far-reaching but I’m trying to wrap my mind around this theory.
That is a significant amount to grasp. Some great points for me to think about.
June 6, 2009 — 12:05 pm
Mark says:
Brian,
I am one of the Refiers that waited to long. I had a fixed rate 30 at 4.625% no points and I on opinions I was reading was holding out believeing that it would go down as low as 4% – 4.25%. Now it is at 5.875% that is almost a 1.25% increase in less than 25 days. I cant believe that this kind of an increase is not getting more media hype than it is. I have 2 mortgages at 6% my monthly savings on refiing both loans would have been over $700, that is money I would have spent on different things, ie. home upgrades, vacation, new vehicle, etc. That is just me, now how many of me’s are out there that are not going to refi because of this drastic rate increase. I have got to believe that this will put a real damper on any type of recovery that the economy would have experienced had the mortgage rates remained under 5%.
Mark
June 11, 2009 — 9:46 am