By Mike Whitney
Now there’s something you don’t see every day.
On Friday, the rate for a 30-year fixed mortgage plunged to an all-time low of 3.4 percent. At the same time, the rate on a 15-year fixed mortgage sank to an eye-watering 2.73 percent. The Fed’s $40 billion per month QE3 is pushing mortgage rates to record-lows making it cheaper to buy a home than anytime in history.
Now you can buy that gargantuan 3-story English Tudor with the open-beam ceilings and the heli-pad at rates that are just a few blips above the rate of inflation. It doesn’t get any better than that, does it? And its all because the Fed decided to pound down yields on interest rates by loading up on more mortgage-backed securities. Hurrah for Ben Bernanke!
The impact of the Fed’s program has been swift and impressive as this excerpt from the New York Times indicates:
“Mortgage refinancing jumped to a three-year high, as interest rates on home loans dropped to new lows, according to a weekly industry survey from the Mortgage Bankers Association.
‘Refinance application volume jumped to the highest level in more than three years last week as each of the five mortgage rates in the M.B.A.’s dropped to new record lows in the survey,’ Mike Fratantoni, the association’s vice president of research and economics, said in a prepared statement. (“Refinancing Spikes as Mortgage Rates Fall”, New York Times)
So everyone is getting on the refi-bandwagon. But how can that be, after all, aren’t 25 percent of all mortgage holders underwater on their loans? Surely, a bank would never refinance someone who owed more on his mortgage than the house was currently worth, would they?
Au contraire. That’s exactly what they are doing, thanks to the renovated HARP program–dubbed Obama Refinance–which provides refi relief to borrowers who owe up to 125 percent of the value of a home. In other words, you may owe $125,000 on a home that is currently valued at $100,000 and still qualify. The collateral rules have been stretched to the max.
And it’s not just re-fis that are impacted by HARP. According to the LPS data, “underwater borrowers are also prepaying at a much faster clip. Among homeowners with a loan-to-value ratio of 120 percent or more…there was a 65 percent jump in prepayments, from an 11.66 percent prepayment rate in January 2012 to a 19.27 percent prepayment rate in August 2012.”
So, it’s all good, right? Re-fis and prepayments are up, because rates are down and government programs are finally working they’re supposed to. Score one for Bernanke.
Of course, there is a better way to keep people out of foreclosure. It’s called principal reduction. But the banks don’t like principal reduction because it costs them money. So Obama and the Fed have moved heaven and earth to accommodate their primary constituents. That’s what this is all about; finding ways to fix the ailing housing market without adversely impacting bank profits.
And as long as we’re talking about bank profits. Here’s a clip from the Financial Times that sums up QE3′s effect on them:
“Bank profits from new mortgages have soared since the Federal Reserve began its third round of bond purchases two weeks ago, fueling the debate over the fallout of the latest dose of quantitative easing.
‘For banks which are mortgage originators this [QE3] was some of the best news they could possibly have heard,’ said Steven Abrahams, mortgage strategist at Deutsche. ‘They will continue originating loans and selling them into the market at a significant premium.’
Yipee. The banks are not only making bigger profits (by refusing to pass along the savings from the Fed’s program to new home buyers), they’re also “originating loans and selling them into the market at a significant premium”, which means that Bernanke is not just drawing from the pool of “existing” MBS. He’s also providing a powerful incentive for the banks to ease lending standards and issue mortgages to people who cannot repay the debt. (just like before!)
Is this really Bernanke’s plan; to reflate the housing bubble at all cost even if it means blowing the economy for a second time in less than a decade? It sure looks like it. Just look at this blurb from Financial Market News under the heading of WHAT IS THE FED TRYING TO ACCOMPLISH:
“The interest rate strategy team at Bank of America Merrill Lynch says the Fed’s actions could have “positive implications for the return of private capital to the mortgage market, which means that the accelerated wind-down of the GSEs (government sponsored entities) and the re-opening of private label securitization are now far more realistic and imminent possibilities.
