Operation Twist and Fed reinvestment into Mortgage Backed Securities.

[sgip]

SO... the news today is finally confirmed. The Fed will take a relatively small step ($400b) in trying to reduce longer term interest rates. The MBS market sure likes the news. Some quick thoughts:

1) When Quantitative Easing 2 (QE-2) started, everyone said mortgage rates would drop. They went up about 1 percent instead.  Now that Operation Twist is going forward, it's still anyones guess as to how mortgage rates will react.

2) Mortgage rates are not directly tied to the 10 Yr T. Don't watch that market to know where mortgage rates are headed. Keep an eye on the Mortgage Backed Securities market (MBS).

3) Although there will be some sharp initial reaction to the news, remind yourself that a spike does not equal a trend. If over the next 3-4 days we see a developing trend towards lower mortgage rates (my assumption...) then we may see 3.5% 30 fixed rates become the new "historical low".

4) Just refinanced? Some lenders don't want you to re-refinance until 90 days or so pass. Check your documents to see what they may have said their policy is about refinance churning. If nothings there, call your new loan servicer and ask. You don't have a pre-payment penalty, but the company that did your loan may not be willing to re-do it.

5) Just purchased? It's possible to refinance providing the numbers make sense. Many buyers have closed their home with a rate in the low 4's. A fee free refinance might still have a rate in the low 4's until the rate market figures out where the bottom in mortgage rates will end up. Might not hurt to wait a bit before stepping into the refi pond.

6) If rates head towards 3.5%, expect processing times to grow from 45 days to 4 months. Many home owners have rates in the mid 4's and the current low 4 rates didn't make sense to refinance into. If we see a 3.5% market, everyone is going to jump in, stretching every lenders processing time to the limit. 

7) What happens if your lender won't re-negotiate your locked rate? For one, you can go elsewhere but you will also need to pay for a second appraisal. A small cost in the long run relative to what your new payment will be.

The next 4-5 days are going to be very interesting indeed for those looking to purchase or refinance. Should the Agencies lift the HARP refinance Loan To Value ceiling from 125% to "unlimited" - don't expect to close your transaction for 8-9 months!

My .02c

Soylent Green Is People.

 

[so_scared]

SGIP,
A little tangential, but what do you think will happen to all the mortgage reits who borrow short term to buy long term MBS and lever up? Are they going to get crushed?

 

[sgip]

It's entirely right on target. These investors are going to get squeezed when mortgages flip out of their pools through refinancing. If HARP refinance loan to values are eased those who have higher rate MBS's will be slaughtered. What this also means is that there may not be as much demand outside of the Fed for MBS's since the pre-payment rate is so high. If we didn't have problems in the Eurozone which is driving cash to Treasuries and MBS's, mortgage rates without Fed assistance would be higher. I don't think Europe will stabilize for some time so cash has to go somewhere. That somewhere is possibly MBS's, even though the price is high and yield is low. At this point capital appears to be chasing the return of principal, not the return on it. 

Finally, with a 1.0 inflation rate, .25 or so cost of funds, 1.0 point cost of servicing, and X being risk, investors are going to think long and hard about pushing 30 fixed rates below the last "historical" bottom seen in October 2010. A 3.5% 30 fixed rate existed (with costs) for about 2-3 days before snapping higher with QE-2 beginning. 3.5% might be around for a while iin this new environment, but it might not be fee free.

My .02c

Soylent Green Is People.

 

[IndieDev]

At this point capital appears to be chasing the return of principal, not the return on it. 

Don't worry. Tech bubble 2.0 is set to form, and then we can go back to business as usual. Unless you can get a 25% ROI every year by fleecing the middle class, it's simply un-American.

 

[so_scared]

It's entirely right on target. These investors are going to get squeezed when mortgages flip out of their pools through refinancing. If HARP refinance loan to values are eased those who have higher rate MBS's will be slaughtered. What this also means is that there may not be as much demand outside of the Fed for MBS's since the pre-payment rate is so high. If we didn't have problems in the Eurozone which is driving cash to Treasuries and MBS's, mortgage rates without Fed assistance would be higher. I don't think Europe will stabilize for some time so cash has to go somewhere. That somewhere is possibly MBS's, even though the price is high and yield is low. At this point capital appears to be chasing the return of principal, not the return on it. 

Finally, with a 1.0 inflation rate, .25 or so cost of funds, 1.0 point cost of servicing, and X being risk, investors are going to think long and hard about pushing 30 fixed rates below the last "historical" bottom seen in October 2010. A 3.5% 30 fixed rate existed (with costs) for about 2-3 days before snapping higher with QE-2 beginning. 3.5% might be around for a while iin this new environment, but it might not be fee free.

