0.25%-0.75% increase in mortgage rates (only?)

[ASH]

So, the 'expert' opinion is that mortgage rates will only go up by 0.25%-0.75% after the fed stops its program of monetizing MBS in March, according to this article in the Financial Times. On the other hand, Morgan Stanley estimates that "the Fed's purchase of $1.6T in bonds last year left just $200B of debt for the private sector to absorb." On top of this, non-performing loans are still doing their moon-shot:



So, I am suffering some cognitive dissonance. The empirical reasons given in the article to believe the impact on mortgage rates might be slight seem fairly straight-forward (the market should be pricing in the end of the Fed's QE program, and there hasn't been much of a leap yet). On the other hand, I have a hard time understanding why there will be much appetite for fresh mortgages. Maybe the answer is that new mortgages are being underwritten with much better standards, and so should be of higher quality. Were there really only $1.25T worth of really crappy mortgages out there in need of monetization?

[jacobdcoates]

Re: 0.25%-0.75% increase in mortgage rates (only?)

I don't mean to be disrespectful Ash, but I was LMAO at the higher quality loan, postulate. It is true that they are better in an absolute sense, But not in any meaningful way. I work in the Mtg appraisal department of a large regional bank. It would be like claiming you were less drunk because you only had 15 shots tonight instead of the 20 shots you had last night. The quality is better in some sense but not in anyway that will make a difference in the outcomes. It just me eyeballing the loan, but it doesn't matter even if they were significantly better, it wont affect the banks loan/losses for a while.

http://www.calculatedriskblog.com/20...e-math-is.html\

My feeling is that rates will go up a lot, say at least 1-1.25% soon after the FED stops and then the FED will start buying again

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

I don't mean to be disrespectful Ash, but I was LMAO at the higher quality loan, postulate. It is true that they are better in an absolute sense, But not in any meaningful way. I work in the Mtg appraisal department of a large regional bank. It would be like claiming you were less drunk because you only had 15 shots tonight instead of the 20 shots you had last night. The quality is better in some sense but not in anyway that will make a difference in the outcomes. It just me eyeballing the loan, but it doesn't matter even if they were significantly better, it wont affect the banks loan/losses for a while.

http://www.calculatedriskblog.com/20...e-math-is.html\

My feeling is that rates will go up a lot, say at least 1-1.25% soon after the FED stops and then the FED will start buying again

No disrespect detected, jacobcoates. Thanks for the data point. It confirms my astonishment at the 0.25%-0.75% prediction. The "higher quality loan" postulate was... weak.

Intuitively, I share your opinion about what will happen -- rates will go up a lot, and then the Fed will start buying again. I'm just having trouble connecting my expectations to what I read the 'experts' saying. Do you have any rationale for why rates aren't climbing faster, already?

[jacobdcoates]

Re: 0.25%-0.75% increase in mortgage rates (only?)

Ash,

My thought is that everyone knows that there is guaranteed demand for mortgage loans from the FED till Mar10

There are also only 2 borrowers right now in housing - those who don't need the money(rich people) and those who couldn't get one without a government backstop(middle class).

Also cyclical in nature, It is pretty much expected in the industry that Nov-Feb is slow for loan production, mostly due to weather related effects. Very similar to auto loans. The basic reason is that no one wants to go out an look at house when it is 10 degrees outside. Right now, it seems mostly that demand is keeping a lid on rates, as borrowers will bolt to another bank right now at even the slightest rate increase. All last month was pretty slow as was most of Nov09. Which is why I don't think the FED will stop buying MTG for very long, if at all. The spring selling season for Autos and Home starts in Mar and peaks about Jul-Aug time frame. The question you have to ask is " Do you think that the FED will risk the housing market?" If you don't then they have to keep buying, well because they ARE the ONLY buyer, as everyone pretty much know that loan quality still leave a lot to be desired. If you think that the FED thinks that the housing market is strong enough to try and stand on its own, then the FED will stop. Thats what it boils down too command and control economy US style.

[GRG55]

Re: 0.25%-0.75% increase in mortgage rates (only?)

