May 23, 2013: Companies can't count on low rates forever, right? A QE3 primer, and why it could be expensive; HUD disaster relief website list
Rob Chrisman

The Fed giveth, and the Fed taketh away. Both stocks and bonds fell on Wednesday after a Q&A session with Ben Bernanke, and minutes from the latest U.S. Federal Reserve meeting, shed some uncertainty on the schedule of QE3. We also had U.S. existing home sales move higher in April, +.6%, and so once again we have numbers showing a continued improvement in the housing market. Even though sales have likely been restrained by limited available inventory in recent months, the pace of sales reported for April was the strongest of the expansion to date (excluding the home buyer tax credit periods). The sales mix has also become healthier lately with distressed sales accounting for only 18% of the market in April, down from an average of 23% in 1Q and 28% in April 2012. The median price of an existing home sale increased 11.0% over last year.


Of course we all know that mortgage bankers shouldn’t base their entire business plan on interest rates. If you’re a company, you can control things like great operations, employee training, marketing efforts, and so on. I heard Kurt Reisig, the CEO of American Pacific, once say, “Hope is not a strategy.” With the Fed holding rates artificially low, when the Fed stops, rates will go up – any more questions? And any company’s owner thinking, “Please, just give me seven more months of 3.50% 30-yr loans so I can do some volume and make some money” may be disappointed. The problem is that higher rates are often a product of the economy really picking up steam, with “really picking up steam” being somewhat subjective.


“Taper” is the big word these days. Yesterday there were two key phrases that spooked fixed income investors: Bernanke’s “in the next few meetings” and the minutes’ “a number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting”. June? What? What happened to all the brightest guys in the room saying rates would be here into 2014? Bond prices dropped and rates moved higher, with the bulk of my e-mails being investor rate changes following the Fed’s FOMC minutes being released, which were more hawkish than previously expected even following Bernanke’s testimony at 10AM EDT. During Bernanke’s testimony he reiterated "if we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases”. But wait – what if an LO, Realtor, or title company based their 2013 business plan on $85 billion a month of Fed purchases? Oops.


Many think rates will drop again at some point (if I knew how much and when do you think I’d be sitting here at 4AM writing this?) since much of the Fed-related news in the last few weeks (articles, speeches, and releases) have been contradictory. By holding rates down, it is hard for the Fed to know where rates would really be, and how those market rates would truly drive the economy. And the latest minutes (for the Apr 30-May 1 meeting) mentioned June as the time at which tapering may start (“a number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting”).


Is Quantitative Easing going to end this week? No – the third round of it (QE3) is still going to go on in some manner for quite some time. Quantitative Easing is the concept of the Fed becoming a buyer of Treasuries and Bonds to try and stimulate the economy, and the reasons are still present. The Fed does QE when it is hoping to (1) create inflation and avoid a deflationary economy, (2) lower the unemployment rate, and (3) boost stock prices. For this latest round of Quantitative Easing, the Fed especially wanted to help stimulate the housing market and our economy overall. Certainly there is no inflation, stocks are doing well, and many housing markets have shown signs of improvement for several months.


The issue to end it or not is not simple. US Federal Reserve officials could face a backlash from paying billions of dollars to commercial banks when the time comes to end QE3 and let interest rates creep higher. Remember that the Fed, one piece of the government, owns billions of dollars of debt, including a lot of what is issued by another piece of the government. The growth of the Fed’s balance sheet means it could pay $50-$75 billion a year in interest on bank reserves at the same time as it makes losses and has to stop sending money to the Treasury. What kind of public relations issues will it face after the Fed was yelled at for rescuing banks during the financial crisis? In an interview a while back, James Bullard, president of the St Louis Fed, said: “If you think of the profitability of the biggest banks, if you’re going to talk about paying them something of the order of $50 billion – well that’s more than the entire profits of the largest banks.”


What is he talking about? All banks hold reserves at the Fed. The central bank has boosted its balance sheet to more than $3 trillion as it buys assets to drive down long-term interest rates through QE, QE2, and QE3. The Fed pays for the assets by creating bank reserves, which now amount to around $2-2.5 trillion. At the moment it only pays 0.25% interest on those reserves. If the Fed plans to raise interest rates before it sells assets, interest of 2% on $2.5 trillion of reserves would run to $50 billion a year. On the bank’s side, that interest may not turn into profits for the banks. They will have to pass the revenues on by paying more interest to their depositors - but it could still add to a populist backlash in recent years against the Fed and the big banks. It could sell assets – but just think of what that would do to prices and rates versus simply scaling back purchases.


Continuing along with this primer, the Fed remits all of its earnings to the Treasury and has paid hundreds of billions in the last four years. But some of those gains will be reversed when it sells assets bought at today’s low interest rates at a time when rates are higher. Hopefully the Treasury is not counting on that income forever. The Fed could increase interest rates on excess reserves more slowly than benchmark rates, or more reserves could be shifted out of the Fed and lent out as the economy improves. Still, the eventual tightening could lead to substantial amounts being transferred to commercial banks from the Fed, given the amounts of cash they have parked there. (The last figure I saw indicated that Wells Fargo had about $100 billion sitting at the Fed.)


