Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% Does Not Exist For Most

Posted on November 28th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I hope that you had a great Thanksgiving – now its time to talk about mortgages.

Rates Are Not That ‘Low’ For Most – Nowhere Near ‘Historic Lows’

Rates are not as low as the Wall Street analysts and media would have you believe. They are nowhere near ‘historic lows’ that’s for certain. They speak of mortgage rates as a static and generic thing that going forward will remain at levels that will fix all of the housing markets woes.  However, in in reality mortgage rates swing wildly from day to day just like stocks, are ‘custom-outfitted’ for each and every borrower and only a select few are able to get the rates being irresponsibly thrown around lately.

Over the past few days the relentless pump over 5.5% is an absolute red herring. The media and Wall Street analysts should not be quoting mortgage rates because they are committing the greatest ‘bait and switch’ of all time. They are going to make thousands of loan officers around the nation look like crooks because 5.5% really does not exist for most.

The 5.5% rates that are making everyone so giddy are what’s known as ‘base-rates’ for perfect credit, vanilla borrowers.  The ill-informed are assuming everyone gets that rate and is able to qualify.  Perhaps two years ago when when house values were soaring and there was no negative-equity, credit was easy, the mortgage market was liquid and banks and the GSE’s had far more generic loan programs this was the case – but that is far from reality today.

Think of the 5.5% rates like that car shown for $9,999 in the paper – there is only one available, its last years model, this years’ is much more expensive and by the time you get yours, it costs twice as much. The fact is that most do NOT get the best rates available, rather get a shockingly higher rate.

The Borrowers Who Need Help Are Not Getting It

The fact is that the 5.5% rates are for the best AAA, high-FICO, low loan-to-value, owner-occupied purchase or rate & term refi. This loan scenario makes up the minority of all borrowers. Those in toxic loans, underwater or near-underwater in their homes, as 60% in CA are, with a credit score under 720 or a second mortgage / less cash down still can’t get a loan or will pay very high rates relative to the past several years even when rates were at their peak during those periods.

To see how devastating negative-equity is across the nation see my following post: Bubble-States Awash in Negative-Equity (13)

The rates for Jumbos are much worse and did not respond anywhere close to conforming.

The borrowers who fit the new ‘Prime’ mold are likely in fine financial health, have money to put down or equity in their property, no second mortgage and top credit score. This minority borrower class getting great rates will not have any noticeable effect on the housing market.

Two related Mr Mortgage Posts:

Please read my latest report entitled Mortgage Rates Tumble! It Does Not Mean What it Used to for additional information.

In addition, see Fed Buying Agency MBS – Still No Explicit Guaranty!

Now I am going to show you some of the best rates available in the nation available on 11/26. These are wholesale rates meaning they are only available to mortgage brokers. To get a retail (consumer) rates, just add one point roughly.

For example, if you see a 5.5% @ (1.000) this means that at a rate of 5.5%, the mortgage broker would receive in return 1% of the loan amount in a rebate that can be used as her commission, to pay borrowers fees etc. In a deal with this pricing and rebate depending on the loan amount it would likely be a ‘no point’ deal where the consumer had to pay all other closing costs such as appraisal, credit, escrow, title, lender processing, underwriting etc. Count on about $2500 for ‘other’.

Taking this into consideration you will see on the rate sheet that a 30-yr fixed $417k loan is about 5.5% at no points. A Jumbo $650k loan is approx 6.25% at no points.

BUT, NOW GET READY FOR THE TRUTH – In Recent Months Rate Adjusters Have Soared

A rate adjuster is a ‘hit’ to the interest rate if you do not fall inside the tight vanilla box. During the bubble years, the vanilla box was big. Over the past year, it has shrunk considerably to a point where to the majority do not fit inside of it. This is a perfect example of ‘credit tightening’.

All of those adjusters in the grid below the rates grid are what takes most borrowers interest rates well above 6% again. If you are not a perfect 720 score, <80% borrower you can’t have 5.5%.  When reviewing the adjusters below note they are cumulative and 1.000 equals roughly .375% in rate. Therefore, if you are lucky enough to only be impacted by 1.000 of adjustments, your real interest rate is 5.875% at no points plus $2500 closing costs.

Actual Conforming Rates (11/26) Below – most borrowers will get rates at 6.25% to 6.75%

Conforming $417k Fannie Mae ‘base rates’ are shown below across the top row.  Note the 30-yr fixed at 5.5% pays the loan officer 1.128% of the loan amount to be used as commission or towards closing costs.  In most cases this would mean 5.5% is a NO POINT loan. To do a NO COST loan the rebate has to be around 3% which takes rates well above 6%.