I don't mean to be disrespectful Ash, but I was LMAO at the higher quality loan, postulate. It is true that they are better in an absolute sense, But not in any meaningful way. I work in the Mtg appraisal department of a large regional bank. It would be like claiming you were less drunk because you only had 15 shots tonight instead of the 20 shots you had last night. The quality is better in some sense but not in anyway that will make a difference in the outcomes. It just me eyeballing the loan, but it doesn't matter even if they were significantly better, it wont affect the banks loan/losses for a while.

http://www.calculatedriskblog.com/20...e-math-is.html\

My feeling is that rates will go up a lot, say at least 1-1.25% soon after the FED stops and then the FED will start buying again

What happens if the Fed gets replaced [at least partially, if not entirely] with Fannie and Freddie, showing off their shiny new "capless" balance sheets, courtesy of the Treasury Dept?

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

What happens if the Fed gets replaced [at least partially, if not entirely] with Fannie and Freddie, showing off their shiny new "capless" balance sheets, courtesy of the Treasury Dept?

I think the Fed's ability to monetize greatly exceeds the Treasury's ability to backstop Fannie/Freddie with borrowed money. The Fed will have bought $1.25T worth of MBS by March, but so far, the Treasury has provided only $111B of funding to Fannie/Freddie. The Treasury's funding has to come out of tax revenue (ha!) or fresh borrowing. I can't believe that the Treasury will be able to provide anything close to the level of support for the mortgage market that the Fed delivered. I bet the Treasury will be stretched just covering Fannie/Freddie's losses, much less allowing them to expand purchases of mortgages (or relax underwriting standards). 'Tis better to print than borrow, when you're broke.

What do you think, Jacob?

Also, on a related (but somewhat tangential) note, I'd be interested in advice from any who care to comment on the following:

I currently rent, and it is very affordable relative to my income. Approximately 2/3 of my assets are in (mostly) traditional retirement accounts; the other 1/3 was accumulated as a potential down payment on a first house, but also serves as an emergency fund. There are personal factors involved, but from a strictly financial perspective ought I to:

(A) Lock in a low fixed mortgage rate while the getting is good, and expend all of the non-retirement assets except for the rump of physical gold to put 20% down on a property that is nice enough I wouldn't mind staying there for ten years or so (thereby benefitting from any wage inflation that may occur).

(B) Lurk like a vulture and then expend all my non-retirement assets on a "good enough" distressed property priced low enough that I can buy it without taking out a loan (thereby largely freeing myself from housing costs separate from maintenance, property taxes, and utilities).

(C) Expend half my non-retirement savings to pay taxes converting half my retirement assets to Roth, while keeping my non-retirement PM as an emergency fund and starting over with the house fund (thereby securing a significant chunk of my wealth from future tax hikes... assuming the law doesn't change).

(D) Do nothing; stay liquid; wait and see what happens.

Truth be told, I'm sorely tempted by (C). I really like the idea of having retirement savings that are unencumbered by the prospect of future income taxation at an unknown rate. The main objection to (C) is the possibility -- discussed on other threads -- that personal retirement accounts will eventually be raided in one way or another by a fiscally strapped government. I suppose there's also the possibility that in 30-35 years we'll be living with an entirely different tax system (VAT or national sales tax or some sort of wealth tax) such that the income tax advantage of the Roth is undermined. Still, it seems like it might be worth a go with 1/3 of my assets. In the long run, I'd like to have 1/3 of my assets in a traditional retirement account, 1/3 in a Roth vehicle, and 1/3 in non-retirement accounts.

[Rajiv]

Re: 0.25%-0.75% increase in mortgage rates (only?)

ASH

Look also at true self directed IRAs and 401Ks

In PGI Agency has a good set of resources to help and guide

including a very good presentation

[serge_oc]

Re: 0.25%-0.75% increase in mortgage rates (only?)

I am curios about B).

It seems that PMs will rise, and housing prices will fall further.

At some point, you may be able to buy a nice property outright (these days they are all distressed). Perhaps a nice REO. Anything else is not so good: foreclosure is a mess, short sale takes forever, and standard sale is just an owner procrastinating the coming short sale so he can stay in the house for free up to a year.

