Category Archives: Mortgage

Are Bonds Headed Back To Extraordinarily Low Rate Regime?

The U.S. 10-Year Treasury Yield has dropped back below the line containing the past decade’s “extraordinarily low-rate” regime.

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Among the many significant moves in financial markets last fall in the aftermath of the U.S. presidential election was a spike higher in U.S. bond yields. This spike included a jump in the 10-Year Treasury Yield (TNX) above its post-2007 Down trendline. Now, this was not your ordinary trendline break. Here is the background, as we noted in a post in January when the TNX subsequently tested the breakout point:

“As many observers may know, bond yields topped in 1981 and have been in a secular decline since. And, in fact, they had been in a very well-defined falling channel for 26 years (in blue on the chart below). In 2007, at the onset of the financial crisis, yields entered a new regime.

Spawned by the Fed’s “extraordinarily low-rate” campaign, the secular decline in yields began a steeper descent.  This new channel (shown in red) would lead the TNX to its all-time lows in the 1.30%’s in 2012 and 2016.

The top of this new channel is that post-2007 Down trendline. Thus, recent price action has 10-Year Yields threatening to break out of this post-2007 technical regime. That’s why we consider the level to be so important.”

We bring up this topic again today because, unlike January’s successful hold of the post-2007 “low-rate regime” line, the TNX has dropped back below it in recent days. Here is the long-term chart alluded to above.

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And here is a close-up version.

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As can be seen on the 2nd chart, the TNX has just broken below several key Fibonacci Retracement levels near the 2.30% level – not to mention the post-2007 Down trendline which currently lies in the same vicinity. Does this meant the extraordinarily low-rate environment is back?

Well, first of all, the Federal Reserve only sets the overnight “Fed Funds” rate – not longer-term bond yields (at least not directly). So this is not the Fed’s direct doing (and besides, they’re in the middle of a rate hiking cycle). Therefore, the official “extraordinarily low-rate” environment that the Fed maintained for the better part of a decade is not coming back – at least not imminently. But how about these longer rates?

Outside of some unmistakable influence resulting from Fed policy, longer-term Treasury Yields are decided by free market forces. Thus, this return to the realm of the TNX’s ultra low-rate regime is market-driven, whatever the reason. Is there a softer underlying economic current than what is generally accepted at the present time? Is the Trump administration pivoting to a more dovish posture than seen in campaign rhetoric? Are the geopolitical risks playing a part in suppressing yields back below the ultra low-rate “line of demarcation”?

Some or all of those explanations may be contributing to the return of the TNX to its ultra low-rate regime. We don’t know and, frankly, we don’t really care. All we care about, as it pertains to bond yields, is being on the right side of their path. And currently, the easier path for yields is to the downside as a result of the break of major support near 2.30%.

Source: ZeroHedge

Fed Announced They’re Ready To Start Shrinking Their 4.5T Balance Sheet ― Prepare For Higher Mortgage Rates

Federal Reserve Shocker! What It Means For Housing

The Federal Reserve has announced it will be shrinking its balance sheet. During the last housing meltdown in 2008, it bought the underwater assets of big banks.  It has more than two trillion dollars in mortgage-backed securities that are now worth something because of the latest housing boom.  Gregory Mannarino of TradersChoice.net says the Fed is signaling a market top in housing.  It pumped up the mortgage-backed securities it bought by inflating another housing bubble.  Now, the Fed is going to dump the securities on the market.  Mannarino predicts housing prices will fall and interest rates will rise.

Whistleblower Files Charges Against Looting Of Freddie Mac Scheme

Obama administration looted investors to fund Obamacare

WASHINGTON, D.C. – A whistleblower who filed last week a formal complaint with the Federal Housing Finance Authority (FHFA) Office of Inspector General (OIG) provided Infowars.com with a document leaked from Freddie Mac that proves both Freddie Mac and Fannie Mae are currently out-of-compliance with Security and Exchange Commission (SEC) filing requirements.

