I have never seen the mortgage market so skittish. Lenders and Wall Street/Investors are tightening their guidelines - consumers have low expectations and many mortgage brokers/lenders are closing their doors.
So that's the bad news - the good news is that with the more restrictive guidelines; only the most qualified borrowers can obtain a mortgage and that means that there will be lower default rates in the future. Obtaining a mortgage is a significant and important financial decision. At Covenant we exist to empower you to be a good steward of your finances - sometimes that means waiting on a purchase -living on a budget and saving your money so that you are better prepared for the responsibility of a mortgage.
More good news - jumbo conforming is now available in our market - that means we can now finance your mortgage up to $729,750 in the DC metro area. There is a minor pricing adjustment for these loans.
Finally, there is still a rates conundrum - read the article below to better understand -
Rich Pennington
Fed Efforts Foiled By Banks as Residential Mortgage Rates Rise
By Bob Ivry and Sharon L. Lynch
March 15 (Bloomberg) -- Ben S. Bernanke can't revive the housing market and the banks are no help.
The U.S. Federal Reserve cut interest rates five times, pumped $200 billion into the financial system, and yesterday its New York branch provided funds to help rescue Bear Stearns Cos.
None of that has brought down mortgage rates for residential borrowers, whose success in refinancing or buying would help bolster the U.S. economy. The interest rate on a 30- year fixed-rate mortgage has climbed to 6.37 percent from 5.5 percent since Jan. 24, according to the Mortgage Bankers Association, as financial institutions try to cover $195 billion in mortgage-related losses and save capital for future losses.
``The mortgage rate isn't down as much as it should be because the banks are in desperate straits and they need to maintain a larger spread than they normally would,'' said Alan Nevin, chief economist with the California Building Industry Association in Sacramento. ``The banks need to generate income and the easiest way to do that is to broaden the spread. If they pay 3.5 percent and charge 6 percent, that's a lot of money.''
Over the past 10 years, the average spread between 10-year U.S. Treasuries and 30-year fixed-rate mortgages has been 1.75 percent. Last week, the spread was 2.83 percent. That means a homeowner's mortgage costs are more expensive now than they have been.
Investor Trust
The Fed lowered its target for federal funds 13 times from Jan. 3, 2001, to June 25, 2003. After each cut, mortgage costs fell eight times and rose five times, according to North Palm Beach, Florida-based Bankrate.com.
That has little to do with Fed policy and everything to do with the confidence of investors, who aren't buying securities backed by home loans, said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California, and chairman of the Fisher Center for Real Estate at the University of California, Berkeley.
``No one wants to lend much of anything today,'' Rosen said. ``The secondary market system for many loans has broken down. People don't trust the paper. We have an investor strike going on.''
The Fed this week agreed to make $200 billion available to securities firms by lending Treasuries in exchange for mortgage- backed securities because many private investors have quit buying mortgage-backed bonds. Record home foreclosures sent premiums on Fannie Mae and Freddie Mac-backed securities to the highest in 22 years this month.
Emergency Financing
That may worsen further as JPMorgan Chase & Co. and the New York Fed agreed yesterday to provide emergency financing for 28 days to Bear Stearns. The New York-based securities firm, the second-biggest underwriter of mortgage bonds, said its cash position had significantly deteriorated. The Dow Jones Industrial Average fell 1.6 percent.
``Banks are trying to increase their reserves to get through this period where we have greater uncertainty, and also uncertainty about future losses,'' said Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California in Los Angeles. ``They are being much more careful.''
Home-loan issuance will drop by 15 percent this year, in part because lenders can't sell mortgages on the secondary market, according to the Washington-based Mortgage Bankers Association.
Rates Are Set
Buyers are less willing to take a risk on purchasing after U.S. home prices fell year-over-year in 2007 for the first time since the Great Depression, according to the National Association of Realtors. This year, they will probably drop 5 percent nationally, according to Freddie Mac, the second-largest provider of U.S. mortgage financing.