What are your thoughts on B, given that (seemingly) PM will go up, and RE prices down?

I think the Fed's ability to monetize greatly exceeds the Treasury's ability to backstop Fannie/Freddie with borrowed money. The Fed will have bought $1.25T worth of MBS by March, but so far, the Treasury has provided only $111B of funding to Fannie/Freddie. The Treasury's funding has to come out of tax revenue (ha!) or fresh borrowing. I can't believe that the Treasury will be able to provide anything close to the level of support for the mortgage market that the Fed delivered. I bet the Treasury will be stretched just covering Fannie/Freddie's losses, much less allowing them to expand purchases of mortgages (or relax underwriting standards). 'Tis better to print than borrow, when you're broke.

What do you think, Jacob?

Also, on a related (but somewhat tangential) note, I'd be interested in advice from any who care to comment on the following:

I currently rent, and it is very affordable relative to my income. Approximately 2/3 of my assets are in (mostly) traditional retirement accounts; the other 1/3 was accumulated as a potential down payment on a first house, but also serves as an emergency fund. There are personal factors involved, but from a strictly financial perspective ought I to:

(A) Lock in a low fixed mortgage rate while the getting is good, and expend all of the non-retirement assets except for the rump of physical gold to put 20% down on a property that is nice enough I wouldn't mind staying there for ten years or so (thereby benefitting from any wage inflation that may occur).

(B) Lurk like a vulture and then expend all my non-retirement assets on a "good enough" distressed property priced low enough that I can buy it without taking out a loan (thereby largely freeing myself from housing costs separate from maintenance, property taxes, and utilities).

(C) Expend half my non-retirement savings to pay taxes converting half my retirement assets to Roth, while keeping my non-retirement PM as an emergency fund and starting over with the house fund (thereby securing a significant chunk of my wealth from future tax hikes... assuming the law doesn't change).

(D) Do nothing; stay liquid; wait and see what happens.

Truth be told, I'm sorely tempted by (C). I really like the idea of having retirement savings that are unencumbered by the prospect of future income taxation at an unknown rate. The main objection to (C) is the possibility -- discussed on other threads -- that personal retirement accounts will eventually be raided in one way or another by a fiscally strapped government. I suppose there's also the possibility that in 30-35 years we'll be living with an entirely different tax system (VAT or national sales tax or some sort of wealth tax) such that the income tax advantage of the Roth is undermined. Still, it seems like it might be worth a go with 1/3 of my assets. In the long run, I'd like to have 1/3 of my assets in a traditional retirement account, 1/3 in a Roth vehicle, and 1/3 in non-retirement accounts.

[jk]

Re: 0.25%-0.75% increase in mortgage rates (only?)

ash,
your option c, the roth conversion, is very attractive for someone your age. also, re the concern of mandated investments in ira's, etc- you'll have paid the taxes on the roth assets- all the easier to withdraw them in a flash.

re the house buying option- i think that depends on the stability of your employment. can you know you will indeed want to/be able to stay in the house for a prolonged period? if so, you might not catch the bottom in nominal price, but locking in a low fixed rate will be worth a lot if the inflationary scenario [which everyone around here expects] indeed comes to pass. in the 70s housing rose nominally while actually losing a little in real terms. the real profit was the shrinkage in real value on the other side of the balance sheet- i.e. the nominally fixed mortgage became laughably small viewed in real terms. otoh, if there is any doubt about being able to hold onto the house/location for a prolonged period, then i'd hesitate to buy.

[unlucky]

Re: 0.25%-0.75% increase in mortgage rates (only?)

So, I am suffering some cognitive dissonance. The empirical reasons given in the article to believe the impact on mortgage rates might be slight seem fairly straight-forward (the market should be pricing in the end of the Fed's QE program, and there hasn't been much of a leap yet).

Here are some possible reasons I can think of, although I can't claim much evidence to support any of them.