The whistleblower – a CPA who worked in risk management for Freddie Mac from 2014 to 2016 – explained to Infowars.com the leaked internal document was created by Freddie Mac auditors in the preparation of Freddie Mac’s 2015 filing with the SEC of the Government Sponsored Entities (GSEs) Form 10-Q and 10-K – two SEC forms that require auditors to review and management to submit a comprehensive financial summary of the entity’s performance.

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“Freddie Mac management was and is aware that the GSEs equity shares have no value due to the Net Worth Sweep (NSW) but have not disclosed this in any public filing, including not in their 10-Q and 10-K filings,” the whistleblower told Infowars.com.

“At a minimum, Freddie Mac management is complicit with FHFA in the erosion of the property rights of shareholders and likely complicit in securities fraud with FHFA, as Freddie Mac’s management has not disclosed to the public that they are aware Freddie Mac equity has zero value.”

The NWS traces to Aug. 17, 2012, the Federal Housing Financial Agency and the Department of Treasury engineered an amendment to the Senior Preferred Stock Purchase Agreements through which Treasury had invested in Fannie and Freddie to allow the U.S. Treasury to grab ALL Fannie and Freddie earnings, regardless how large Fannie and Freddie’s profits might be.

“The document leaked from Freddie Mac is an internal memo prepared by the auditors (either internal or external) to management discussing their thresholds for materiality for their testing,” the whistleblower explained. “This document was prepared for a ‘review’ (the level below an audit in terms of assurance) and is done in conjunction of filing quarterly SEC filings like the 10-Q.”

“The auditors would have met with management for interviews to allow the auditors to gain an understanding of the organization itself, its operations, financial reporting, and known fraud or error.”

On Page 8 of the leaked report, the Freddie Mac auditors and management write: “We see no value in the common shares or the junior preferred shares as the Net Worth Sweep dividend effectively prohibits Freddie Mac from rebuilding capital despite the return to operating profitability.”

No similar statement from the auditors and management of the GSE effectively considered Freddie Mac as headed toward a situation where the Treasury had robbed Freddie Mac of all shareholder value by confiscating some $260 billion from Freddie Mac and Fannie Mae since 2012 by sweeping all earnings under the NWS from the GSEs into the Treasury’s general fund.

“This is shocking because SEC regulations required the auditors and management of Freddie Mac, when reporting the GSEs audited financial statements (including 10-K and 10-Q Forms) to report their financials not as a ‘going concern,’ but as a liquidation,” the Whistleblower stressed. “Additionally, Freddie Mac management states in the report, ‘The Treasury, which holds a warrant to purchase nearly eighty percent of our common stock, has recommended that our company be wound down.”

“FHFA, as an independent agency, has a fiduciary responsibility to Freddie Mac as it ‘has all rights of stockholders’ and therefore, FHFA as an independent agency, should not be taking direction from another agency,” the Whistleblower emphasized.

“Freddie Mac management was and is aware that the equity shares have no value due to the net worth sweep but have not disclosed this in any public filing,” the Whistleblower concluded.

“At a minimum, Freddie Mac management is complicit with FHFA in the erosion of the property rights of shareholders and likely complicit in securities fraud with FHFA as Freddie Mac’s management has not disclosed that they are aware the equity has zero value.”

By Gerome Corsi | Infowars

Used Home Sales Fall From 10-Year Yigh

U.S. home resales fell more than expected in February amid a persistent shortage of houses on the market that is pushing up prices and sidelining potential buyers.

The National Association of Realtors said on Wednesday existing home sales declined 3.7 percent to a seasonally adjusted annual rate of 5.48 million units last month.

January’s sales pace was un-revised at 5.69 million units, which was the highest level since February 2007. Economists polled by Reuters had forecast sales decreasing 2.0 percent to a pace of 5.57 million units last month.

“Realtors are reporting stronger foot traffic from a year ago, but low supply in the affordable price range continues to be the pest that’s pushing up price growth and pressuring the budgets of prospective buyers,” said Lawrence Yun, the NAR’s chief economist.

Sales were up 5.4 percent from February 2016, underscoring the sustainability of the housing market recovery despite rising mortgage rates. In February, houses typically stayed on the market for 45 days, down from 50 days in January.