``The mortgage rates are set in the securities market more than they are by the banks,'' said Michael Carliner, former chief economist for the National Association of Home Builders.
The yield premium, or spread, on 30-year fixed-rate mortgage securities sold by Fannie Mae over 10-year notes reached 238 basis points on March 6, the widest since 1986. The spread was 207 basis points yesterday, compared with an average of about 112 basis points the past five years.
The spread helps determine the interest rates offered to homeowners on new prime mortgages.
TED spread
The difference between what the U.S. government and companies pay for three-month loans has also climbed in the past month. The so-called TED spread increased to 1.52 percentage points yesterday from 0.78 percentage point on Feb. 14.
The Fed has lowered its benchmark rate five times since September, to 3 percent from 5.25 percent.
The median price of an existing home fell 13 percent in January from its peak in July 2006, according to the Chicago- based National Association of Realtors.
``The Fed actions are not going to stop house prices from falling,'' said Morris Davis, a former Fed economist and professor of real estate at the University of Wisconsin- Madison's School of Business. ``In an environment with falling prices and defaults, mortgages are a lot riskier now than three years ago. In an environment where housing prices are falling you should expect spreads to widen.''
Saturday, March 15, 2008
Thursday, March 6, 2008
Rates Conundrum
Rates are still great- but we get asked alot - why aren't they any better
Read this article better understanding -
March 6 (Bloomberg) -- Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.
General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor's and Moody's Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based firm sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.
Borrowers from investor Warren Buffett's Berkshire Hathaway Inc. to Germany's HeidelbergCement AG face the same predicament. Yields on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997.
The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness. So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mortgage crisis. Last month some showed the odds of a default by an investment- grade company spreading to others exceeded 100 percent -- a mathematical impossibility, according to UBS AG.
``The credit-default swap market is completely distorting reality,'' said Henner Boettcher, treasurer of HeidelbergCement in Heidelberg, Germany, the country's biggest cement maker. ``Given what these spreads imply about defaults, we should be in a deep depression, and we are not.''
Hedging Losses
The problem started in the second half of last year when subprime mortgage delinquencies started to rise, causing investors to retreat from complex instruments such as synthetic collateralized debt obligations, or packages of credit-default swaps that became hard to value. The swaps are contracts based on bonds and used to speculate on a company's ability to repay debt.
As values of CDOs began to fall, banks that had sold swaps underlying the securities started to buy indexes based on them instead, a method of hedging their losses on portions of the CDOs they owned. The purchases are driving the cost of the contracts higher, raising the perception that company bonds tied to the swaps are suddenly riskier and leading investors to demand higher yields throughout the corporate debt market.
The Markit CDX North America Investment-Grade Index, a gauge of credit-default swaps on 125 companies from Wal-Mart Stores Inc. to Walt Disney Co., has more than doubled since the start of the year to a record 177.5 basis points as of 12:21 p.m. today, according to Deutsche Bank AG. The index dropped to a low of 29 in February last year.
Undermining Bernanke
The $1.5 trillion CDO market is undermining Bernanke's attempts to lower borrowing costs. The Fed cut its target rate for overnight lending between banks by 2.25 percentage points to 3 percent since September, and even debtors with the safest ratings are paying more. Money-market rates for euros and pounds climbed to the highest since mid-January yesterday, signaling the global squeeze on short-term bank lending may be returning.
The financing unit of GE, the world's most prolific borrower, sold the 4.875 percent five-year bonds last week at a yield 1.29 percentage points higher than similar-maturity government rates, Bloomberg data show. Last May, the company issued 750 million euros of 4.375 four-year notes at a spread of 0.27 percentage points.
The additional expense stems from credit-default swaps tied to GE's bonds. Their cost climbed to a record 165 basis points on March 4 from 12 points a year earlier, according to CMA Datavision in New York.
