Monday, December 12, 2011

Securities Lending – Share Hypothecation

For the last several months, Efinity Finanical has quietly grown in the Dallas Fort Worth market. Those clients already presently working with our advisors are well aware of the weekly commentary we publish. Last week's was so good we felt it should repost here on the Efinity Report. Enjoy.

Securities Lending – Share Hypothecation
One of the main issues facing the financial world today is the difficulty investors have estimating the effect that a specific financial issue, such as a 50% haircut on Greek bonds, may have on the global or domestic financial and banking system.

So why can’t the people who run the European Central bank, the U.S. Central Banks Federal Reserve and Wall Street estimate the probability and effect of a bank going out of business? It looks like the reason some banks are classed as “too big to fail” is the fact that no one knows what will happen if they DO fail!

The reason is the financial system is based on everyone lending and making promissory contracts with each other. The system has evolved to a highly leveraged point where very little real cash or collateral exists. Looking at ‘cash in the bank’ has been replaced by credit ratings and rates as means to judge the fiscal security of a loan to a counterparty.

Unfortunately, these ratings and loan rates can change quickly; confidence is especially ephemeral these days. Take Italy, for example, whose cost of borrowing has nearly doubled in a period of weeks. This means the capital held by banks in the form of Italian bonds has shrunk by nearly 50%.

European banks are currently levered by approximately 30 to 1 – for every $1 they have in actual capital, they have $30 in borrowings. U.S. banks are current around half that level.

Shorting the System
Another reason for high volatility is the increasing ability of financial firms to profit from betting against markets - Shorting. Probably the most infamous example was Goldman Sach’s $550 million fine relating to fraud charges over the shorting of (seeking to profit from betting against) mortgage securities they had previously profited from by advising clients to buy. The fund was called Abacus.

Securities Lending
Securities Lending, a.k.a. Share Hypothecation, is a little known method for large financial firms to leverage the financial system - proponents call it the lubrication of securities markets. It certainly facilitates increased short selling activity. It is estimated that $1.9 trillion of securities are out on loan every day.

Securities Lending allows a Wall Street firm to loan shares to another firm in return for both a transaction fee and collateral to cover the loan. Although this may sound ‘normal’ among large companies, many Wall Street investor custody agreements include securities lending clauses allowing the firm to lend out shares owned by retail investors.

Yes, investment banks and the like regularly take their investors’ shares and loan them to companies looking to short the market.

For any financial relationship you have, check to see if the company participates in Securities Lending. If they do and the lender goes bankrupt, you will lose your shares!

Why Lend Securities?
Financial companies often “Lend” securities to facilitate short selling. Selling a stock “Short” means borrowing stock from a Lender for a period then selling the stock to a Buyer. At the end of the borrowing period, the Borrower has to give the stock back to the Lender.

If the price of the stock goes down during the lending period, at the end of the period the Borrower buys the stock in the market at the current reduced market price and gives it to the Lender. The Borrower therefore pockets the difference between the price they had originally sold to the Buyer at the start of the lending period and the price they had just paid for it at the end of the lending period.

If the stock rises in value during the borrowing period, the Borrower loses the difference in the original sale price and the price they have to buy it back to satisfy the loan. This practice avoids the short company for being accused of “Naked Shorting”, the practice of selling a stock short without owning the underlying stock.

Take a moment to think how frightening this concept is…in order to make a big negative bet against a company or country, all a Wall Street company has to do it find a counterparty who is willing to loan the representative securities for a nominal fee.

Even worse, the collateral to cover the trade is rarely “tangible”; it’s often other financial contracts. It is therefore very easy to see how confidence can rapidly evaporate in financial markets.

Company versus Country
One interesting result of the above is the changing risk/credit perception between many large corporations and a number of countries, chiefly those in Europe. Sovereign fixed income investments that were previously thought to be low volatility are now behaving like Tech stocks! At the same time, high yield corporate bonds are relatively stable.

Countries have been able to run whatever fiscal policy they wanted because their credit rating always allowed them to borrow and borrow at low interest rates. Companies generally had to maintain pristine balance sheets to enjoy anything like similar access to debt. Moreover, everyone assumed sovereign debtors were highly creditworthy whereas companies have to prove their creditworthiness on a quarterly basis.