Because the Fed’s actions will squeeze net interest margins (NIM) for banks, many analysts also think this could push banks to start making loans. That is clearly something the Fed is trying to achieve. (“US MORTGAGE MEMO: New World Of MBS Buying By The Fed”, MNI)
“The re-opening of private label securitization”? Is that what’s going on? Bernanke is hoping that the spillover effect from QE3 will kick-start the private-label mortgage market again sending bank profits back into the stratosphere. But that’s where all the trouble began, isn’t it? After all, it wasn’t Fannie and Freddie that cooked up liar’s loans, Alt-A, ARMs, piggybacks, HELOCs etc. It was the banks. The banks didn’t care whether applicants were creditworthy or not because they figured there was an endless supply of fools who would buy their bonds in the secondary market. Now we’re back on that same track again and headed for another disaster.
Here’s how Bernanke defended QE3 at a recent press conference:
“I want to emphasize that the Fed’s purchases of longer-term securities are not comparable to government spending. The Federal Reserve buys financial assets, not goods and services. Ultimately, the Federal Reserve will normalize its balance sheet by selling these financial assets back into the market or by allowing them to mature.
This is pure baloney. Of course it’s “government spending”. Who do you think is going to pay for the losses on the dodgy MBS the Fed’s been buying? Bernanke? Don’t make me laugh. And don’t believe the BS about the Fed just “swapping one financial asset for another”. At the end of the day, one balance sheet is loaded with reserves (or cash) while the other is chock-full of mortgage-backed securities. Which would you rather have? It’s a no-brainer.
The Fed has no way to get rid of the garbage on its balance sheet (which has ballooned to $3 trillion) either. In fact, when it first announced that it planned to auction off assets from its misguided AIG acquisition, the stock market plunged nearly 200 points in a matter of minutes. Why? Because adding to the supply of distressed financial assets, pushes down stock prices across the board. So auctioning off a couple trillion in MBS is never going to be an option. Bernanke is going to have to inflate the value of his entire stinkpile of MBS by printing enough money to pave the way to Kingdom Come. That’s the only way he can shift the banks losses onto the public tab without triggering a full-blown market crash. And that’s exactly what he will do.
There are a few other things you might want to know about QE3, too. Like this tidbit from Catherine Austin Fitts at The Solari Report:
“It looks like the Fed decision last week to buy $40 billion a month in mortgage paper is the ultimate plan to clear the market once and for all of fraudulent mortgages, mortgage backed securities and related derivatives. This means Fannie and Freddie will be bailed out and winding down through the back door. This means the big banks may be paid in full for your mortgage. It also means your pension fund assets will not be marked to market – at the price of debasing the purchasing power of your assets and benefits.
The Fed is now where mortgages go to die. Thousands of mortgages on homes that do not exist or on homes that have more than one “first” mortgage are now going to the Fed to disappear. (“QE3 – Pay Attention If You Are in the Real Estate Market, The Solari Report.)
So there is downside to QE3. It transfers questionable assets onto the Fed’s balance sheet and pumps up stock prices. (Research shows that most of the gains from the Fed’s easing program go to investors with only slight effect on employment and GDP.) But what effect will it have on housing; that’s what we want to know? Here’s an excerpt from a report by CNBC‘s Diana Olick at Realty Check that helps explain what’s really going on:
“The nation’s housing market heads into the slow season on still shaky ground. Gains in home sales and prices during the spring and summer months appear to be fading slightly. Looking ahead, contracts to buy existing homes in august fell short of expectations as did contracts to buy newly built homes. Mortgage rates are at new record lows, but … the investor share of sales has been falling briskly lately as properties dwindle, especially out west. Without those sales on the low end, the housing recovery could take a step backward.