My .02c

Soylent Green Is People.

Is it true that WFC is largest originator? Does WFC have most to gain from massive refi? it seems like all the financials are getting crushed as their profitability are hurt from the flatter yield curve, but WFC seems to be outperforming the broader financials.

 

[sgip]

Largest originator is meaningless in the grand scheme of things. Countrywide was also the biggest for a time being.

Yes, banks are going to be big losers. They're earning 1% net interest income on 30 year products (although earning 1-2% in loan fees up front), while trying to attract capital with their 1.5% CD rates. Can't earn 1% on loans and pay out 1.5% on deposits without it all finally ending in tears. 

Anyone else notice that WFC and BAC were downgraded by Moody's today? That's news purposefully slipped under the MSM radar on this big Fed announcement day.

I'm long tinfoil, Smith and Wesson, and MRE's at this point. It's going to be quite the bumpy ride ahead for all things financial.

My .02c

 

[IndieDev]

I'm long tinfoil, Smith and Wesson, and MRE's at this point. It's going to be quite the bumpy ride ahead for all things financial.

My .02c

Potatoes, water, and ammo. You will make a killing.

 

[so_scared]

Largest originator is meaningless in the grand scheme of things. Countrywide was also the biggest for a time being.

Yes, banks are going to be big losers. They're earning 1% net interest income on 30 year products (although earning 1-2% in loan fees up front), while trying to attract capital with their 1.5% CD rates. Can't earn 1% on loans and pay out 1.5% on deposits without it all finally ending in tears. 

Anyone else notice that WFC and BAC were downgraded by Moody's today? That's news purposefully slipped under the MSM radar on this big Fed announcement day.

I'm long tinfoil, Smith and Wesson, and MRE's at this point. It's going to be quite the bumpy ride ahead for all things financial.

My .02c

I did notice that downgrade too...TBTF is apparently less important now.

On their net margins, if they are selling most of their mortgages off, what difference it make? If WFC originates (earns 1%) and services (earns 50 bps) but sells 100% off, it sounds like an awfully profitable business if trillions are going to be refi'ed.

If they can pay 1.5% on CDs yet "turn" that over every 45 days (or however long it takes to sell the mortgage off) for 1% in origination and gain a recurring 50 bps for servicing, sounds like a pretty attractive inventory turnover ratio against giant balance sheet. Does Fannie and Freddie require some type of hold back? Am I missing a piece of the puzzle?

 

[sgip]

I misspoke on a 1.5% CD rate. That's for 5 years. WFC's short term rates are .05% Amazing!

Contrary to popular belief, bankers do look at long term income versus short term outflow. The origination fees of a mortgage are paid out to employees other than loan officers. That $$$ coming in might seem like a tidy sum, but it's eaten up by overhead. What happens when a bank has net .50 for servicing in a 2% inflation environment, and money doesn't come to rest in your deposit accounts unless you pay something higher than market? Where is the income shareholders demand from their stock investment? 

The profit in loans that we're speaking about is really much thinner than you might think. Because of this, razor thin margin companies like AIM and CashCall may be in jeopardy of providing mortgages at all if rates and rebates go much lower. BAC this year floated the idea of abandoning mortgage origination alltogether - not due to litigation issues per se, but because of the lower income mortgages will be providing.

Trillions of loans won't be refinanced. Many will, but non FNMA / FHLMC loans are out of luck if loan to values aren't supported. FHA loans might be refinanced in a low rate environment, but the MMI really suppresses any possible refi market unless the rate is at least 1.25% lower. In other words, the earliest it makes sense to refinance a 4.75% FHA loan is if a zero point 3.50% rate exists! Finally, the manager of Fannie / Freddie is already talking about increasing PMI requirements and Loan Level Price Adjusters (LLPA's)  to raise income for the Agencies. A base rate for 800 FICO score borrowers with 30% equity might run as low as 3.5%, but if your FICO is 741 (good) and your LTV is 78% (good), and if LLPA's are higher (not good), 3.5% bubbles up to 3.75% or higher.

Some additional food for thought...

Soylent Green Is People.

 

[usctrojancpa]

Wow, 10-year bond rates are around 1.75% as we speak (we are in Japanese territory).  SGIP, is there a good website where people can check out Fannie Mae MBS bond pricing?

 

[sgip]

Daily mortgage rate averages:

http://www.mortgagenewsdaily.com/mortgage_rates/daily.aspx

Weekly Mortgage Rate survey:

http://www.freddiemac.com/pmms/

Both are "no BS" resources for true market rate information. The Freddie Mac survey is stale data, but the same data that the MSM talks about every week.