Now that the confidence in the finances of many countries has disappeared, we are seeing massive swings in the prices of sovereign bonds; those securities that we all previously thought were very stable. Hedge Funds and short sellers are able to use leverage to bet against the debt of countries in the same way they contributed to the decline of Lehman Brothers.

In our opinion, large multinationals have managed their finances exceptionally well in recent years and their debt (Bonds) deserve the stability currently being shown. We have long stated that the world continues to grow in new areas and different ways. Companies and not countries seem to be doing much better at managing this change.

Thursday, November 3, 2011

Damn'd if you Do and Damn'd if you Don't

A state court judge has ruled that Illinois can move forward with a lawsuit alleging that Wells Fargo & Co. steered minority borrowers into risky mortgages at the height of the housing bubble. Important to note the court DID NOT find that Wells Fargo engaged in discriminatory lending but the Illinois action is the first fair-lending lawsuit brought by a state attorney general against a national bank to reach discovery, attorneys familiar with the case said. After discovery, Illinois may be able to bring the case to trial. We believe this is a poor decision.
Here are the underlying issues and possible ramifications for this. ALL residential mortgage lenders (BofA, Wells Fargo, Chase, Ally Bank even Efinity for that matter) had and have annual requirements and goals for community lending. Ten years ago, the push from Fannie Mae and Freddie Mac were to grow minority ownership. This was a directive from prior US President Bill Clinton during his presidency (1993-2001). A challenging task as these markets historically have been plagued with on-going credit and down payment issues. The "steering" as referred by the Illinois state attorney general will be difficult to defend as home loan underwriting requirements were much less focused on standard automated underwriting findings and subject to interpretation. Many of the loan programs available to mortgage lenders at the time were very lenient on income and employment documentation compared to the standard FHA loan programs. In addition, programs typically offered short term fixed payment durations lowering the starting rate and payment which many borrowers were attracted to. Add the year over year property increase assumptions, these underwriting decisions are now deemed discriminatory. Furthermore, what will be difficult to defend is the reasoning why those loan programs were selected. In many circumstances, borrowers fully intended to flip or move in a short time window making short term fixed duration loans preferable as the interested rates were significantly lower. Adding to the lack of clarity behind these transactions in question, no where within the application explains or supports the reasoning behind the transaction.

WF was "gently" pushed to lend in certain markets which conventional lending could and would not support. The transactional volume requirements demanded certain products which were available to the market place. Unfortunately while clients are usually always made aware of the risks associated with an adjustable mortgage product the purchase decision is usually made payment. Are there individual transactions where perhaps the risk/rewards were not fully vetted out 100%, perhaps but in this instance we believe individual borrowers are not taking personal responsibility for their decisions.

Friday, October 14, 2011

Creative planning but ...

There are new developments between the Obama administration and a federal housing regulators who are considering a program to draw private investment back into the government-dominated residential mortgage market by having Fannie Mae and Freddie Mac sell slices of securities that wouldn't carry a federal guarantee but would pay a higher interest rate than current mortgage-backed bonds.

No decisions have been made, but officials believe a small pilot program could be rolled out sometime next year, according to people familiar with the matter.

Officials see it as a step toward reducing the $10.4 trillion U.S. mortgage market's dependence on government-controlled mortgage companies Fannie Mae and Freddie Mac. If the leadership in both groups believe this model would keep US residential mortgages affordable, we're all for it. However, we fear what this same leadership has not factored in is the "dramatic" increase private money would require in rate to not have government guarantee. The margins just aren't attractive to the everyday commercial investor and without attractive margins, rates to the consumer will surely rise.

Saturday, July 2, 2011

You can lead an Economy to Water, but can you make it Create Jobs?

You can lead an Economy to Water, but can you make it Create Jobs?

So it‟s now official, the U.S. Economy is going through a “soft spot”. According to the U.S. Federal Reserve Chairman Ben S. Bernanke, speaking last week at an International Monetary Conference in Atlanta:

• "The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea."
• …the economic recovery is “uneven …and frustratingly slow”
• The Fed will keep interest rates bottomed out for “an extended period.”

A few conclusions spring forth from these quotes:

• The Fed will keep Interest Rates low for as long as
possible; longer than most economists currently
believe. Bonds won‟t be under too much interest rate
pressure for a while yet.

• Chairman Ben Bernanke currently feels the launch of a
third round of monetary easing will probably do nothing
to stimulate „real‟ economic demand; principally
meaning create jobs.

