Okay, that is a bad rhyme. But the truth is, we might as well be rubbing the bottle with the genie to see what is coming next. We have talked about this for months. The Federal Reserve Board has finally reached the date in which they are no longer purchasing Mortgage-Backed Securities (MBS). The devastation of the secondary market for home loans was one of the major effects of the financial meltdown which occurred over a year ago. The Fed took many definitive actions to keep rates down while the government took many other actions to right the financial ship. Here are some of these actions:
►The Fed lowering benchmark short-term rates to close to zero.
►The Fed purchasing hundreds of billions of dollars in Treasury securities.
►The Fed purchasing hundreds of billions of dollar in MBS.
►The Fed providing significant liquidity to the system.
►Congress passing two versions of the Homebuyer Tax Credit.
►Congress increasing high-end loan limits on conforming and government loans.
►Congress bailing out the banks with an influx of Troubled Asset Relief Program (TARP) funding.
►Not to mention several tax rebates, foreclosure prevention programs, unemployment aid, bailing out the car companies and more.
Now, the Fed is ready to see if the private markets will pick up the slack and allow home loans to be originated and sold on the open markets at a price that will not halt the economic recovery, particularly in the real estate sector. Is this a non-event at this point?
Note that rates had already increased moderately in the weeks before the Fed’s deadline of March 31. There have been many explanations for this increase, including tepid response to government bond auctions. However, it is entirely possible that the tepid response was due to anticipation of this important date.
Now, speculation moves to another level as it appears we will ponder as to whether rates will continue to rise and whether the Fed will start selling some of the hundreds of billions of dollars in bonds they currently own. Here is a quote from a recent article from The New York Times:
No one expects the Fed to unload its holdings anytime soon, which would be reckless given the housing market’s fragility and the country’s high unemployment. But since the Fed now owns about 25 percent of the outstanding stock of bonds, any talk about actually selling should be a cause for greater concern than the Fed simply ending further purchases.
What will happen? No one actually knows. Rub-a-dub-dub.
This is not the only program which is ending. The tax credit is schedule to end at the end of April. Many had expected an automatic extension. As a matter of fact, homebuyers seem to be acting like this extension was a given. From CNN/Money:
There is little sentiment for continuing this program, especially because many consider the latest iteration's results to be disappointing. Even the Senate's biggest proponent of the homebuyer tax credit, Johnny Isakson (R-GA) is ready to let it end. "He has no plans to introduce legislation to extend the credit," said Isakson's spokeswoman. "Part of the benefit of the tax credit was the urgency its sun-setting generated." Thus at the time of printing the tax credit is up in the air.
Government support of housing recovery is not ending. The Obama Administration recently announced a new initiative to refinance and modify underwater mortgages with incentives to investors to pare down principal. The program includes mortgage payment aid for those who are unemployed. Also, grants were announced to five more states hit hardest by the crisis.
Here is an interesting note. The Congressional Budget Office recently announced that the TARP program, which was supposed to cost the government $700 billion, is now estimated to cost only 16 percent of that total, or $109 billion. How times have changed. We now think of $100 billion as a bargain!
What is the point of all this? With the jobs picture turning positive, the markets are turning back to normal. This means that the government has to facilitate this process. Do not think by any means that we are out of the woods just yet. There are a ton of foreclosures to come, and if a recovery means higher rates and oil prices, it will be an even slower recovery than expected. The Fed has indicated that they are prepared to keep rates low because of these facts, and if the recovery continues, expect more speculation regarding when and how the Fed will increase rates. In the meantime, the Fed has also told Congress that they are ready to step in and reintroduce measures when and if necessary.
Now we come back to the question, how do all of these factors affect originations? For one, the rate volatility we warned about has become a reality. That means that originators must keep on top of the markets at all times. Even when you are in loan application as you are filling out the rate on the Good Faith Estimate (GFE).
Second, rising rates are not ever pleasant. However, if these rising rates are due to a recovery in which people start finding jobs, it will be a positive tradeoff. That is why the positive employment report for March was so important. We have another eight million jobs to go before we recover the jobs lost during the recession. That is a long road to travel. A long-term recovery only happens when people are employed and can afford to keep their homes in the long run. We will accept higher rates that are still historically low if people are going back to work.
Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s Certified Mortgage Advisor Program can be found at www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial or e-mail [email protected]