U.S. financial markets were little moved by the data as investors increasingly worried whether President Donald Trump would be able to push ahead with his pro-growth policies. The dollar fell against a basket of currencies and U.S. stocks were trading mostly lower. Prices for U.S. government bonds fell.

The 30-year fixed mortgage rate is hovering at 4.30 percent.

Home loans could cost more after the Federal Reserve last week raised its benchmark overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent. The U.S. central bank has forecast two more rate hikes for 2017.

BUOYANT LABOR MARKET

Demand for housing is being buoyed by a labor market that is near full employment. But home sales remain constrained by the dearth of properties available for sale, which is keeping prices elevated.

While the number of homes on the market increased 4.2 percent to 1.75 million units last month, housing inventory remained close to the all-time low of 1.65 million units hit in December. Supply was down 6.4 percent from a year ago.

Housing inventory has dropped for 21 straight months on a year-on-year basis. With supply remaining tight, the median house price surged 7.7 percent from a year ago to $228,400 in February. That marked the 60th consecutive month of year-on-year price gains.

Builders have been unable to fill the housing inventory gap, citing rising prices for materials, higher borrowing costs, and shortages of lots and labor.

Lennar Corp, the second-largest U.S. homebuilder, reported on Tuesday a drop in quarterly gross margin as the company struggled with higher land and construction costs.

The Florida-based builder, however, sold 5,453 homes in the first quarter ended Feb. 28, up from 4,832 homes in the year-earlier period, and reported a 12 percent jump in orders.

The NAR estimates housing starts and completions should be in a range of 1.5 million to 1.6 million units to alleviate the chronic shortage. Housing starts are running above a rate of 1.2 million units and completions around a pace of 1 million units.

At February’s sales pace, it would take 3.8 months to clear the stock of houses on the market, up from 3.5 months in January. A six-month supply is viewed as a healthy balance between supply and demand. Though higher prices are increasing equity for homeowners and might encourage some to put their homes on the market, they could be sidelining first-time buyers from the market. First-time buyers accounted for 32 percent of transactionslast month, well below the 40 percent share that economists and realtors say is needed for a robust housing market.

That was down from 33 percent in January but up from 30 percent a year ago.

Source: Crusader Journal

Janet Yellen Explains Why She Hiked In A 0.9% GDP Quarter

It appears, the worse the economy was doing, the higher the odds of a rate hike.

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Putting the Federal Reserve’s third rate hike in 11 years into context, if the Atlanta Fed’s forecast is accurate, 0.9% GDP would mark the weakest quarter since 1980 in which rates were raised (according to Bloomberg data).

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We look forward to Ms. Yellen explaining her reasoning – Inflation no longer “transitory”? Asset prices in a bubble? Because we want to crush Trump’s economic policies? Because the banks told us to?

For now it appears what matters to The Fed is not ‘hard’ real economic data but ‘soft’ survey and confidence data…

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Source: ZeroHedge

Millions Of Americans About To Get Artificial Boost To Their FICO Scores

Back in August 2014, we reported that in what appeared a suspicious attempt to boost the pool of eligible, credit-worthy mortgage recipients, Fair Isaac, the company behind the crucial FICO score that determines every consumer’s credit rating, “will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.” In doing so, the company would “make it easier for tens of millions of Americans to get loans.” Stated simply, the definition of the all important FICO score, the most important number at the base of every mortgage application, was set for an “adjustment” which would push it higher for millions of Americans.

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As the WSJ said at the time, the changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. “It expands banks’ ability to make loans for people who might not have qualified and to offer a lower price [for others],” said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association, a trade group.” Perhaps the thinking went that if you a borrower has defaulted once, they had learned your lesson and will never do it again. Unfortunately, empirical studies have shown that that is not the case.