• Ben is looking for help from the Government and
Private Sectors in his efforts to inflate the economy.

• The Fed expected QE2 to have more impact on jobs
and GDP. The money benefitted the banking industry
but not industry in general.

It‟s possible to explain away the „soft spot‟ as a result of the Spring 2011 Supply Shocks in Japan and the Middle East; it may even be possible to extrapolate this thinking to justify a return to GDP growth in the Fall.

But one thing remains, until the job market shows signs of sustained improvement, long term confidence in a persistent domestic economic recovery will be questionable.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established”, another quote from Ben Bernanke.
Monetary policy cannot be a Panacea
Is The Fed saying that it has done as much as it can through Monetary Easing; the printing and circulating of more money?
QE1 and QE2 achieved their objectives by:

• Saving the U.S. Banking System, and therefore the world‟s banking system.
• Raising the price of Equities
• Reducing Interest Rates and the Dollar

But QE2 or QE3 can‟t sustain economic growth. Quantitative Easing was initially a protective measure; pump liquidity into the economy and provide banks with copious amounts of free capital.

Thereafter, it was intended to be a box of matches that could set the economy ablaze. Well, now all the QE matches have been struck, the economic wildfire still refuses to spread.

Employment is the fuel necessary to get this fire to spontaneously combust.

How to Stimulate Employment?

Jobs are a common byproduct of economic activity; however, productivity increases (together with an amount of outsourcing) has created an economic recovery with fewer new jobs than expected.

So what‟s a government to do about job creation?


The Fed obviously thinks: “QE1 and QE2 didn‟t ignite the job market, so why would QE3 do any better?” Additionally, the debt created by quantitative easing requires repayment at some stage (seriously). Repayment will require deficit reduction which will require cut backs in economic activity.

Conclusion: QE3 may ultimately hurt the job market.

Keeping Interest Rates and the Dollar Low?

The Fed may have ended the QE programs, but it will still try to keep interest rates and the dollar low by other means; means too complex to detail here.

Why keep Interest Rates and the Dollar Low?

• Lower interest rates encourage investment (loans cost less) and discourage savers (don‟t put your money in the bank; put it into riskier assets or a business).
• A lower dollar makes domestic goods cheaper and more competitive overseas while making imports more expensive.

Although recent balance of payments data shows U.S. exports have benefitted from a lower dollar, it‟s clear that low interest rates have failed to stimulate lending and economic activity. Why pump more money into the monetary system when it isn‟t finding its way to enough businesses and households. The Government needs to direct the monetary faucet where it can create jobs.
If the printing presses don‟t stop creating money soon, the risk of inflation will increase dramatically. In turn, this may cause interest rates to rise which would defeat the object of the stimulus exercise.

Rising interest rates are synonymous with monetary tightening. Monetary tightening normally means fewer jobs; a downwards spiral no one wants to see at the moment.

Failure to control spending can actually hurt jobs in a similar way to reducing spending.

Note: For all you bond investors, a domestic “rising interest rate environment” may yet be a year or two away if the Fed has their way.

Government & Private Sector Stimulus

Chairman Bernanke‟s comment: “monetary policy cannot be a panacea” begs the question “What else will help monetary policy to create sustainable growth?”

"Policymakers urgently need to put the Federal governments' finances on a sustainable trajectory," Bernanke said in Atlanta. "Establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates."

Looks like Ben thinks it's now up to the politicians to help the economy by reducing the federal deficit.

And now the good news – it appears both sides of the political divide agree that the deficit must be reduced. The debate has moved on to:

• How to Reduce the Deficit: Reduce Spending or Increase Taxes?
• How much to Reduce the Deficit by

At a time when investors are looking for a clear direction, let us weigh in with a decisive conclusion:

Let’s wait and see what the Government agrees and what kind of earnings season we have starting early July…

PS: Have you noticed the increasing number of States and Municipalities implementing fiscal tightening activities. Nowhere near enough to make a difference yet, but a step in the right direction and a shining beacon for the route the Federal Government will have to follow soon.

Tuesday, May 31, 2011

As we called it, Double Dip Housing has arrived

Here are latest from S&P/Case Shiller report out this morning.

• 4.2 percent decline in Q1 of 2011, 2.9 percent from one year ago.

• The 10 cities fell .6 percent in March

• Top 20 cities fell .8 percent in March

What's probably most concerning and begs to question, what happened to the home buyer tax credits which were supposed to stimulate the economy and housing market (not necessarily in that order)?