Now, add up all of the adjusters for not being a perfect credit, low loan-to-value vanilla borrower.  See below this grid.

ADJUSTMENTS GRID ABOVE – (Note: 1.000 adjustment = roughly .375 to rate)

The Conforming $417k base rate row above are not what most get. This is because all loans are unique. You have to build your loan using the adjusters – I highlighted the most popular in red boxes. Please see all that apply to you. Notice how that if you do not have a perfect 740 score, decent loan-to-value and no second mortgage, you are getting hit. 1.000 in hits = roughly .375% in rate.

Conforming Borrower & Current Rate Example

675 credit score, 80% cash-out refi used to pay off a second mortgage, fully documented. This used to be considered super prime with very few pricing adjustments. Now they get smoked. 1) LTV & FICO hit = 1.75% to fee 2) Cash-Out Hit = 1.00 to fee.

The cumulative adjustment for this loan scenario of 2.75% of the loan amount in fee or 75 to 87.5bps in rate pushing the 5.5% rates to a whopping 6.375% at no points.

If they had a second to 90% CLTV they wanted to keep open as many do, there would be another 1% hit making the rate as high as 6.75% or forcing the borrower to come in with 1% of the loan amount, as much as $4,170 PLUS all closing costs.

Actual Jumbo Rates (11/26) Below – most borrowers will get rates at 6.75% to 7.50%

Jumbo from $417,001 to $625k ‘base rates’ are show below in upper left boxes. Serious adjusters apply here as well unless you are a 740 credit score borrower doing an 80% rate/term refi or purchase with no second mortgage on a primary residence.

Note that a 30-yr fixed at 6.25% pays the loan officer 0.818% of the loan amount to be used as commission or towards closing costs.  In most cases this would mean 6.25%-6.5% is a NO POINT loan.

Now, add up all the hits for not being a perfect credit, low loan-to-value vanilla borrower below the rate boxes.  I have highlighted some of the most common in red.  These are cumulative adjustments. Be aware that 1.00 in fee adjustments equal roughly .375% to .500% in rate.

ADJUSTMENTS GRID ABOVE – (Note: 1.000 adjustment = roughly .375 to .500 to rate)

The Jumbo ‘base-rates’ quoted above are not what most get. This is because all loans are unique and you have to build your loan using the adjusters above – I highlighted the most common in red boxes. Please see all that apply to you.

Notice that if you are not a perfect borrower doing a vanilla loan with no second mortgage you can’t get these rates. As a matter of fact, a 680 score borrower can’t even do a loan over 75%. A 680 score 75.01% LTV borrower used to be AAA Prime and are still rated that way on the balance sheet of banks such as Wells Fargo, Citi and Chase.  Note that 1.000 in hits = roughly .375% in rate to .500 in rate.

Jumbo Borrower & Current Rate Example

700 credit score, 80% no cash-out refi, fully documented. This used to be considered super prime with very few pricing adjustments. Now they get smoked. 1) LTV & FICO hit = 0.75% to fee 2) ‘Other’ hit >75% LTV or CLTV = 0.500 to fee. 3) If the borrower had a second mortgage above 80% which is common add another 1.00 to fee.

The cumulative adjustment of 1) and 2) it is a total of 1.25 to fee or roughly .625% to rate.  This bring the base rate of 6.25% at no points to a whopping 6.875% at no points to the consumer.

If they had a second to 90% CLTV, which is common, there would be another 1% hit making the rate as high as 7.500% or forcing the borrower to come in with 1% of the loan amount, as much as $6,250 PLUS all closing costs.

Rates Rising Through Larger Rate Adjusters (Tighter Credit)

In the past the ‘base rate’ box was huge.  For example at Fannie/Freddie the person with a 580 score would get the same rate as with a 700 score if their respective computer systems said the loan was eligible. Now that box has become very small with sizable rate adjustments for being outside the box.  Below is an example of a couple of adjustments. There are dozens more similar to this enacted over the past year. We are seeing this type of thing come out all of the time now – remember that 1.000 = roughly .375% to the rate.

The ‘Refi-Boom’ Being Reported – MBA Applications Tick up

Not so fast – when rates drop suddenly and sharply as they did on the Fed announcement last week, very little new business is taken right off the bat. Rather, portfolios just tend to shift from one lender to another, as borrowers and brokers want to take advantage of the lower rates. Typically, the lender at which they are presently locked will not roll down the rate to the current market so the only way to get current market is to switch lenders. This skews the mortgage applications data by a) stuffing a previous month’s worth of loan applications into a few days b) showing a spike in all lenders originations as they take business previously with their competition.  What the MBA survey never tells you is how many loans they lost to other during the few days of record originations. This is where the real losses lie.