Broken Models
Banks bought more contracts on indexes containing GE's swaps after CDO pricing models broke down, sending the so-called default correlation to more than 100 percent last month from 60 percent in July, according to research from Zurich-based UBS.
The programs, which computed the value of the highest-rated portions of CDOs, implied that all companies in the CDX index would default if just one did. Banks often hold these senior tranches after arranging the CDOs for investors.
``The banks that have been using correlation to calculate their risk will have to go back to scratch,'' said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance. ``By using correlation models as the main means of risk management, the engineers threw out sound banking practices.''
Investors have shunned all but the safest government debt since subprime mortgages roiled credit markets. Seven-year CDOs tied to investment-grade swaps have lost almost 18 percent of their value since June, according to data from New York-based JPMorgan Chase & Co.
Compounding Declines
The mathematical breakdown is compounding the decline by creating a vicious circle. As the cost of the swaps on the CDX index increases, the models signal a greater risk of defaults, and vice versa. A bank holding $100 million of the highest-rated portion of a swap-based CDO now has to buy $60 million of swaps to maintain its hedge against losses, JPMorgan said. A year ago, it would have had to buy $10 million.
``The recent unwind and activity in that market is also causing activity in our name,'' said GE spokesman Russell Wilkerson. Swaps linked to GE's financing unit are included in 67 percent of European CDOs, more than any other company, according to S&P.
Before the subprime collapse, the burgeoning CDO market had the opposite effect. Increasing demand for the underlying assets helped lower U.S. corporate bond yields to 1.28 percentage points over similar-maturity government notes in February 2007, the smallest spread since 2005, indexes from New York-based Merrill show. Synthetic CDOs pool swaps, while others package loans or bonds.
`Key Factor'
``It's the key factor that brought spreads to irresponsibly tight levels up to the end of the second quarter of last year,'' said Nigel Sillis, director of fixed-income and currency research at Baring Asset Management in London. ``Now we're seeing the reverse, except that the impact is far more negative than it was ever positive.''
One way to make the models useful again is to reduce the amount banks expect to recover from defaulted bonds to 30 percent of face value from 40 percent, according to analysts at UBS and New York-based Citigroup Inc. Banks would still have to buy more default protection though, keeping the pressure on borrowers.
``The unwinding of structured credit is eating away at the fabric of the corporate bond market,'' said Suki Mann, a credit strategist at Societe Generale SA in London. ``The increase in credit-default swaps is making it far too expensive to borrow.''
To contact the reporters on this story: Abigail Moses in London Amoses5@bloomberg.net; Hamish Risk in London hrisk@bloomberg.net; Neil Unmack in London at nunmack@bloomberg.net
Read this article better understanding -
March 6 (Bloomberg) -- Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.
General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor's and Moody's Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based firm sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.
Borrowers from investor Warren Buffett's Berkshire Hathaway Inc. to Germany's HeidelbergCement AG face the same predicament. Yields on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997.
The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness. So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mortgage crisis. Last month some showed the odds of a default by an investment- grade company spreading to others exceeded 100 percent -- a mathematical impossibility, according to UBS AG.
``The credit-default swap market is completely distorting reality,'' said Henner Boettcher, treasurer of HeidelbergCement in Heidelberg, Germany, the country's biggest cement maker. ``Given what these spreads imply about defaults, we should be in a deep depression, and we are not.''
Hedging Losses
The problem started in the second half of last year when subprime mortgage delinquencies started to rise, causing investors to retreat from complex instruments such as synthetic collateralized debt obligations, or packages of credit-default swaps that became hard to value. The swaps are contracts based on bonds and used to speculate on a company's ability to repay debt.
As values of CDOs began to fall, banks that had sold swaps underlying the securities started to buy indexes based on them instead, a method of hedging their losses on portions of the CDOs they owned. The purchases are driving the cost of the contracts higher, raising the perception that company bonds tied to the swaps are suddenly riskier and leading investors to demand higher yields throughout the corporate debt market.