Perhaps the best news to come out of this will be evidence that mortgage rates will remain low as yields become subject to basic economic supply and demand. With new mortgage transaction counts down, there just isn't enough fixed income products out there to buy outside of corporate bonds and US Treasuries..

To further the point, the National Association of Realtors released an article the other day verifying the median income of real estate agents has fallen 22% to $34,100? Median income….half make more and half make less. Also, a mere 16% of national real estate agents made 6 figures last year. I’m sure you’re curious to what that number represents and it’s 176,556 agents.

Ok, so all this wonderful news is out there. Here's our take on how to truly jumpstart both the housing industry and this economy.

• Bring back down payment assistance. I know the GSE's (Fannie Mae and Freddie Mac) despised these buyer assisted grant programs. Here's how the vast majority of them worked: Seller of the home (at closing) would make a "charitable donation" to a Non-profit organization (say a church), the church in turn work pocket a $900 admin. fee but remit the rest of the month (at times up to $10,000) towards the buyers closing cost. True the default in loans structured in the aforementioned way had higher default levels but now that HUD has grossly increased both the initial upfront Mortgage Insurance Premium and Monthly Premium, there's got to be a pretty decent model which supports a 3-6% default and still ensure "success" in homeownership.

• Housing is only so important to an already service oriented country like the US. Manufacturing MUST return. Leadership in Washington DC must bring back significant incentives to "defend" this countries manufacturing arm.

• Flat tax. If this county remains (as we suspect it will) a service oriented country, we must tax it accordingly whereby those leveraging the most services or consuming the most goods, in turn pay more.

Simple, now where do we petition these simple requests?

Saturday, April 16, 2011

Someone else seems to "get it"

Rising food, gas prices lift U.S. consumer inflation
WASHINGTON— Americans are paying more for food and gas, a trend that could slow economic growth in the months ahead.

The Consumer Price Index rose 0.5 percent in March, the Labor Department said Friday. That
matched February's increase, the largest since the recession ended in June 2009. In the past 12 months, the index has increased 2.7 percent, the biggest rise since December 2009.

Excluding the volatile food and gas categories, the so-called core index rose 0.1 percent and it is up only 1.2 percent in the past year.

Consumers are spending more, but the steep rise in food and gas prices could limit their
ability to purchase discretionary goods and services. Consumer spending makes up 70
percent of economic activity.

Rising inflation has caused many analysts to reduce their estimates for economic growth in
the January-March quarter from roughly 3 percent or higher to as low as 1.5 percent.

Gasoline jumped 5.6 percent last month and has risen nearly 28 percent in the past year.
Consumers paid an average price of $3.81 a gallon nationwide on Friday according to the
travel group AAA.

Food prices rose 0.8 percent last month, the largest increase in almost three years. Prices
for fruits and vegetables, dairy products, chicken and beef all increased. Coffee costs
rose 3.5 percent.

Separately, the Federal Reserve said U.S. factories produced more consumer goods,
business equipment and raw materials in March, boosting manufacturing activity for the
ninth straight month. Overall industrial production increased 0.8 percent.

Factory production, the largest single segment of industrial production, increased 0.7 percent advertisementadvertisement Rising food, gas prices lift U.S. consumer inflation
Trend could slow economic growth in the months ahead, new report suggests last month. Manufacturing has been a key driver of economic growth since the recession ended. That continued last month, even with supply chain disruptions stemming from the
crisis in Japan.

Manufacturers, food processors and other producers are facing higher costs for oil,
grains and other commodities. But only some of those increases are reaching the consumer.
Many retailers are reluctant to pass on the higher prices for fear of losing price-
conscious customers.

Vegetable bandits strike as food prices soar

Consumers have seen wages and salaries stagnate in the past year, limiting their ability
to pay more for many goods. According to a separate government report Friday, average
hourly earnings for all employees, adjusted for inflation, dropped 1 percent in the past 12

Stagnant wages are a big reason that most Federal Reserve policymakers say the spike in
gas and food will have only a modest and temporary impact on inflation.

"Nothing here to change the Fed's view that the surge in commodity prices can be ignored as
long as it doesn't lead to second-round effects in wages and core inflation," said Paul
Ashworth, chief U.S. economist at Capital Economics.

Thursday, April 7, 2011

Who can you trust?