1. The 0.25 to 0.75% rise refers to the spread from treasuries rather than the actual interest rate. The rise in the spread may be limited because once it increases sufficiently, banks who are currently buying treasuries will switch to buying MBS instead. The result will be a rise in treasury yields and therefore the total increase in interest rates will be greater than 0.75%.

2. The estimates are based on the idea that the end of QE should be already reflected in market prices. But market prices may also reflect the knowledge that the Fed will not tolerate a large increase in spreads, i.e. traders assume that if the spread increases by more than about 0.75%, the Fed will step back in to start buying. If this is true, then any doubts about the ability of the govt to support the markets might show up first in treasury yields, and not in spreads.

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

ASH

Look also at true self directed IRAs and 401Ks

I have only self-directed retirement accounts. They are self-directed brokerage accounts at Fidelity.

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

What are your thoughts on B, given that (seemingly) PM will go up, and RE prices down?

I also think that is likely. The main objection to B is that even if PM goes up a lot and RE prices come down a bit further in real terms, it is unlikely that I would be able to pay cash for the type of property on which I'd like to settle. My thought is that B may be one of the better moves financially, but there are personal quality-of-life factors that argue against it. (I wouldn't be considering it except for the very large wealth-building advantage conveyed by having a paid-off house in my mid-30's.)

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

ash,
your option c, the roth conversion, is very attractive for someone your age. also, re the concern of mandated investments in ira's, etc- you'll have paid the taxes on the roth assets- all the easier to withdraw them in a flash.

re the house buying option- i think that depends on the stability of your employment. can you know you will indeed want to/be able to stay in the house for a prolonged period? if so, you might not catch the bottom in nominal price, but locking in a low fixed rate will be worth a lot if the inflationary scenario [which everyone around here expects] indeed comes to pass. in the 70s housing rose nominally while actually losing a little in real terms. the real profit was the shrinkage in real value on the other side of the balance sheet- i.e. the nominally fixed mortgage became laughably small viewed in real terms. otoh, if there is any doubt about being able to hold onto the house/location for a prolonged period, then i'd hesitate to buy.

Thanks for the advice, JK. Job security is a tricky thing to evaluate. I was the first permanent hire at a small company which now has about 15 people or so. Given the structure of the company and my role here, I'd probably be one of the last to go in a down-sizing. On the other hand, we work in a heavily government-subsidized industry; all it takes is for me to get my wish (i.e. the government balances its budget), and *poof* -- suddenly much less money for science and defense R&D. That could easily wipe the company out.

Maybe the moral of the story is to wait a year, and only buy if my wife is able to find a job in the area. The financial advantage of a low fixed-rate mortgage may be offset by the acceptance of greater risk through reduced flexibility.

[c1ue]

Re: 0.25%-0.75% increase in mortgage rates (only?)

ASH,

Every person must make their own decisions on the relative risks.

I would recommend though, that your scenario planning consider this:

One way or another - there WILL be a spike in interest rates.

It could be due to the balance of payments crisis. If this doesn't happen, then there WILL be a Volcker style killing of inflation expectations at some point.

This last point is purely my own - my belief is more of the former but in the case of the 'muddle through' latter (i.e. 100% inflation over 4 years a la iTulip), the Fed/Treasury must readjust people's expectations on price increases or inflation expectation itself will continue the inflation.

If this assertion is correct, then there will be an opportunity where the house price WILL be at its nadir - and your cash, assuming it has kept up its purchasing power, will purchase what you desire.

The Jtabeb method (GRIZZLY!) has its risks in either scenario; both in the monster taxation aspect and in the confiscation aspect.

It is the contemplation of all of these equally poor choices which led me to prepare the 2 exit options.

[vinoveri]

Re: 0.25%-0.75% increase in mortgage rates (only?)

It is the contemplation of all of these equally poor choices which led me to prepare the 2 exit options.

c1ue, would you mind sharing your exit options to the extent you feel comfortable? I too have been considering the case if and when circumstances here become intolerable, and leaving becomes the best option. The shenanigans that occurred in the fall of 2008 was enough to actually get me to apply for an immigration visa (paranoid and overreactionaryu as that may sound to some ... including my own family).