For more on this see my recent report: Mortgage Rates Drop! It Does Not Mean What it Used to (67)

In closing DON’T BELIEVE THE HYPE folks. I maintain that this move was not necessarily to ‘help’ borrowers with lower rates, rather to talk Bond prices better so the likes of Bill Gross and foreign central banks can sell Agency securities.  Agency securities had been coming under serious pressure for the past couple of months.  See my most recent post on the subject below.

Fed Buying Agency MBS – Still No ‘Explicit’ Guaranty

That being said there is nothing wrong about calling your mortgage broker or the bank and seeing what you can hammer out. Perhaps, there are things that can be done. At least now you have some ammunition.-Best, Mr Mortgage

More Mr Mortgage

45 Responses to “Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% Does Not Exist For Most”

  1. Yes, you need perfect credit to get that low rate. But, it is there and this still means rates are moving lower. Bullish. Look where we came from.

  2. If you need to raise your credit score, check out
    “The Drive to 850”. Lots of good tips on raising your score.

  3. Wasn’t a large part of the problem we’re in now caused by credit that was too cheap & too loose?

    Perhaps it shows my age, but any rate under 7.5% sounds entirely reasonable to me & a rate under 6% is ridiculous. If a rate under 6% is to be offered, it should only go the the best qualified borrowers who have a substantial downpayment. I don’t begrudge a lender making a fair rate of return on their money & I don’t consider 6% or less to be fair rate of return for a long term risk like a mortgage.

    The “underpricing” of risk & the resultant “yield chasing” is what got us where we are today.

  4. […] Comments shinola on Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% is Nowhere near Reality for MostBertDilbert on Mortgage Rates Drop! It Does Not Mean What it Used toLex on Mr Mortgage: In-Depth […]

  5. Am I reading that first pic right? If you have >720 FICO and you have between 85.01-90% LTV you get a better rate.. but if you have even MORE money down (lower LTV) you dont get a better rate?

  6. Why all the bitching. This is a normal mortgage market. After the aberration of the 2000s.
    the press have to quote the best rates. They can’t pout up a box every time they comment.

    Why the 100% focus on fixed rates. In a recession/depression, people should focus more on variable rate mortgages.

  7. This market is going lower and it may take years to get out of this funk. Look at Japan as an example. Also, our demographics are changing in such a way that over the next decade or two it will be even harder to break out of this. We are experiencing an econometric “regime change”; the US economy is moving out of its growth phase. It is an unwise move to try and pick a bottom. Dick, a fool and his money are soon parted.

  8. Here is my take on the situation. A good portion of the Western world had housing bubbles. I think that some of this is due in part in our inability to adjust to China and India in the market place. While the Housing bubbles allowed us to continue the game of consumerism, as we found out it was a short lived and disastrous experience. The US response has somewhat been that we are going to be a “green nation”. Green is easily achievable when you don’t make anything, but it is something that we can look to and claim success with making forward progress. In the larger scheme, green is just a distraction from our inability to compete.

    The truth of the matter is that the money is going to follow the smokestacks as money has historically done so. Producing value added from natural resources has always been the key to economic prosperity. Of this tried and tested true method of accumulation of wealth, we are going to have to cross the USA off the list.

    Consumerism was a fraud, just like housing prices. What happens now will be horrendous unemployment, most likely followed by a sharp and and significant correction in the USD. I am not even going to try to calculate when the dollar correction will happen, but happen it must, it is the only way to return jobs to the USA.

    This dollar drop that puts us back in a competitive position on a world scale will be accompanied by a sharp spike in inflation. That means that a lot of the low inflation that was booked due to cheap imports will be backed out and reverted to what it cost to make in the USA. Don’t expect to get inflationary wage increases to match the inflation spike. Rather, the consumer will have to absorb the inflation which translates to a lower standard of living.

    It took the US until 1934 to devalue the USD in the great depression. Unfortunately that may be how long it takes this time around. Those strapped with a mortgage payment will find the inflationary jump will put a serious crimp in lifestyle and possibly lead to further defaults.

    In the meantime, if the USA keeps wanting to play the green game, let them have it, but putting your money with the smokestacks is going to generate the better long term results. Having your money denominated in smokestack currency when the eventual US currency downgrade comes will save you from getting kicked. After the devaluation happens, repatriate your funds and invest in American industry which will be back on competitive footing.