Some follow up notes:

1) When considering a refinance, ask your mortgage service provider if they can structure your refinance for the same payoff as your original loan. We can for example take a 341 month remaining term loan and refinance to a 341 payment new loan. Yes, it wil diminish the "big savings" that you are being told about when you refinance. Yes also, it will keep you from adding 19 more payments to your end balance assuming you keep the loan for 30 years.

2) ARM loans have hit a floor of about 2.5%. This means that fixed loans are likely coming near to a floor. Don't try and time the market as it may pass right by when you aren't looking.

3) The Fed says they are going to try and use $400b to nudge rates lower for a multi trillion dollar bond market That's not much ammunition to fight with. This turn in rates may be shorter than you think.

4) Whomever you work with needs to be grilled on A - turn times (application to funding) and B - rate lock extension issues. Turn times are starting to mushroom. That 3x rate quote could turn away quickly if you miss your closing date. What's the deal on extending with the company you want to work with.

5) Got a loan over $625,500? This recent turn in rates is for Agency Conforming, not portfolio jumbos.

6) A client last week went with another company because their rates were lower. Today I get a note "Have you heard of an $800 charge by the Federal Government for not having an impound account to cover real estate taxes and home owner's insurance?" Translation: The other company with "better rates" requires an impound account and did not disclose this up front. The lender is now trying to push this BS story about a "Federal Goverment" fee.  The moral of the story? Get your rate quotes in writing. There are sometimes a few undisclosed charges that still come up at the zero hour which might have been avoided early on. 

My .02c

 

[rkp]

Daily mortgage rate averages:

http://www.mortgagenewsdaily.com/mortgage_rates/daily.aspx

Weekly Mortgage Rate survey:

http://www.freddiemac.com/pmms/

Both are "no BS" resources for true market rate information. The Freddie Mac survey is stale data, but the same data that the MSM talks about every week.

Some follow up notes:

1) When considering a refinance, ask your mortgage service provider if they can structure your refinance for the same payoff as your original loan. We can for example take a 341 month remaining term loan and refinance to a 341 payment new loan. Yes, it wil diminish the "big savings" that you are being told about when you refinance. Yes also, it will keep you from adding 19 more payments to your end balance assuming you keep the loan for 30 years.

2) ARM loans have hit a floor of about 2.5%. This means that fixed loans are likely coming near to a floor. Don't try and time the market as it may pass right by when you aren't looking.

3) The Fed says they are going to try and use $400b to nudge rates lower for a multi trillion dollar bond market That's not much ammunition to fight with. This turn in rates may be shorter than you think.

4) Whomever you work with needs to be grilled on A - turn times (application to funding) and B - rate lock extension issues. Turn times are starting to mushroom. That 3x rate quote could turn away quickly if you miss your closing date. What's the deal on extending with the company you want to work with.

5) Got a loan over $625,500? This recent turn in rates is for Agency Conforming, not portfolio jumbos.

6) A client last week went with another company because their rates were lower. Today I get a note "Have you heard of an $800 charge by the Federal Government for not having an impound account to cover real estate taxes and home owner's insurance?" Translation: The other company with "better rates" requires an impound account and did not disclose this up front. The lender is now trying to push this BS story about a "Federal Goverment" fee.  The moral of the story? Get your rate quotes in writing. There are sometimes a few undisclosed charges that still come up at the zero hour which might have been avoided early on. 

My .02c

excellent post SGIP.  what is the typical difference between you and the low rate companies in BPS?  while $800 fees and other fees do add up, saving monthly on 30 years adds up to.

 

[sgip]

No one company is all things to all people at all times. There are things that the AIM's ect are much better at doing - low rate refinances - and things that brick and mortar companies are better at - complex financial transaction, high ratio, low FICO deals, ect. There are times when BofA has better pricing than everyone else, while Chase can close in 20 days. There really isn't a metric one can use to say "my loan fits here because...." Every situation differs.

It often happens that a low quote is seen on line, but once the digging is done during the process terms change radically. That's true at low cost providers and at brick and mortar companies. If your deal is really vanilla - low LTV, high FICO, W-2 income, low debt to income ratios, long time on the job - then a low margin, low rate provider like some of the Internet lenders out there may provide a better deal than traditional companies can. If that's the route a borrower fees best to take, just make sure research is done on their reputation. A lender with a high BBB rating is meaningless. Yelp, TheRipoffReport, and other sites have fresher background information on the company you may want to work with.  Take a good look at the lenders ability to close, not their fees and rates, before applying.

My .02c

Soylent Green Is People