Here's a question I would like to pose for the loyal Efinity audience.

Is the economic environment in this country really improving or are we all being fed a stream of special interest commentary which want us to think things are getting better?

I have two separate examples for your collective review which point to the latter. I for one have a HUGE problem with this. It's important to note that I include our government included as one of the special interest groups.
Example #1
As reported by the Wall Street Journal, Federal Reserve Chairman Ben Bernanke Monday downplayed inflation fears which led some of colleagues to recently warn tighter monetary policy may be needed to keep prices in check. Bernanke said the rise in global commodity prices is likely to be temporary and shouldn't translate into a broader inflation problem. However, the Fed chief was quick to add that if his prediction is wrong and inflation begins to mark strong gains, the central bank would respond. "I think the increase in inflation will be transitory," Bernanke said when asked to further explain.
This has been a consistent them from the Fed Chairman for the past 18 months. In no way shape or form believe my limited view trumps the access to data the Fed Chairman has, however I do believe that statistics can be shown in many ways to shape many opinions. And if left-unchecked can fog the real issue which is that inflation is here, it will affect the economic recovery of this country and there is a strategic advantage for the Fed to not fully publicize the real issue.

Allow me to explain further (if you don't care to read through this, you can skip to my summary). First, one has to understand how the Bureau of Labor Statistics determines the Consumer Price Index (CPI). The CPI is a measure of the average change in prices over time of goods and services purchased by households. The Bureau of Labor Statistics publishes CPIs for two population groups: (1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for all Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI-U), which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force. The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 26,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments. All taxes directly associated with the purchase and use of items are included in the index. Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives.

In calculating the index, price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local
data are then combined to obtain a U.S. city average. For the CPI-U and CPI-W separate indexes are also published by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for 27 local areas. Area indexes do not measure differences in the level of prices among cities; they only measure the average change in prices for each area since the base period. For the C-CPI-U data are issued only at the national level. It is important to note that the CPI-U and CPI-W are considered final when released, but the C-CPI-U is issued in preliminary form and subject to two annual revisions.

The index measures price change from a designed reference date. For the CPI-U and the CPI-W the reference base is 1982-84 equals 100. The reference base for the C-CPI-U is December 1999 equals 100. An increase of 16.5 percent from the reference base, for example, is shown as 116.500. This change can also be expressed in dollars as follows: the price of a base period market basket of goods and services in the CPI has risen from $10 in 1982-84 to $11.65.

Now that you have a better understanding, here's the most recent summary dates March 17th (see
I'd like to point you to a few items once you've read through this list.

Seasonally adjusted changes from preceding month
Un-adjusted 12-mos.
Aug. Sep. Oct. Nov. Dec. Jan. Feb. ended
2010 2010 2010 2010 2010 2011 2011 Feb. 2011

All items.................. .2 .2 .2 .1 .4 .4 .5 2.1
Food...................... .1 .3 .1 .2 .1 .5 .6 2.3
Food at home............. .0 .4 .1 .2 .2 .7 .8 2.8
Food away from home (1).. .3 .3 .1 .1 .1 .2 .2 1.6
Energy.................... 1.6 1.1 2.5 .1 4.0 2.1 3.4 11.0
Energy commodities....... 2.6 2.2 4.4 .7 6.4 4.0 4.8 19.3
Gasoline (all types) .... 2.9 2.2 4.5 .7 6.7 3.5 4.7 19.2
Fuel oil (1)............ .9 .8 4.7 4.2 4.9 6.8 5.8 27.1
Energy services.......... .4 -.4 .0 -.8 .6 -.6 1.1 .2
Electricity............. .1 -.1 .2 .6 .3 -.5 .4 2.2
Utility (piped) gas
service.............. 1.4 -1.4 -.6 -5.3 1.7 -1.2 3.4 -5.9
All items less food and
energy................. .1 .0 .0 .1 .1 .2 .2 1.1
Commodities less food and
energy commodities.... .1 -.2 -.2 .0 -.1 .2 .2 .0
New vehicles............ .2 .1 -.1 -.2 -.1 -.1 1.0 .9
Used cars and trucks.... .9 -.4 -.6 .1 -.1 -.3 .1 1.9
Apparel................. .0 -.5 -.2 .1 .1 1.0 -.9 -.4
Medical care commodities
(1).................. .2 .3 .1 .2 .1 .5 .7 2.7
Services less energy
services.............. .0 .1 .1 .2 .1 .1 .2 1.5
Shelter................. .0 .0 .1 .1 .1 .1 .1 .8
Transportation services .0 .3 .3 .4 .2 .6 .5 3.5
Medical care services... .2 .7 .2 .2 .3 -.1 .4 3.0