    Home buyers should keep the larger picture in mind and prepare for the future inflationary spike. That means that you will have to plan on throwing out your budget or have a significant contingency factored in. A 40-60% devaluation from current levels is not out of the question.

  9. How is the dollar suposed to decline exactly? The USD is nothing but a ratio to another currency pair. The most popular being EUR/USD.

    US i rates are 1% while Europe is at 3.5%. This means the EUR is strong then the USD (Hence you can invest EUR at 3.5% vs. 1% of USD). US rates may move down -50bps. EUR has a long way to go, and in my opion are behind the curve. Assume they will lower to 2% for aruments sake.

    So, US at 1% and Europe at 2%. If anything people will be selling EUR becuase the i rate is falling dratically. They will put thta in other currencies including the USD (to perhaps buy high yielding stocks).

    Sooner or later, the US will be the first to recover. Europ will recover late ron. That means US i rates will move from 1% to 3% while Europe is still reamins at 3%.

    Don’t you ge tit people. The dollar will not fall but gain in value.

  10. This ‘US is the tallest midget’ thesis is getting old. I just think our banks and solons are the best liars.

  11. Mr. M, I have over 20 years expereince in this. I don’t slam your material. I am just telling it like I see it. Dick.

  12. We are in a GLOBAL recession. That means EVERY country will take a hit on their currency. If it was just the U.S. , then the USD would have been slamed.

  13. Dick,

    Every currency cannot take a hit, otherwise we would be at no change… But hey, you have 20 years on Wall Street and I am just a high school drop out. This is the High School Drop Out Economic View. The Euro is a young currency, only about 9 years old. The Europeans are far more conservative with particular emphasis on the Germans. This conservatism will be their downfall in this recessionary environment.

    I find it far more likely that the Yen and USD is going to get carry traded against the Euro, making the Euro the recessionary loser against the Yen, USD. My guess is the sharp currency traders are going to take my point of view and take the currency gain with the higher interest bearing Euro rates. In short, it is the USA/Japan against the European Union.

    As for the correction in the dollar, it is kind of like the housing problem. Many knew a problem existed but when reality struck, the result was sudden and fierce.

    Well, that is it from High School Drop Out Economics class… Do stick around because I am curious to see if the drop out beats 20 years on Wall Street.

  14. After a global credit bust, the senior currency tends to become chronically strong against most other currencies and commodities. This turns out to be working right now. The US$ had been beaten down for close to 4 years. Now it is working it’s way back towards parity. That’s all. I still remember when the Euro was first floated, it got down to $.92 at one time. So the US$ is only working it’s way back to what it has lossed over the last several years.

  15. I think the EDuro got down to as much as .75. At least .80.

  16. peterb/Brant Gaede

    I am going to call against you then… As I recall, the USD push to 120 to the Euro was blamed on “mattress money” and the non convertibility of National notes beyond X date. As for parity, assuming your talking even exchange with the Euro, I just do not see it, due to the more conservative stance the Euro has taken in the past. Plus we have the Fed holding a couple of trillion in unknown paper credited to unknowns…. My understanding is the current strength of the USD was due to unwinding of contracts denominated in USD which required the converting to USD. If so we are at a top, if not, we might be forming a measured move chart pattern…. I will take the contrarian stance as usual….

    Brant Gaede
    As I also recall, I think the Euro got down to at least .79, maybe .76, but below .80 for sure.

  17. Not only has the housing industry boom bust, but so should the financial credit boom be allowed to bust, it already has, if the government lets it.

    A bust of an industry should mean a return to normal market conditions, supply and demand should be equal. Housing is not equal because of the deflationary cycle creating a surplus of supply while the financial credit industry has the demand but not the supply or desire to lend.

    Some of my opinions to correct the above statement:

    1-FOR ANY COMPANY RECEIVING TAYPAYER MONEY, there should be an automatic reduction in every salary and elimination of any and all bonuses for every employee, including directors from every company involved with any aspect of the financial market, that had any dealings with earning profits on any and all mortgages, MBS, or CDS, especially the ratings companies given the AAA ratings on subprime CDO and MBS’s. The shareholders dividents will be halted as well.

    Simple logic or common sense- why should the taxpayer be paying for the losses (being experienced based on the companies past decisions) so the employees and shareholders don’t lose their profits? They are lucky to have a job, their actions have loss a number of jobs in the private sector.

    What confidence is being supplied by injecting 8.4 Trillion dollars of taxpayers money into a dwindling industry? Who are we protecting?