Now, nearly three years later, in the latest push to artificially boost FICO scores, the WSJ reports that “many tax liens and civil judgments soon will be removed from people’s credit reports, the latest in a series of moves to omit negative information from these financial scorecards. The development could help boost credit scores for millions of consumers, but could pose risks for lenders” as FICO scores remain the only widely accepted method of quantifying any individual American’s credit risk, and determine how much consumers can borrow for a new house or car as well as determine their credit-card spending limit

The transformation is already in proces as the three major credit-reporting firms, Equifax, Experian and TransUnion, recently decided to remove tax-lien and civil-judgment data starting around July 1, according to the Consumer Data Industry Association, a trade group that represents them. The firms will remove the adverse data if they don’t include a complete list of a person’s name, address, as well as a social security number or date of birth, and since most liens and judgments don’t include all three or four, the effect will be like wiping the slate clean for millons of Americans. This change will apply to new tax lien and civil-judgment data that are added to credit reports as well as existing data on the reports.

Civil judgments include cases in which collection firms take borrowers to court over an unpaid debt. Ankush Tewari, senior director of credit-risk assessment at LexisNexis Risk Solutions, says that nearly all judgments will be removed and about half of tax liens will be removed from credit reports as a result of the changed approach. He says LexisNexis will continue to offer the data directly to lenders.

In addition, if public court records aren’t checked for updates on lien and judgment information at least every 90 days, they will have to be removed from credit reports.

The outcome of this change is clear: it “will make many people who have these types of credit-report blemishes look more creditworthy.

The WSJ notes that the unusual move by the influential firms comes partially in response to regulatory concerns. The three reporting bureaus rarely tinker with the information that goes on credit reports and that lenders consult to gauge consumers’ ability and willingness to pay back debts.

The regulatory push to boost America’s creditworthiness started at the top, under the guise of improving data tracking and collection:

The Consumer Financial Protection Bureau earlier this month released a report citing problems it found while examining credit bureaus and changes it is requiring. Issues the agency cited included improving standards for public-records data by using better identity-matching criteria and updating records more frequently.

Inaccurate information on credit reports, especially if it is negative information, can derail consumers from being able to gain access to credit and even lead to other setbacks like not being able to rent an apartment or get a job.

One in five consumers has an error in at least one of their three major credit reports, according to a 2013 Federal Trade Commission study mandated by Congress. The three credit bureaus received around eight million requests disputing information on credit reports in 2011, according to the CFPB.

It won’t be the first time such an exercise is conducted: in 2015, as part of a settlement with the NY AG, credit-reporting firms were already prompted to remove several negative data sets from reports. These included non-loan related items that were sent to collections firms, such as gym memberships, library fines and traffic tickets. The firms also will have to remove medical-debt collections that have been paid by a patient’s insurance company from credit reports by 2018.

What happens next?

Such changes might help borrowers and could spur additional lending, possibly boosting economic activity. But it could potentially increase risks for lenders who might not be able to accurately assess borrowers’ default risk.

Consumers with liens or judgments are twice as likely to default on loan payments, according to LexisNexis Risk Solutions, a unit of RELX Group that supplies public-record information to the big three credit bureaus and lenders.

For lenders and credit card companies it means one thing: chaos, and the potential of substantial future charge offs: “It’s going to make someone who has poor credit look better than they should,” said John Ulzheimer, a credit specialist and former manager at Experian and credit-score creator FICO.

“Just because the lien or judgment information has been removed and someone’s score has improved doesn’t mean they’ll magically become a better credit risk.”

* * *

So how many US consumers will be impacted by this change? The answer: up to 12 million.

As the WSJ points out “removing this information from credit reports also will lead to changes in people’s credit scores. Roughly 12 million U.S. consumers, or about 6% of the total U.S. population that has FICO credit scores, will see increases in those scores as a result of this change, according to the company that created the FICO system, which is used by lenders in most U.S. consumer underwriting decisions.”

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While for many of these consumers, the score increase will be relatively modest, as FICO projects that just under 11 million people will experience a score improvement of less than 20 points, that should be more than sufficient to go out and buy that brand new $60,000 BMW with an 80-month, $0 down, 0% interest rate loan.

Sarcasm aside, ultimately lenders will still be able to check public records on their own to find this information, and since FICO scores will now be “adjusted” just like GAAP, the likely outcome will be the transition of credit vetting in house, as Fair Isaac loses credibility within the loan system, potentially leading to even more draconian credit terms, even if it comes at substantial expense to US-based lenders.