The Markit CDX North America Investment-Grade Index, a gauge of credit-default swaps on 125 companies from Wal-Mart Stores Inc. to Walt Disney Co., has more than doubled since the start of the year to a record 177.5 basis points as of 12:21 p.m. today, according to Deutsche Bank AG. The index dropped to a low of 29 in February last year.
Undermining Bernanke
The $1.5 trillion CDO market is undermining Bernanke's attempts to lower borrowing costs. The Fed cut its target rate for overnight lending between banks by 2.25 percentage points to 3 percent since September, and even debtors with the safest ratings are paying more. Money-market rates for euros and pounds climbed to the highest since mid-January yesterday, signaling the global squeeze on short-term bank lending may be returning.
The financing unit of GE, the world's most prolific borrower, sold the 4.875 percent five-year bonds last week at a yield 1.29 percentage points higher than similar-maturity government rates, Bloomberg data show. Last May, the company issued 750 million euros of 4.375 four-year notes at a spread of 0.27 percentage points.
The additional expense stems from credit-default swaps tied to GE's bonds. Their cost climbed to a record 165 basis points on March 4 from 12 points a year earlier, according to CMA Datavision in New York.
Broken Models
Banks bought more contracts on indexes containing GE's swaps after CDO pricing models broke down, sending the so-called default correlation to more than 100 percent last month from 60 percent in July, according to research from Zurich-based UBS.
The programs, which computed the value of the highest-rated portions of CDOs, implied that all companies in the CDX index would default if just one did. Banks often hold these senior tranches after arranging the CDOs for investors.
``The banks that have been using correlation to calculate their risk will have to go back to scratch,'' said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance. ``By using correlation models as the main means of risk management, the engineers threw out sound banking practices.''
Investors have shunned all but the safest government debt since subprime mortgages roiled credit markets. Seven-year CDOs tied to investment-grade swaps have lost almost 18 percent of their value since June, according to data from New York-based JPMorgan Chase & Co.
Compounding Declines
The mathematical breakdown is compounding the decline by creating a vicious circle. As the cost of the swaps on the CDX index increases, the models signal a greater risk of defaults, and vice versa. A bank holding $100 million of the highest-rated portion of a swap-based CDO now has to buy $60 million of swaps to maintain its hedge against losses, JPMorgan said. A year ago, it would have had to buy $10 million.
``The recent unwind and activity in that market is also causing activity in our name,'' said GE spokesman Russell Wilkerson. Swaps linked to GE's financing unit are included in 67 percent of European CDOs, more than any other company, according to S&P.
Before the subprime collapse, the burgeoning CDO market had the opposite effect. Increasing demand for the underlying assets helped lower U.S. corporate bond yields to 1.28 percentage points over similar-maturity government notes in February 2007, the smallest spread since 2005, indexes from New York-based Merrill show. Synthetic CDOs pool swaps, while others package loans or bonds.
`Key Factor'
``It's the key factor that brought spreads to irresponsibly tight levels up to the end of the second quarter of last year,'' said Nigel Sillis, director of fixed-income and currency research at Baring Asset Management in London. ``Now we're seeing the reverse, except that the impact is far more negative than it was ever positive.''
One way to make the models useful again is to reduce the amount banks expect to recover from defaulted bonds to 30 percent of face value from 40 percent, according to analysts at UBS and New York-based Citigroup Inc. Banks would still have to buy more default protection though, keeping the pressure on borrowers.
``The unwinding of structured credit is eating away at the fabric of the corporate bond market,'' said Suki Mann, a credit strategist at Societe Generale SA in London. ``The increase in credit-default swaps is making it far too expensive to borrow.''
To contact the reporters on this story: Abigail Moses in London Amoses5@bloomberg.net; Hamish Risk in London hrisk@bloomberg.net; Neil Unmack in London at nunmack@bloomberg.net
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