    The entire outstanding mortgages only total 11.3 Trillion dollars.

    2-Refinance every homeowner who is underwater with reasonable working guidelines, 28/36 or 29/41 to the NEW market value of the area. To eliminate negative equity for every homeowner, it will cost 1.43 Trillion dollars. This could be paid by the banks and investors totally or be split 50/50 between the government and the holders of said mortgages involved.

    Note- I would rather have taxpayer money go to taxpayers instead of Bank of America receiving 15 Billion dollars and doubling their stake in the China Construction Bank Corp. with taxpayers money. Or Have US Bank Corp. receive 6.6 Billion Dollars enabling them to assume TWO banks that after the first 1.6 Billion dollars in losses experienced,that are allowed to be deduct against total profits, the FDIC agreed to cover the rest with an unknown amount. Sounds like Citibank.

    Principal reductions of mortgages affected by negative equity would show most banks are already insolvent due to their over leveraging and balance sheet playing.

    Note: This is the reason of changing the deliquent borrowers mortgage terms making them qualify with lower interest rates or longer terms under the proposed modifications without principal reductions, the banks will be allowed to maintain the asset as a “full” asset on their balance sheets if there is no principal reduction. (mark to marketing accounting system)
    Again who is your government protecting?

    The government will still “lend” money that can continue to be borrowed from the window and term auction initially, but proof must be supplied that new loans to the public were issued with the initial start up money to recieve more money.
    There will be conditions placed on the money.(even the money already given, it is not for capital reserves or expansion of the banks, it was supposed to LIQUIDIFY the industry allowing them to lend to the public)

    Just a question: how is the taxpayer suppose to recieve a 5% interest return with their capital investment, TARP, on a company that is top heavy(takes all the profits out in salaries and bonuses first), has basically stopped lending money, their one way to earn money WITHOUT risking more of their depositors money and still remain over-leveraged without guidance or regulation?

    My plan solves the issues of liquidity and credit crisis to Main Street and Wall Street. This also increases over 35,000 jobs for a period of 3-5 years.

    The participating banks will be allowed to take triple the loss as a write down for tax purposes on their balance sheets to “off set or cover” insolvency, if deleveraging of the shadow banking system is also taking place.

    3- The Government will guarantee all NEW small business loans and student loans issued with the three C’c of lending. They will also guarantee NEW mortgage loans that are underwritten with the 3 c’s and at reasonable ratios. Previous issued student loans can be refinanced with a government guarantee as well.

    They will not be guaranteeing any previously issued securitizatons including residential or commerical mortgages, car loans or charge cards.

    4- Have the government match up to $2,000. savings annually for every working person for 5 years in an IRA or 401K, increase the dollar amount of restriction encouraging savings, not borrowing. This is in addition to any employer match contributions.

    5- Any bank or financial entity can not be leverage over 10:1. Deleveraging will have to be done to remain in business and participate with receiving any of the governments funds, which is the TAXPAYERS money.

    The government, any branch of the government, does not pick the winners or losers of the industry , and does not guarantee any potential losses to any purchasing/merger bank. Allow the banks a free market or capitalism. There will be banks that fail, that is capitalism.

    6- Use the balance of 8.4 TRILLION DOLLARS alloted to create jobs in intrastructure, education, energy, education, manufacturing, health and to cover, if necessary the 6.84 Trillion in bank deposits of the taxpayers that were leveraged out by the banks.

    The financial sectors power is dwindling, not being erased but we need to build a more diversified base of income/jobs for the majority not the minority.

    The economy in general will decrease (deleveraging of the entire ecomony) because the American public will not resort back to borrowing without savings again for awhile, due to personal fear of failure.

    Confidence is restored by jobs and the ability to survive not having Wall Street earn mega bucks by high yeilds.

  18. Susan

    You said: “4- Have the government match up to $2,000. savings annually for every working person for 5 years in an IRA or 401K, increase the dollar amount of restriction encouraging savings, not borrowing. This is in addition to any employer match contributions.”

    The government does not have any money, they can only tax YOU to get money. Whom do you propose that it be that this 2k a year fall on? In essence, the government is being asked to be irresponsible in overspending in order to have citizens save? We would be paying interest assuming that treasuries would have to be issued in our current state of overspending.

    Only a terrorist would make such a proposal as this. Don’t you know that the American economy is consumerism? Are you against the US economy? Are you trying to put Americans out of work? My goodness! Let’s see, if the working stiff puts away 2k and the government throws in 2k then we total up to 4k which is the equivalent of 6 economic stimulus “Bush Bucks” checks.