Our SummaryWhile statically speaking, the adjusted 12 month index reflected a 2.1% increase (before seasonal adjustments), unless you're radically different than most people I know and don't spend equally on a whole range it items (including evidently a whole lot of apparel) this report summarized simply does not accurately reflect the present sign of the times. Which is; food, energy and gasoline are MAJOR drivers for people's spending. Car sales are down. Home sales are down. So if we were to focus on the net spending habits of people and clients (we deal with); here's the summary of inflation as it affects them:
• Food - 2.3 increase
• Food at home - 2.8% increase
• Energy - 11% increase
• Gasoline (all types) - 19.2% increase
Interesting that all of these figures are materially higher than the 2.1% reported CPI. The takeaway here is simply that disposable income is being reduced. As a country moving away from manufacturing and more towards consumer services, disposable income is imperative to a healthy and strong recover. Same goes for jobs. Perhaps this is a prime reason channels like CNBC dedicate some much talk of crude oil prices.

Example #2 forthcoming in the next Efinity Report post.

Friday, February 11, 2011

If you won't listen to us... perhaps the writers with the AP will sway you

Era of super-low mortgage rates is OVER

30-year benchmark rises to 5.05 percent from 4.81 percent
The average rate for a 30-year home loan rose above 5 percent this week for the first time since last April — just as Americans are feeling more secure in their jobs and confident about the economy, and just before the big spring home-buying rush.

Freddie Mac said Thursday that the average rate was 5.05 percent, almost a full percentage point higher than in November, when it hit a 40-year low.

Economic signals suggest the recovery is gaining momentum. New claims for jobless
benefits came in this week at the lowest in three years, and the unemployment rate has fallen nearly a full percentage point in two months. Americans are spending more and saving less.

The exception is the beleaguered housing market. Record foreclosures have forced home prices down, and last year was the worst for sales in more than a decade. About the only good news was that qualified buyers could get the deal of a lifetime from their lenders, if they had the means — and the stomach — for the market.

Now rates are rising, and analysts expect that will continue through the end of the year, to about 5.5 percent. The next few months are the busiest for the housing market — about one in three home sales happens in the spring.
It doesn't help," says Greg McBride, a senior financial analyst with "Any increase in mortgage rates takes away buying power and dilutes the incentive to refinance."

Rates have been rising since the fall, mostly because of fears that higher inflation is coming. Investors have been demanding higher yields on Treasury bonds ever since the Federal Reserve announced its program to pump up the economy by spending $600 billion to buy government debt. Mortgage rates tend to track the yield on the 10-year Treasury note.

"You'll see some effect on demand, but it's really how secure people are in their jobs and how much money they feel they have relative to their homes," says Cristian deRitis, an economist specializing in housing for Moody's Analytics.

"Many of those people just won't buy a house," says Wells Fargo senior economist Mark Vitner. "They'll hold off."

Home prices are expected to fall at least 5 percent more this year. Because of the feeling that the home isn't the failsafe investment it used to be, renting is more attractive. Especially when some analysts say it could be years before prices return to their pre-recession peak.

That may be contributing to the fact that, despite record inventory levels of affordable homes in nearly half of U.S. cities, mortgage applications continue their downward slide as buyers remain on the sidelines.

"Believe it or not, what I'm seeing, and I'm working with first-time homebuyers, they are not as affected by the interest rate as they are by getting a down payment," says Julie Longtin, a real estate agent with RE/MAX Cityside in Providence, R.I. "That's what is holding them back."

On a $200,000 loan, the payment difference between today's rate and November's is less than $100 a month — hardly enough by itself to spook a buyer.

If rates continue to rise, as many predict they will, the housing market will be in for yet more trouble. "Six percent would do serious damage if it happened in a very short period of time," said Patrick Newport, U.S. economist at IHS Global Insight.

Even 6 percent would be a bargain for homebuyers historically. Rates were in double digits through most of the 1980s. It wasn't until 1991 that rates consistently stayed below 10 percent. At the peak of the credit bubble in July 2006, the 30-year fixed mortgage was 6.76 percent.

