Although, Bear Stearns is no more, the NY times has some interesting observations on the now dead bank....
WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms
Stick around, because we’ll soon find out. And it’s not going to be pretty.
Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.
But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.
And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.
Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.
Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.
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The man gets some recognition....
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Seems sensible to keep away from the US housing disaster, at least for the time being....
BOSTON (Reuters) - For decades, buying a home was a key step on the path to financial security for the American middle class. Home owners could count on a fixed mortgage payment rather than rising rent, take advantage of tax breaks, and build equity as their houses increased in value over time.
But with home prices falling and families losing their homes to foreclosure, some people who under other circumstances would be looking to buy their first home now see greater security in renting. One such person is Lisa Chesnut, who lives in Tucson, Arizona, and works as an information systems coordinator. With a good job and two young sons, 29-year-old Chesnut and her husband, Bryan, look like classic first-time buyers.
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The fed's attempts to save the housing market have come to nothing. Risk has returned with a vengence. Banks have remembered how interest rates should properly reflect default probabilities.
Feb. 29 (Bloomberg) -- Consumers like Valerie Jacobsen aren't getting much of a break on borrowing costs even after five months of interest rate cuts by the Federal Reserve. Jacobsen, 30, wants to refinance her 7.25 percent first and 8.5 percent second mortgages into one loan at a lower cost. To cut the payments enough to recoup her $3,000 in closing costs, she needs a rate well below 6 percent. She wasn't ready when costs dipped in January and now they're back at levels that make her plan too expensive, the Austin, Minnesota, resident says.
``Rates I'm seeing aren't really mimicking what the Federal Reserve is doing,'' said Jacobsen. ``I'm wondering why that is.''
Trying to spur lending and avert a recession, the Fed has chopped 2.25 percentage points off its benchmark rate since September. Wariness among lenders and fears of inflation are keeping mortgage and auto loan rates close to or above levels before the central bank began easing, while credit-card issuers are tightening their standards.
The slippage between the Fed's rate cuts and consumers' ability to borrow or reduce loan costs is weakening the central bank's ability to stimulate the biggest part of the economy, consumer spending. It accounts for more than two-thirds of goods and services output and stalled for the second consecutive month in January after adjusting for inflation, the Commerce Department said today.
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More bad news, if more were needed.....
As if investors didn't have enough to worry about, Friday's batch of economic numbers shows more signs of recession as well as its evil twin--inflation. First, the government reported that U.S. consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices.
Then, a Chicago-based business group said U.S. Midwest business activity contracted sharply in February, showing that even areas of the country least affected by the boom-bust housing cycle are feeling ripples from the crisis. On top of that, U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed.
No surprise, then, that stocks opened sharply lower on Friday--and then proceeded to fall even more. Friday's reports were just the latest in a string of worrisome news about the growing threat of recession and inflation.
"Over the last three to four weeks, there have been a string of economic releases that were dramatically weaker than expected," said John Canavan, a market analyst at Stone and McCarthy Associates. "The implications are quite negative for the economy."
The only bright spot: futures traders are now speculating that the Federal Reserve will cut interest rates by three-quarters of a point at its March 18 meeting instead of the half point that was expected previously.
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Does Bernanke know what he is doing? He gives a good impression of being incompetent.
Feb. 28 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand.
``Bernanke has really overweighted the economic risks relative to inflation,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, following the Fed chief's testimony to Congress yesterday. ``He may get some disagreement'' among colleagues on the Federal Open Market Committee, Silvia said.
Investors' expectations for inflation over the next 10 years jumped to the highest since June after Bernanke pledged to the House Financial Services Committee to act in a ``timely manner'' to combat ``downside risks'' to growth. A day after government figures showed wholesale costs rose 7.4 percent in January from a year ago, Bernanke said the price outlook has deteriorated ``slightly.''
Bernanke is at the Senate Banking Committee today in the second day of semiannual testimony on the economy. His prepared remarks were the same as yesterday's.
Unfortunately, oil prices are not playing nice. The Fed would like to cut rates but inflation just will not go away.
The price of oil has hit a record high for the second day running, touching $102.08 a barrel for US sweet crude. However, the figure is still surpassed in inflation-adjusted terms by the peak of $102.53 reached in 1980, the International Energy Agency says. The oil price surge is supported by traders switching their cash out of shares and currencies and into commodities, traders say
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Over the last week, I have been watching mortgage rates. I have seen few signs that they have come down, despite the interest rate cuts from the Fed. In fact, those cuts have done nothing to rescue America's devastated housing markets.