    We are Americans! We are pooped out of the womb, our butts are branded with “consumer” and then we’re shipped our as baristas, burger flippers, convenience store clerks, and point of sale clerks. This consumer economy is where we are to develop people with future technological patent potential which will enable us to retain our technological superiority over the rest of the entire world…

    Not only that, green is taking over. Just the other day, bossman walked out onto the workplace and saw all of his employees standing around doing nothing. Bossman asked, “What the hell is going on here?” One of the employees spoke up. “When we work we breeth harder and release additional CO2. By not working as hard, we reduce our carbon footprint.” The bossman says “I see.” Paychecks come around and the employees are stunned! All the checks were less than normal by a significant amount! The employees said “What in the hell is this? Bossman says “The company has decided to go green. As you all know money is made out of paper which means that somewhere along the line a tree is chopped down. By reducing the cash in your wallets, fewer dollars will need to be in circulation, thus saving a tree.”

    As a nation, we should embrace unemployment as being a good thing in that Americans are not driving around in their cars spewing out carbon emissions going to and from work and the shopping mall. Just another victory for greenness.

  19. good stuff susan.

  20. Bert, You know what I am saying on the “all currencies taking a hit.” I probably didn’t explain it well. Yes, the US and Europe both get hit. Therfore, the currency paid EUR/USD stays the same.

    I think what we saw witht he weak USD several months ago was the US was slipping into a recession while BRIC and all the other countries like Europe were doing well. Now everyone is in recession.

    Becuase of this the USD will hold up and not weaken. Remember, this is not a stock but a RATIO.

  21. Susan, You make some good points. However,

    – It is already too late. The FED already took a different route.

    – The gov’t is pouring an enourmous amount of money into the economy w/o formal rules. No rules = money will not be used for inetended purposes.

    – I agree assests need to fail so to recover faster. But assests ARE falling and being purged right now which is good. So, the correction IS taking place. I’d be more concered if asset values were not coming down.

  22. I just want to point out Mr. M’s data.

    (1) Home Depot has beaten street estimates

    (2) Mortgae rates are down to historic lows. (I know this is only for good borrowers. But they are moving lower).

    These are small signs we are turning. Bullish!

  23. Mortgage rates are very high compared to the past 6 years. Perhaps 10-year notes yields are at historic lows but not mortgage rates. You didn’t read this story I guess.

    On Friday most of the gains were given back ad the best 5% of all borrowers could get 5.75% at no points…barely. Back a few years ago 5.5% came around often. There are may out there with Jumbo fixed at 5.5%.

    For most out there, a conforming mortgage rate is about 6.5% and Jumbo 7%, which is 150 bps from historic lows and at levels people just can’t benefit by refinancing.

  24. BertD- Although you’re taking the contrarian view against my thesis, you’re in the majority on thinkinng that the US$ will not continue it’s rise from this rest it’s now taking. I think Dick is correct in his logic regarding the ratio’s of currencies value. Thus, as the Euro and Pound are found to be every bit as flawed as the US$, they will be devalued against the US$. The US$ is the world currency, and is behaving as it should as panic and loss of faith in world markets continues. The short term T Bills are showing this as well. Unwinding and safe haven are playing the main drivers to the US$ gain. As the markets pursuades people back in during this rally, the US$ will stall for a while. If history and this great unwind play-out, the US$ should be much stronger by June of 2009. Time will tell, but history is strongly in favour of the senior currency rising to the top during a major economic contraction.

  25. Dick, although Home Depot came in better than expected, that’s hardly enough data to be considered a bullish sign given every single other indicator out there that’s negative. Unemployment is rising, lay-off announcements are growing. Every great economic contraction has several relief rally’s on it’s trip down the to the bear cellar. Turning a profit in this environment is going to be very difficult. So as the first crop of earnings reports come in 2009, they should be contraction confirmations. And that will be the next leg down in the markets.

    As for mortgage rates, I think they tend to drop in a contraction. So this makes sense to me. We’re in deflation. Most things get cheaper in a deflationary scenario. Something about destruction of demand that drives most every price down.

  26. “In closing DON’T BELIEVE THE HYPE folks. I maintain that this move was not necessarily to ‘help’ borrowers with lower rates, rather to talk Bond prices better so the likes of Bill Gross and foreign central banks can sell Agency securities. Agency securities had been coming under serious pressure for the past couple of months. See my most recent post on the subject below.”

