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Holden Lewis
Past posts from Holden Lewis's Web log about mortgages and real estate, and how they are affected by the economy.
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Why and what now?

Thursday, May 28
Written 6:30 a.m. EDT
MORTGAGE RATES ZOOM UPWARD: Mortgage rates skyrocketed by about half a percentage point Wednesday afternoon. That was on top of a rise of about a quarter of a percentage point Tuesday afternoon. If you were floating and had not locked a rate by late Tuesday morning (eastern time), you are in a state of bewilderment and disappointment today. Maybe you hoped to snag a rate below 5 percent a couple of days ago; now you're staring at around 6 percent, maybe a little less.

A rate of 6 percent is very nice, by historical standards. If you're buying a house and now you're stuck with a 6 percent rate when you expected to pay much less, don't complain about it in public. That would be like griping about getting a Coach handbag for your birthday when you really wanted a Louis Vuitton. No one wants to hear it.

(If you're a dude, substitute "getting a Porsche Boxster when you desired a 911.")

If you wanted to refinance at 5 percent or below but you didn't lock, you might have missed the opportunity. Let's hope it knocks again soon, but it might not. Then there are all of us "woodheads" who never applied for a refi at all.

I think this week's jump in rates is aberrant and that rates will fall back to the mid-5 percent range. The Federal Reserve had been buying mortgage-backed securities for two months in an effort to keep rates low. Something seems to have happened this week at the Fed. Maybe a key person went on vacation or got sick, and no, I'm not kidding when I speculate that the root of the problem might be that prosaic. Someone was absent or asleep. I expect the Fed to try to push rates down again. How well will it succeed?

For this blog, the timing of yesterday's rate rise couldn't have been worse. I write the weekly mortgage analysis Wednesday afternoons, and I was too busy with that to write a blog post. (Even if I had had time, the copy editing and publishing and propagation process here take longer than clicking the "Publish" button on Blogspot, and that's a feature, not a bug.) That's why I recommend following me on Twitter at twitter.com/HoldenL. I was tweeting about this all yesterday afternoon.

Another note about the timing of this. As I explain in today's mortgage analysis, our research department collects rate data Wednesday mornings. As a result, our weekly rate survey didn't capture the entirety of yesterday's rise. It said the 30-year fixed went up 21 basis points. Had rates skyrocketed any other day of the week, our survey would have reflected it.

We're not alone; other prominent surveys missed the full brunt of yesterday's debacle. The Mortgage Bankers Association's weekly survey was released yesterday morning, so it missed the afternoon craziness. Freddie Mac's weekly rate survey gathers data from an entire week, so a one-day anomaly like yesterday is diluted.

WHY IT HAPPENED: Mortgage broker Tom Vanderwell speculates about why rates skyrocketed yesterday. He lists all the likely reasons: a huge federal budget deficit and concerns about the U.S. government's debt rating, the effect that a GM bankruptcy would have on the federal budget deficit, a bad existing home sales report, another report about the continuing drop in house prices, the release of research showing that mortgage modifications aren't working, rising oil prices, government intervention in debt markets and global political tensions.

Aren't you glad you're not the president?

I agree with Vanderwell's analysis. As far as explaining why mortgage rates took a rocket ride yesterday, I would put his third and fourth bullet points at the top of the list: falling home prices and rising mortgage delinquencies.

Specifically, the Case-Shiller Home Price Index was released Tuesday, and it showed a grim picture of falling house prices. They will continue to fall for some time in most of the country. Vanderwell writes: "That means that the collateral for mortgage-backed securities is dropping in value making them less desirable." Yes, exactly.

Vanderwell goes on to say, "A number of reports have come out recently that showed that the performance of mortgage-backed securities is continuing to suffer and mortgage delinquencies are continuing to rise." Again, this makes mortgage-backed securities less attractive to investors.

If you're like me, you're thinking, "But neither falling home prices nor rising delinquencies should have come as a surprise to investors. In the absence of surprise, why was yesterday's reaction so intense?" My guess is that some investors felt doubts about how steadfast the government is in its commitment to keeping mortgage rates low.

The Fed has been keeping mortgage rates artificially low by buying hundreds of billions of dollars' worth of mortgage-backed securities, or MBS. The government's artificially voracious demand for MBS kept mortgage bond prices high. When bond prices are high, interest rates are low.

(Bond prices and yields move in opposite directions. A bond is an IOU. If I borrow $100 from you and promise to give you $105 a year from now, that's a one-year, $100 bond at 5 percent. If you immediately turn around and sell that bond to someone else for $101, the buyer will earn 4 percent, having paid $101 today to get $105 a year from now. When you sold it, the bond's price went up so the yield went down.)

The Fed has committed to spending more than $1 trillion this year to keep mortgage rates down. But if long-term Treasuries begin to rise, then keeping mortgage rates low might seem like a lost cause. This is especially true if delinquencies continue to rise and the Obama mortgage modification plan crashes and burns (a likely outcome, because it's already stalled and gone into a tailspin). Investors are asking themselves, "How long will the government continue to overpay for a defective product -- namely, bonds that back mortgages that are going into default?"

Some investors probably sold their mortgage-backed securities Tuesday and Wednesday, causing MBS prices to fall, and then other investors sold MBS so they could get out before prices fell further, and soon a critical mass of MBS sellers blew up the mortgage market. That's my guess as to what happened.

TOOTING MY HORN: As far as I could tell, the only mainstream media reporters who were aware of yesterday's craziness, and reporting it in real time, were me and Bloomberg's Jody Shenn. And a lot of people might not consider Jody and me to be in the MSM.

You're not going to get fast-breaking mortgage information from a newspaper Web site or a TV station or local or national radio. If you relied on those mainstream outlets yesterday, they let you down. That's one of the reasons they're dying. Newspapers have horoscopes, Fox News has Glenn Beck laughing at a juggler, radio has the Morning Zoo Crew and 20 minutes of commercials every hour. Good luck with those business models, guys.

I'm disappointed that so many of my Twitter followers are people in the mortgage business. I'm glad they're following me, but I wish more consumers would. The Twitter handle is @HoldenL.

Other people to follow on Twitter: the aforementioned Tom Vanderwell @tvanderwell and Dan Green @mortgagereports. I can recommend a couple of others, with qualifications. Rhonda Porter @mortgageporter tweets about mortgages, but also about the Seattle Mariners and her dining choices. Housing Wire @housingwire is excellent, but too biz-oriented for most consumers. Give 'em a try and unfollow them if you don't like them.

Per company policy, there's no blogroll here. If there were, then the top items would be Dan Green's blog, The Mortgage Reports; Tom Vanderwell's blog, Straight Talk About Mortgages and Real Estate; the indespensible pseudonymous-slash-eponymous blog Calculated Risk, and the news service Housing Wire. The latter two might be over your head or too inside-baseball, but you always have the option of putting on your thinking cap.

-- Posted: May. 28, 2009

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