WASHINGTON (MarketWatch) -- Consumers inspired by Wednesday's rate cuts in overnight lending rates shouldn't count on consumer interest rates falling in response, said Bob Walters, chief economist for Quicken Loans. "If you are looking to purchase a home or to refinance, I'm not so sure you'll see mortgage rates fall," he said Wednesday. "Mortgage rates don't have that much room to fall."
Last week, the average rate for a 30-year fixed mortgage was 5.48%, one of the lowest rates since 2004, according to Freddie Mac's survey. On Wednesday, the Federal Reserve's Open Market Committee lowered the target for the federal funds rate by 50 basis points to 3%. In eight days the Fed has cut rates by 1.25 percentage points, the fastest pace in 20 years.
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When will it end? Housing just keeps on sliding into a black hole. The December numbers top off a truly terrible year:
WASHINGTON (MarketWatch) -- Capping the worst year for the housing market in 25 years, resales of U.S. homes and condos fell 2.2% in December to a seasonally adjusted annual rate of 4.89 million, the National Association of Realtors reported Thursday.
For all of 2007, sales of single-family homes fell 13%, the biggest decline since 1982. The median sales price of an existing single-family home fell for the first time in the 40-year history of the survey, dropping 1.8%. Although no hard data are available, most economists believe median home prices hadn't fallen since the Great Depression of the 1930s. December resales at 4.89 million were weaker than the 4.98 million pace expected by economists surveyed by MarketWatch.
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Will the collapse of bond insurers usher in the next stage of financial collapse? It certainly looks like it.....from the New York Times....
Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.
Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.
That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.
To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.
While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.
The notion that the failure of even one big bond insurer might touch off a chain reaction of losses across the financial world has unnerved Wall Street and Washington. It was a factor in the Federal Reserve’s decision on Tuesday to calm investors by reducing interest rates by three-quarters of a point, to 3.5 percent
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The New York Times has stopped speculating about whether further interest rate cuts are advisable. The only question worth considering is how much.
Inflation data comes out a few days later. The numbers could be very troublesome for the Fed. The headline CPI could be has high as 4 percent.
Accelerating inflation and the Fed is cutting rates; talk about policy incoherence.
Market Week
How Much of a Rate Cut?
PERSISTENT worries about the financial system have led many traders to stop questioning whether the Federal Reserve will cut interest rates again this week and to ask instead how big the cut will be. A Bloomberg News poll of economists forecasts a quarter of a percentage point. Prices of futures contracts tied to the benchmark federal funds rate show heavy betting on a half-point move.
Komal Sri-Kumar, chief global strategist at the TCW Group, a Los Angeles fund management firm, expects a quarter-point cut when Fed policy makers meet Tuesday. That would be best for the economy and stock prices, he says. “If there is no change, then the stock market tumbles,” he said. A half-point cut may prompt a relief rally in stocks, he said, although it may also ensure that “the dollar will take one more tumble.” That could force the Fed to start raising rates later to defend the long-enfeebled currency.
“The Fed will have to walk a narrow walk and cut rates by a quarter-point,” Mr. Sri-Kumar said. He expects the rate cut to be accompanied by a statement adding up to a quarter-point’s worth of soothing words. It is likely to indicate that officials understand that “growth is more of a concern than inflation,” he said.
He cautioned that stocks’ course will also depend on how well banks perform as they struggle to quantify their exposure to bad debt and clear it from their books. “The subprime situation needs to get settled,” Mr. Sri-Kumar said. “Until this is resolved, a cut in rates alone won’t help the financial sector.”
Even if the losses are more extensive than feared, he said, the mere act of accounting for them may help financial stocks and the broad market. “If you are able to draw a line under your losses and say this is it, the reaction will be positive,” he said, “even if the institutions have substantial losses.”
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Freddie Mac painted a desperate picture of the US housing market. According to its latest forecast, it expects that only 6.3 million homes will be sold this year; the lowest sales volume since 2001.
Residential lending will also tumble, Freddie expects the figure to drop to 2.75 trillion, the lowest since 2002. Meanwhile, it expects mortgage rates to spike at 6.7 percent this quarter; that is around 0.5 percent higher than the first three months of this year.
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Why are the easiest lessons the hardest to accept. Take the relationship between money and inflation. Since the Romans, people have understood that if a government produces more money, prices rise. It is as simple as that.
Does the Fed accept this most basic of economic relationships? The chart above tracks the 12 month rate rate of the most important measure of the money stock - M2. In 1995, the Fed did understand the importance of controlling the money supply. They had managed to get monetary growth down to around 1 percent a year.
Then something happened. Collectively, the FOMC must have taken a stupid pill. The committee ordered the guys in the basement to crank up the printing presses. In 1996, the money supply started to rise very rapidly indeed.