    MM: Excellent. You have cracked the nut. Of course, one could probably have reduced the statement down to something as short as:

    ‘They’re buying time’…

    But I’ll certainly take your measured explanation any day, because it speaks directly to one of the faulty pillars. That being that these mortgages are not debts held to maturity by a single organization (your local bank). Due in large part to the repeal of a certain law back in 1999, debt that should have been kept ‘local’, has been packaged and spread worldwide by myriad financial institutions. It’s globalism after all – and that is/was supposed to be a good thing for our economy, wasn’t it?

    Currency devaluation cannot be ignored and will not be denied. And if you don’t have a portion of your assets in cash positive resource companies or hard assets both, you are going to experience a loss of purchasing power… So you say your portfolio has experienced a 25 – 50% haircut (or more) in the last 120 days due to this unwind?

    That was the appetizer.

    We’ve had recessions. But we’ve never experienced a currency devaluation proportionate to the amount of debt currently held by both public and private institutions. To suggest that the collapse of financial institutions that are 100 years old, and the ramifications of same, as simply a ‘hump’ that we will get over by 2009 – and by implication, that somehow countries abroad who finance our debt will simply continue to belly up for another round of (even more) worthless debt, is pure fantasy – and dangerous. Unless of course, you have $$ to burn.

    BertDilbert: Right on the money.

    Peterb: You’re right too – we are experiencing a ‘normal’ deflation. By normal, I mean that if the GOVERNMENT was to stay out of this mess and let the market function, we would endure this deflation and in time, work it out. Unfortunately, government cannot (and will not) sit idly by and let market discipline enforce equilibrium on its own.

    Instead, the next leg down (or up, depending on how you interpret reflation), will be an order of magnitude worse. And this is the part that some people refuse to grasp. They’ve never lived through hyperinflation, so therefore it either doesn’t exist, or can never happen here because our financial system won’t allow it, is too strong, has the necessary stop mechanisms, blah, blah.

    Oh well. One thing is for certain, we’re all gonna become acquainted (if we haven’t yet) with some form of the existing – or coming hardship.

    Peace – (and Liberty)


  27. brilliant post CC

  28. Which is closer, the Great Depression or the Long Depression to today’s nightmare? An interesting historical viewpoint…

    Reading for a Sunday

  29. The dollar cannot be formally devalued because there is nothing to devalue it against. Flooding the economy with money would do the trick re inflation. But it makes sense to buy consumables such as food as a partial hedge against bad things that might come. Also some gold.

  30. admin, I read from other sources that rates were as low as 5.25%. We are moving in the right direction.

  31. Sorry Dick, but I respectfully disagree with your suggestion that this is anything close to a bottom – in mortgage rates, the US economy, the market and/or the US currency. Debt is still far too high, and corporate American still has a LOT of de-leveraging to do. the FED has adopted a ZIRP stance, and is quickly going the way of Japan – and all you need to do is LOOK at the stock market to know full well that the real ugly stuff hasn’t hit yet. Bottom calls are coming out of the woodwork – but with each call, the economic vortex is getting bigger and bigger, and the damage keeps moving out. First it was residential mortgages, then banks, then the economy, now CRE, credit card debt etc – we haven’t even started to deal with the blow back of a potential GM/Ford/Chrysler bailout or BK.. then we also will have to deal with unfunded pension liabilities.. etc etc etc – bottom? No way. Maybe a year or so from now things will level out.. but from where I sit (same biz as you.. same experience) we are very far away from any light at the end of the tunnel.

    S&P will (in my humble opinion) hit 600.. maybe less – this US govt needs to smarten up.. and quick.

  32. Hi Dick – yes on Tuesday morning the hour after the announcement base rates got as low as 5.25%. Since they have risen back to 5.75%. But as I explain in this report, these are base rates that only perfect borrowers with down payments or equity can get. The rest get much higher rates. This small base-rate box was huge from 2003-2007 – back then when rates fell like this a much larger percentage of people would benefit. Now it is a small fraction – mostly those that do not need any benefit.

  33. How can we bottom when we are still contracting?

  34. Mr. M –

    Is there anywhere on the web a “civilian” can get access to updated quotes on these base rates? It looks like I fit the profile as being one of the few people who can benefit from this, and I’d hate to have to trust what my broker says…

  35. Your right! Most people don’t qualify for that 5.5% rate. After all the credit score hits to Fannie and Freddie such as a .50% hit for a 719 credit score you can’t get that. Now if you had to go net branch just to keep your doors open and are able to take your client FHA with MI regardless of LTV , then you can get the same rate as someone with a much lower score. Is FHA still the new subprime or is fannie and freddie going to get off their fannie and offer better pricing for good full doc client’s or are they just goint to fade away. . and all will be FHA! Your comments!