Source: ZeroHedge

Who’s Supporting The “New Normal” Housing Market in 2017?

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“A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword,” explained Daren Blomquist, senior VP at ATTOM Data Solutions. “Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time home buyers the housing market typically relies on for sustained, long-term growth.”

So the housing market is “starkly different than a decade ago,” said Alex Villacorta, VP of research and analytics at Clear Capital. “As such, it’s imperative for all market participants to understand the nuances of the New Normal Real Estate Market.”

They were both commenting on a joint white paper by ATTOM and Clear Capital, titled “Landlord Land,” that analyzes who is behind the US housing boom that drove home prices to new all-time highs, and in many markets far beyond the prior crazy bubble highs – even as homeownership has plunged and remains near its 50-year low.

First-time buyers are the crux to a healthy housing market, but they aren’t buying with enough enthusiasm. In 2012, buyers with FHA-insured mortgages – “who are typically first-time home buyers with a low down payment,” according to the report – accounted for 25% of all home purchases. In 2013, their share dropped to about 20%, in 2014 to 18%. Then hope began rising, briefly:

However, in January 2015, FHA lowered its insurance premium 50 basis points, and there was a modest resurgence in FHA buyers – a trend perhaps indicative of loosening credit requirements or of a desire to re-enter the housing market for those displaced during the crash.

Their share of home purchases ticked up to 22.3%. Alas, “the FHA resurgence was short lived” and in 2016 eased down to 21.7%.

With first-time buyers twiddling their thumbs, who then is buying? Who is driving this housing market?

Institutional investors? Defined as those that buy at least 10 properties a year, they include the largest buy-to-rent Wall Street landlords, some with over 40,000 single-family homes, who’ve “picked up the low-hanging fruit of distressed properties available at a discount between 2009 and 2013,” as the report put it. That was during the foreclosure crisis, when they bought these properties from banks.

In Q3, 2010, institutional investors bought 7% of all homes. In Q1 2013, their share reached 9.5%. As home prices soared, fewer foreclosures were taking place. By 2014, when home prices reached levels where the large-scale buy-to-rent scheme with its heavy expense structure wasn’t working so well anymore, these large buyers began to pull back. In 2016, the share of institutional investors dropped to just 2% of all home sales.

But as institutional investors stepped back, smaller investors jumped into the fray in large numbers, “willing to purchase in a wider variety of market landscapes and operate on thinner margins.”

To approximate total investor purchases of homes, the report looks at the share of purchases where the home is afterwards occupied by non-owner residents. In 2009, according to this metric, 28% of all home purchases were investor-owned properties. In 2010, it rose to 30%. In 2011, 32%. Then as big investors pulled out, it fell back to 30%. But by 2015, small investors arrived in large numbers, and by 2016, investor purchases jumped to 37%, an all-time high in the ATTOM data series going back 21 years.

The chart shows the share of purchases in a given year. Note the declining share of first-time buyers (blue line), the declining share of institutional investors (gray bars), and the surging share of smaller investors (green line). In other words, smaller investors are now driving this housing boom:

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The pie chart below shows the share of properties owned by investor size. Among investors in today’s housing market, small landlords that own one or two properties own in aggregate the largest slice of the rental housing pie – 79%:

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However, Wall Street landlords are concentrated in just a few urban areas. For example, Invitation Homes, the 2012 buy-to-rent creature of private-equity firm Blackstone, which owns over 48,000 single-family homes and has nearly unlimited financial resources, including government guarantees on some of its debt, is concentrated in just 12 urban areas, where it has had an outsized impact.

Whereas small investors own properties across the entire country, in urban and rural areas, in cheap markets and ludicrously expensive markets. They own condos, detached houses, duplexes, and smaller multi-unit buildings.

So when the industry tells us about low inventories and strong demand in the housing market, it’s good to remember where a record 37% of that demand in 2016 came from: investors, most of them smaller investors. And when the financial equation no longer works for them, they’ll pull back, just like institutional investors have already done.

By Wolf Richter | Wolf Street