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The Federal Reserve and Elvis Presley

November 20, 2009

Homebuyers will face a new and  important “development”  in the next 90 days — and anyone thinking about buying a house (and even  a bank  CD) should pay attention:

As part of “Quantitative Easing,” the Fed purchased $1.02 TRILLION worth of “Agency MBS securities” (aka home mortgages) in the open market. The Fed will complete their purchases  within the next 90 days. As the chart above shows, they will have purchased a total of $1.72 TRILLION of securities including $1.25 TRILLION home mortgages.

Putting this in perspective:

 In 2009, home buyers borrowed a total of $1.01 Trillion. ( See: http://www.sifma.org/research/pdf/Mortgage_Related_Issuance.pdf  for the data.)

The Fed has purchased EVERY new home loan made in 2009, and they  pegged mortgage rates at an entirely arbitary yield !

Ladies and Gentlemen: The Federal Reserve has left the building!

Once the Fed steps back from the mortgage market,  the “free” market will re-price home mortgage rates…presumably at  higher yields.  Rocky doesn’t know if the upward move in mortgage rates will be violent or gradual, but it will happen — and it will dwarf the effect of Congress’ homebuyer tax credits.  It behooves homebuyers to bear this in mind when they consider when to lock in a mortgage rate.

[Disclosure: Rocky acknowledges that the one Elvis reference in this post was weak. So he’ll add a second one: Elvis said, “The only thing worse than watching a bad movie is being in one.”]

  1. masteroftheuniverse
    November 20, 2009 at 4:18 pm

    Rocky, you’re a helluva smart guy….Just thought I’d mention that

  2. November 20, 2009 at 4:24 pm

    Jeff: Rocky posted this with you in mind!
    (p.s. In Rocky’s trading, he would rather be RIGHT than SMART…. He’s extremely confused by the grains right now…. extremely confused … extremely confused … )

  3. November 20, 2009 at 5:53 pm

    Singing …

    It’s now or never
    Let’s lock this rate
    Just sign here, darlin’
    Let’s not be late
    For who knows when Ben will buy
    More mortgage gumbo, more mortgage pie …

    It’s now or never
    Come on let’s close
    This time we’ll make it
    ..or not, who knows?
    And later if they won’t ease
    Well it’s been great fun, and here’s our keys


  4. masteroftheuniverse
    November 21, 2009 at 7:26 am

    Rocky, my sense of confusion also is my major downfall. I’m getting killed on that KCBOT/CBOT March wheat spread. One thing is that a lot of farmers polled think the major bottom is in. The trade is mildly bullish, but you see a lot of hedging come in on big up days. They’re fighting it out.

  5. masteroftheuniverse
    November 21, 2009 at 11:31 am

    Rocky, I would love to see you work up a post with the name Costello Presley in it. Look him up, and I’m sure you could do an award winning post.

  6. ld
    November 21, 2009 at 12:26 pm

    Rocky: Does the market not see what you see? Why aren’t the house prices reflecting this? I completely agree with Jeff. You’re a helluva smart guy!

    • November 21, 2009 at 1:13 pm

      LD writes: ” Does the market not see what you see? Why aren’t the house prices reflecting this?”

      Good question! Here’s one theory… others are welcome.

      When the Fed disappears [they are already slowly reducing their purchases so as to “wean” the market], what interest rate will investors demand? It’s possible that investors (which are cash rich because they haven’t bought any MBS for a year) may buy the MBS issuance only a few basis points higher in yield. (See my Citi example below.) But it’s also possible that the Fed bid way too high for their MBS paper, and once they disappear, rates move 50 or 100 basis points higher. NOONE KNOWS THE ANSWER TO THIS! NOR DOES ANYONE KNOW HOW MANY DAYS/WEEKS IT WILL TAKE FOR THE MBS MARKET TO ESTABLISH EQUILIBRIUM.

      Remember also that fixed income markets trade on relationships. So if AAA MBS yields rise, Treasury Yields, Corporate Bond Yields and even Bank CD rates will rise. Even German Bund yields may rise when this happens.

      Does the market see this? Of course it does. It’s possible that Citibank sees this too — which is why they (and other banks) are building up huge cash cushions — perhaps to put to work as the Fed leaves the MBS market. If things go perfectly, it will be a seemless and invisible transition from the Fed to the private sector. But things rarely go perfectly. Hence it’s more likely to expect rising yields… with the exit of such a large price-insensitive buyer.

      The initial impace on the housing market should be small, as it’s being driven by personal income and unemployment — neither of which have started improving yet. But if interest rates rise a lot, it could choke off a housing recovery….

  7. ld
    November 22, 2009 at 9:53 am

    If I expect yields to rise, I would not lock in today by either lending long-term at low rates or investing long-term at low rates. But I would be interested to borrow as much as possible. If I try to borrow:
    -> Would I qualify?
    -> Can I make the payments (jobs, personal income, etc.)?
    -> How should I use the borrowed money? Buy a house?
    It seem that restrictions have been placed to curtail who qualifies. We also don’t seem to get the warm and fuzzy that widespread people can make the payments or want to take on additional risk by borrowing more. Housing as one of few collaterals against long-term borrowing doesn’t seem to show signs of significant money creation.
    The question I cannot answer is what have the institutions who “haven’t bought any MBS for a year” been doing with the printed cash?
    Could it be that on the mortgage front, the demand (for mortgages) is the issue and not the yield investors are willing to accept? When the buyer of last resort leaves the building, it will have created enough cash to leave behind buyers who may accept same or slightly more yield. At least, that’s probably what the Fed is hoping to see… Thanks again for the post!

  8. November 22, 2009 at 10:51 am

    LD: According to this Bloomberg article:
    The four largest US Banks (BofA, JPMorgan, Citi, WellsFargo) have increased their cash holdings by 67% over the last year. They now have $1.53 Trillion in cash as of Sept 30th … an increase of $616+ Billion. So…there’s plenty of cash in the banking system to buy MBS … the question is at what yield?

  9. November 24, 2009 at 6:10 pm

    Fakename has nothing substantive to add, except to say that low interest rates have seriously reduced her mortgage payment, which has been very good for Fakename, but probably not so good for whoever the hell actually owns the thousands of snippets of her mortgage. She really only came into the discussion to praise George’s lyrics. Still laughing! And singing, “It’s been great fun, and here’s our keys!”

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