  36. Meridith Whitney says that credit card companies are expected to cut back consumer lines of credit by 2 trillion. Many may find that their limits are cut back to their outstanding balance….

    Needless to say, that is going to hit nearly everybody’s credit score as they will be shown to be using a significant amount of their available credit. This will naturally make even fewer borrowers fit into the good guy headline rate box…

  37. The Credit Cards will be the Next wave to come a crashing and i believe it will make foreclosures look like a day in the park, NO ONE Will be paying their credit card balances shortly, probably make one last run for the Holidays and then its LIGHTS OUT on credit card payments ….. and if the cut credit limits to balances, that will just make it happen even quicker

  38. Javagold

    The best solution for credit card debt for first time underwater home buyers looks to be taking free rent through the default and foreclosure process and paying off that high interest debt. If you end up renting for less you win and if you mod for less you win.

    Otherwise you are going to get pinched as credit card rates continue to soar. Bernanke says that they may lower interest rates again, but as discussed, the consumer has little to no leeway to translate that to a benefit and Bernanke knows this…

    Lower rates at the Fed level are unlikely to translate to credit cards which I expect to climb as defaults mount.

  39. Credit cards seem like and end-game to me. They’re essentially line of credit for individuals. And if you abuse them, they’re cut-off and you lose the accesss to the money. So if you stop performing payments, there goes your line of credit. It’s one thing to default on a mortgage as you can always rent for shelter, but defaulting on credit cards means no more money to use on a monthly basis. So, if the default rates are really soaring on cc, then there’s real trouble out there.

  40. Peterb,
    There is real trouble out there

  41. You didn’t mention FHA!!!!!!!!!! For folks wanting to buy a home with not much down and who don’t have perfect credit, FHA rates have plummeted! Sure, there’s the upfront 1.5% MI that can be financed, and the annual 0.5% premium, but the “core” rate has taken a nosedive! In September, almost one-third of home purchases were by buyers who used FHA financing!

  42. What is happening is both mortgae rates and credit card rates will go significantly lower. Yes, many can’t get that 5.5% on the 30yr fixed. But when the T-Bond goes below 3% it will be only a matter of time before it is reflected in the mortgage market.

    Mr. M, it will take a little while but we will get there. Your article was based only on ONE day and not what is happening over the next few weeks/months. You should hold off on your doom and gloom until the market adjusts.

    Today, on Laszlo Biriyi has a video where he says this is the bottom of the market and he gived his reasons. Take a look.

  43. Dick – Mr. Mortgage’s “Doom and Gloom” also called the end of Wachovia, Washington Mutual, Lehman, Citi, Bear and a few other companies – not to mention the entire sub-prime and alt-a meltdown. So, if its correct, then its not quite accurate to call it ‘doom and gloom’ because his calls have been ‘reality’. So please.. enough with the bullish Wall Street koolaid – spend more time reading Mr. M’s blog, Nouriel Roubini, Calculated Risk, and Mish Shedlock..

    I found this website over a year ago – and have read every post since then. Its taught me more about mortgages and the market than anything I learned ‘on the job’.

    Also.. for every Lazlo Biriyi video you produce telling me its the bottom, I can produce one from Nouriel Roubini, Jim Rogers or Peter Schiff telling you it is not. Given their track records.. I know where my money is going.

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  45. Mr. Mortgage, You’re right . these good rates do not exist for 99% of the buyers and refinancers! The problem I see is that peoples credit scores are only getting worse! If CC companies freeze your high credit to where your balance is guess what? Your credit scores drop in a huge way because you appear to be using all available credit to you. . so there for are a risk to the person extending you credit that you are maxed out!! How is this going to make it easier to obtain credit at a decent rate! If FHA wants to be able to offer and make available credit to all that seek it and qualify then why do they make it so hard for small community mortgage companies to offer any financing to their local community clients! Every day I turn someone away because I don’t have FHA. . . maybe when these people go into foreclosure becuase they were not offered or able to obtain financing from their local community broker who has demonstrated ethics, honesty, and truly care about there local community. Maybe then we can get people got off the internet with these lead companies that only care about the yield spread premimum like our mortgage brokers organazation and fight for the small broker who cares about their local community instead. . I knew we were in trouble when our organazation started to call themselves association for mortgage “professionals” instead of mortgage “broker’s” association and the big banks were our biggest funders. . what’s up with that!!! Who is reall getting paid now???

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