All this leaves buyers wondering: What is the new normal for interest rates?

"We're turning to a more normal mortgage rate environment, says Guy Cecala, publisher of the trade magazine Inside Mortgage Finance. "That pretty much means the 30-year in the 6 percent range. I don't think rates will be going down." - AP writers JANNA HERRON, MICHELLE CONLIN

What this REALLY means for the market and housing over the next 3-5 years + will be detailed in the Efinity Report's next blog. Stay tuned...

Friday, February 4, 2011

Mortgage rates steady

The average rate on the 30-year fixed mortgage changed little this week.

Freddie Mac said Thursday the average rate rose to 4.81 percent this week from 4.80 percent the previous week. It hit a 40-year low of 4.17 percent in November.

The average rate on the 15-year loan slipped to 4.08 percent from 4.09 percent. It reached 3.57 percent in November, the lowest level on records starting in 1991.

Rates have been little changed this year after spiking more than half a percentage point in the last two months of 2010. Investors sold off Treasury bonds during that time, driving yields lower. Mortgage rates tend to track the yield on the 10-year Treasury note.

High foreclosures, job worries and expectations that home prices will fall further have kept many potential homebuyers on the sidelines. Historically low mortgage rates haven’t been enough to jumpstart the housing market.

To calculate average mortgage rates, Freddie Mac collects rates from lenders across the country on Monday through Wednesday of each week. Rates often fluctuate significantly, even within a single day.

The average rate on a five-year adjustable-rate mortgage fell to 3.69 percent from 3.70 percent. The five-year hit 3.25 percent last month, the lowest rate on records dating back to January 2005.

The average rate on one-year adjustable-rate home loans was unchanged at 3.26 percent.

The rates do not include add-on fees, known as points. One point is equal to 1 percent of the total loan amount. The average fee for the 30-year and 15-year loan in Freddie Mac’s survey was 0.8 point. The average fee for the five-year ARM was 0.7 point, and the fee for the 1-year ARM was 0.6 point. - JANNA HERRON | THE ASSOCIATED PRESS

In short, get your cheap money now as the inflation monster is coming.

Monday, January 24, 2011

Our 2011 Outlook (no 3-D glasses required)

Over the last 90 days I have been keeping a watchful eye on our equity markets, general economic news and perhaps more important, the US consumer sentiment. There have been encouraging signs that the economy may have finally stopped sliding into the abyss and by all accounts moving forward under the new financial paradigm. I’d like to refer to this as the “New Normal”. Unemployment has held steady, the Christmas shopping season appears to have beat expectations, the stock market has had a fantastic run over the last 180 days. GM complete its bankruptcy process and most of the largest banks have repaid the TARP money lent to them. Hey, JP Morgan Chase recorded outstanding record profits for Q4.
All of that said, before we take that collective sigh’ and pat ourselves and our fearless leaders in Washington on their backs for a job well done, I’d like to turn some our attention to a news story which was recorded by 60 Minutes in which the title Day of Reckoning and where wall street brain trust Meredith Whitney whose focus of this story was to paint a fairly bleak picture of the individual State balance sheet(s) and the windfall of potential risks. While the news story (seen here ) did have in my humble opinion a few misleading conversation points, it is true that the bulk of the attention has been paid to the national financial deficit problem, not our individual state issues (see Illinois) where these problems have been getting progressively worse over the last 10 years. The issue I am most concerned with as it directly relates to not only to Efinity’s core businesses, but our countries general way of life; the seemingly non-issue of inflation. There has been a growing undertow of consumer inflation in several areas and while gas prices tend to get the most headline coverage, if you compare just the last 6 months of the everyday costs of meat, bread, milk, corn, you’ll begin to see changes which on the onset don’t appear much (.10c to .30c) however these have been in a fairly stable gas price environment. With the highly anticipated summer gas price increase in the 20-30% range (as found in the futures market), we could see a dramatic change in the ability for many American’s to operate their daily lives as they have been. For our older members of society, it’s even worse as not only did many of them have significant capital stripping take place from 2007-2009 but there is a HUGE gap in anticipated appreciation and available returns of investment in savings and market rates. Add the growing concerns in the municipal bond markets and you’ll find the options are even more limited. So, in short order 2011 will be more of the same. A country with potential but with serious legacy problems it needs to deal with, which will come at a cost to all of us and an impediment to GDP.