What were the consequences of all that extra money? The US got two speculative bubbles in a row. First,there was the stock market bubble, which reached a frenzy with the dot.com fiasco. The Fed calmed things down a little in 2000, raised rates and the dot.coms bombed. Undeterred, the Fed went at it a second time. In 2001, just after 9-11, the money supply began to increase, interest rates came down, and off went the housing bubble. Today, that mess is still being cleared up.
So, two speculative bubbles in ten years; with the dollar sinking to record lows. Few central banks have such a dismal record of incompetance. The federal government did their part. Encouraged by lower interest rates, it ran up a large fiscal deficit to complement the monetary chaos over at the Fed.
So, in macroeconomic terms, where is the US right now? It has a massive current account deficit; a large fiscal deficit; rising government indebtedness; personal debt is at an all time high; the economy is slowing, while the housing market has fallen down a dark hole; and to top it all, the Fed still has the money supply growing at around 6-7 percent annually.
What is the way out of this mess? Again, it is nothing complicated. The Fed must reduce the growth of the money supply, which means higher interest rates. This will encourage private sector savings, and reduce personal sector indebtedness. Higher interest rates will also discourage the federal government from running up large deficits. This recipe may involve some upfront costs - a recession is very likely. However, continuing this macroeconomic mess will only delay a much deeper and more painful economic downturn later.
Sadly, the Fed has still not quite understood the relationship. As the chart above indicates, monetary growth is still way too fast. Although, the housing market is unwinding; the Fed have ensured that there is still plenty of inflationary pressure building up. Sooner or later, rates will have to go up again.
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After years of easy money, cheap credit, and reckless monetary policy, central banks are coming to the realisation that an old ghost has returned to haunt us - inflation. The Bank of International Settlements, the organisation that acts as the central bank for central banks warned that central banks must act now and push interest rates higher. The warning was especially directed towards countries with high current-account deficits, in other words, the United States.
The BIS also provided a stark assessment of the US housing market. It said that "The impact of the downturn in the US housing market might not yet have been fully felt." The organisation was right on the money with this one. Housing data from May shows that the crisis is deepening with no end in sight.
The warning from the BIS is welcome, but it is way too late. It would be much better if it had explained the dangers of low interest rates five years ago. All over the world, central banks are now confronted with increasing inflationary pressures, and reluctantly they are beginning to push interest rates up. However, central banks continue to seek the line of least resistance. Rather than aggressively pushing up rates, central banks are doing it slowly, in a forlorn hope that they can avoid recessions.
This reluctance to deal with the problem aggressively threatens to prolong a recession rather than avoid one. It would be better if interest rates were hiked quickly, rather than this low and passive approach that we are witnessing now. People would understand that central banks across the world were serious about tackling inflation, and adjust their behaviour accordingly. Firms would avoid hiking prices, workers would moderate their wage claims, and global imbalances would adjust more quickly and with less pain.
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Today, Bloomberg provided a neat summary of the state of today's housing market.
June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.
Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.
Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.
The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.
Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.
The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.
The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.
In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.
About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.
Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.
A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.
Subprime mortgages have rates that are at least 2 or 3 percentage points above the safest so-called prime loans. Such loans made up about a fifth of all new mortgages last year, according to the Mortgage Bankers Association in Washington.
The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group.
The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.
Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.
These are desperate days for mortgage lenders. Interest rates are up, foreclosures are skyrocketing and losses are mounting. Overall, it is a difficult environment to generate more businss.
Therefore, it shouldn't be too surprising if we hear that mortgage brokers pushing out scare stories about failing lenders. In this particular story, GMAC are caught putting out a letter warning people about the financial frailties of their rival - Washington Mutual.
For mortgage brokers, it is always about the commission. If borrowers stop refinancing, brokers stop earning. With rates rising rapidly, things do look rather bleak. Therefore, scare tactics such as these are the last resort of an industry in free fall.
However, few of us will be outraged. It is what we have come to expect from the American housing industry.
NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.
Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.
What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.
Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"
Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."
GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.
A few weeks ago, Robert Kiyosaki wrote an extraordinarily stupid article entitled "Playing the Mutual Fund Lottery". Kiyosaki tried to argue that buying mutual funds was akin to playing the lottery. Recently, the hapless son of rich dad disowned the article; now he claims that it was a joke written by a friend. Regrettably, the rest of the world lacked his subtle sense of humour, and couldn't pick up on his joke.
However, his most recent article shows an almost equal lack of understanding about the world of finance. This week, he tells us about another financial piece of wisdom, passed on to him by his mythical rich dad - the investor food chain. At the top of this chain we find the capitalists, followed by the bankers, then the bondholders, stockholders and mutual funds, with the workers sitting at the bottom. It is a perspective that Lenin and Marx would have endorsed; happy rich guy at the top, miserable worker at the bottom. The key question Kiyosaki poses is "where on the food chain are you?".