So, yes, housing sales have picked up on the low end where investor groups are scarfing up whatever they can find. But that’s mainly due to Obama’s gift to private equity via the Foreclosure to Rental scam. Here’s a clip from Businessweek that will bring you up to snuff:
“Private-equity investors including Blackstone Group LP (BX) and GTIS Partners are buying foreclosed houses to take advantage of prices that have fallen 34 percent from their July 2006 peak…
The Federal Housing Finance Agency, which has overseen Fannie Mae since a September 2008 takeover of the Washington-based company, announced on July 3 that it had chosen winning bidders without disclosing the names of the companies or terms of the sale because the deals hadn’t been completed.” (“Colony Said to Win Foreclosed Homes Sold by Fannie Mae”, Businessweek)
How do you like that? It’s so hush-hush that nobody’s supposed to know what’s going on. So much for transparency. Here’s more from the same article:
“The 2,490 properties up for auction encompassed portfolios of 775 homes in Florida, 572 in Atlanta, 484 in Southern California, 341 in Phoenix, 219 in Las Vegas and 99 in Chicago, according to an offering document by Credit Suisse Group AG (CSGN), which managed the sale. About 85 percent of the properties already are operating as rentals, according to the document.
So all the hot properties (that everyone wants) are being sold to the big money guys at a hefty discount. Nice. And, there’s more, too:
“The winning bids in the Fannie Mae auction were at least 90 percent of the homes’ estimated value, said five people with knowledge of the auction, who asked not to be named because they signed confidentiality agreements. The FHFA offered bidders ‘synthetic financing’ to reduce the up-front capital required if they agreed to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties, the people said.
So the buyers are getting deep discounts and special gov-backed financing. That’s why–according to CNBC–”Close to one third of the homes that sold in August went to buyers using all cash, despite average rates on the 30-year fixed sitting around 3.6 percent. Rates appear to have less of an impact than hoped.”
What does that tell you? It tells you that there were a lot of people sitting on the sidelines with their pockets stuffed with greenbacks who bought into the “housing bottom” bunkum and decided to buy a house pronto before they missed the boat. That’s how propaganda works, by persuading people to do things that are against their own best interest.
Even so, there aren’t enough of these all-cash buyers or investor groups to drive the market much higher. Why? Because a vital housing market requires move-up buyers. Those are the guys who sell their starter homes and move up to something better. These people make up the bulk of organic sales. Unfortunately, that group of buyers vanished along with $7 trillion of home equity that went up in smoke following the bursting of the bubble in 2007. All that’s left is the all-cash buyers and investor-types, both of whom are looking for the same thing, inexpensive or distressed homes. That’s why all the action is at the low-end of the market, because that’s where people feel like they can make the biggest killing.
So what happens next or, rather, what happens if the banks continue to keep prices artificially high by reducing the number of distressed homes on the market?
Answer: Sales drop off, which is exactly what’s happening. This is from CNBC:
“Fewer Americans signed contracts to buy existing homes in August. After gains in home sales over the spring and summer, an industry survey surprised expectations, registering a 2.6 percent drop in pending home sales from July. This drop forecasts that final closings on existing homes will be lower heading into fall. (“After Brisk Summer, Pending Home Sales Drop in August”, CNBC)
So, there’s a sudden surge in prices and activity, and then–Whammo–sales start to drop off just like that. And the reason they drop off is because unemployment is high, wages are flat, 40% of college graduates are drowning in debt (and can’t qualify for a mortgage), and credit is still tight. That’s why Yale’s Robert Shiller–who predicted the subprime bust — had this to say in a paper published last week by the National Bureau of Economic Research:
“A recovery may be plausible, and home prices have been rising fairly strongly in recent months, we do not see any unambiguous indication in our expectations data of sharp upward turning point in demand for housing that some observers, and media accounts, have suggested.
Indeed. There’s no denying that QE3 and HARP are having an effect on housing. But a healthy market requires strong demand which means that unemployment will have to go down and wages will have to rise before a real recovery can take root. Unfortunately, there’s no sign of progress in either area.