Kiyosaki uses this dubious line of thinking to argue against mutual funds. He points out that "mutual fund investors are just above the bottom" and therefore inferior to banks and bondholders. In his uniquely clueless and incoherent way, Kiyosaki seems to be telling his readers that if they can't be capitalists, they shouldn't invest in equity but should choose fixed-income instead. He talks of the "power of debt in contrast to equity" and that "debt holds a higher position than equity, and bankers and bondholders are in debt positions. Preferred stocks, stocks, and mutual funds are in equity positions". Hopefully, most investors, even the amateur ones that Kiyosaki so contemptuously derides, know the difference between equity and debt.
If only it were as easy as Kiyosaki suggests. The problem, however, is that the returns of fixed-income assets haven't been that impressive in the last five or so years. Certainly, the risks associated with fixed-income assets have been low, but returns have barely kept up with inflation. Until comparatively recently, equity hasn't done much better. Meanwhile some mutual funds have done well, while others have done badly.
I love reading Kiyosaki's articles. His advice is so painful and so self-evident that it is hilarious Obviously, he understands real estate investing when housing prices are in the midst of a bubble. He runs into serious problems when the bubble bursts, and it's obvious to the whole world that real estate investing is a certain money loser. The housing crash has forced him to write about the more complex and wider world of investing. However, his lack of understanding is cruelly exposed. What he knows, everybody knows, and it is hardly worth saying. Keep reading his column, you will learn nothing useful about investing, but it will give you a unique insight into how the amateur property developer reconciles himself to a world of crashing real estate prices.
Consumer prices climbed 0.7 percent, the biggest increase since September 2005, led by a jump in gasoline costs. They were up 2.7 percent from the same time last year. These are bad numbers.
However, the Fed aren't looking at the CPI. Those bozos are looking at "core inflation", which excludes food and energy. These numbers show only a 0.1 percent rise in prices.
Lets get our concepts clear here; what is core inflation? It is a useless irrelevant measure that excludes all the prices that matter to ordinary Americans. It is con, a scam, a nonsense and a joke. Pay no attention to it. It tells us nothing about inflation. Do you know anyone who doesn't eat or doesn't need fuel?
Core inflation is a distraction. Rather than focus on the real issue, i.e. rising prices, the Fed tracks this meaningless index. The Fed would like us to believe that gasoline and food price increases are something that simply happen by accident and that it has nothing to do with them. Let us remind ourselves how the Fed's monetary policy directly causes the prices of these key items to increase.
So, the lesson is simple; the Fed must raise rates and keep on raising them until they regain control of inflation.
However, that is unlikely to happen because Bernanke is soft on inflation. He is weak.
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How soon before we have 7 percent mortgage rates. Currently, the 30 year fixed is at 6.74 percent. Not long.....
CHICAGO (MarketWatch) -- U.S. mortgage rates jumped this week as a sell-off in the Treasury market pushed benchmark interest rates up sharply. Freddie Mac in its weekly survey Thursday said the national average on the 30-year fixed-rate mortgage hit 6.74%, up from 6.53% a week ago and the highest level since July 2006.
"Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut," he said.
Three other loans tracked in the Freddie Mac survey also hit 11-month highs. The 15-year fixed-rate loan, a popular refinancing choice, hit 6.43%, up from 6.22%, its highest level in 11 months. A year ago the 15-year averaged 6.25%.
Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 6.37% versus 6.24% a week ago. A year ago the loan averaged 6.23%. One-year Treasury-indexed ARMs averaged 5.75%, up from 5.65% and above its year-ago level of 5.66%.
The two fixed-rate loans required the payment of an average 0.4 point to achieve the interest rate; the hybrid needed 0.5 point and the ARM 0.7 point. A point is 1% of the loan amount, charged as prepaid interest.
The spike in mortgage rates comes at a bad time for the housing industry, as home builders struggle with excess inventory and sales of existing homes slump. Home prices are also falling in many markets. And the Mortgage Bankers Association Thursday said new foreclosures hit a record in the first quarter.
The US housing market is sliding into the abyss. In May, home foreclosures rocketed 90 percent compared to a year earlier. Default notices, auction sale notices and bank repossessions totaled 176,137. Furthermore, foreclosures were up 19 percent from April, suggesting that the foreclosure rate is accelerating.
Lets summarise; foreclosures up, interest rates up, inventory up, sales down, and prices tumbling. Can things get worse? Yes, they can get much worse.
Hey! You've won a ride back to the top
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