Back to mortgage banking. HUD sent out a disaster notice/reminder to the industry yesterday.


Due to the severe storms and tornadoes that occurred on May 20, 2013, Cleveland, Lincoln, McClain, Oklahoma, and Pottawatomie counties in Oklahoma were identified as “Presidentially Declared Major Disaster Areas.” The Federal Housing Administration (FHA) has issued reminders mortgagees in order to provide assistance to borrowers with FHA-Insured single family mortgages.   Mortgagees should refer to the following Mortgagee Letters:

Mortgagee Letter 2013-11 issued April 13, 2013: “Additional Guidance for the Origination and Servicing of FHA-insured Loans in Presidentially-Declared Major Disaster Areas and Specific Requirement for Hurricane Sandy Affected Communities.” Mortgagee Letter 2012-28 issued December 11, 2012:  “Restatement and Update of Flood Zone Requirements for Federal Housing Administration (FHA) Insured Mortgages.” Mortgagee Letter 2012-23 issued November 16, 2012: “Guidance for FHA-Approved Mortgagees Originating and Servicing Mortgages in Presidentially-Declared Major Disaster Areas.”


There are resources for homeowners that LOs can pass along to borrowers. HUD/FHA Relief Available in Presidentially Declared Disaster Areas: If your property has been affected by a natural disaster (hurricane, flood, tornado, wildfire, etc.), resources are available to assist in your recovery. If an area has been designated as a Presidentially-declared disaster area, federal disaster recovery programs will become available to the residents within those areas. Information regarding the most up to date programs, eligibility criteria, and declared disasters will be available on the national disaster recovery site, located at:


And the following programs are available through an FHA approved lender without regard to the current financing type. Section 203(h), Mortgage for Disaster Victims Program - this program allows FHA approved lenders to provide financing to individuals and families (homeowners or renters) whose residences were destroyed or damaged to such an extent that reconstruction or repair is necessary. This program allows 100% financing for the purchase or reconstruction of a home, however, closing costs and prepaid expenses not paid by the seller must be paid by the borrower in cash through premium financing.


Section 203(k) Rehabilitation Program - this program enables those who have lost their homes to finance the purchase or refinance of a house along with its repair through a single mortgage. Damaged residences are eligible for Section 203(k) mortgage insurance regardless of the age of the property when the property is located in a presidentially declared disaster area. The residences need only to have been completed and ready for occupancy for eligibility under Section 203(k). Per the HUD notice that went out, lenders may use Section 203(k) in combination with Section 203(h) for disaster rehabilitation.


It is important for homeowners to contact their hazard insurance provider and mortgage lender as soon possible to notify them of the condition of affected property and to obtain initial assistance in determining in recovery effort. If a borrower's current mortgage is insured by FHA they will receive an immediate 90-day moratorium on foreclosure and forbearance. If homeowners are not satisfied after discussing possible relief actions with their FHA mortgage lender, they should contact HUD's National Servicing Center at 1-877-622-8525.


Most of the usual timely economic commentary is up in the top paragraphs today. Suffice it to say, the yield curve steepened dramatically (short term rates didn’t do much, long term rates shot higher), but from a technician’s perspective, we’re still below some supposed support level of 2.07% on the 10-yr. And prior to all the jawboning, the 10-year Treasury note was up (better) by .5 point (1.89% yield). And Bernanke did say that the job market remains weak overall: the unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. And the Congressional Budget Office (CBO) estimates that the deficit reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points during 2013, relative to what it would have been otherwise. In present circumstances, with short-term interest rates already close to zero, monetary policy does not have the capacity to fully offset an economic headwind of this magnitude. But the 10-year note plummeted close to one point from before Bernanke’s 10AM EDT testimony began to this first Q&A exchange less than 1/2 hour later.


Despite the sell-off, mortgage banker supply was uneventful at about $2.5 billion, but combined with the selling the Fed was hard pressed to absorb it all. Rate sheets changed often, and by 3PM in New York, noon in San Francisco, prices on 30-year FNMA 2.5s through 3.5s ranged from -1.5 to -.5 and 10-year notes lost nearly .75 of a point with the yield backing up to 2.03%.


So yesterday the focus was on increased concerns of Fed tapering its QE program in the coming months, increased volatility and a sell-off in the Japanese markets given the lack of clarity around the Bank of Japan purchase operations, and continued agency MBS under-performance which has kept buyers on the sidelines. In addition, the strength in the equity market despite concerns of tapering in the UST and MBS market has also contributed to the sell-off.


Today we’ve had Initial Jobless Claims. It was expected to show a decline to 345k from 360k, and it did indeed drop to 340k. In addition to jobless claims, the FHFA releases its House Price Indexes for March and we’ll have New Home Sales for March. And don’t forget that early close in the bond markets tomorrow – rarely leading to any kind of price improvements on rate sheets. Rates are pretty much where we left off on Wednesday, with the 10-yr at 2.02% and agency MBS prices roughly unchanged.




Little Letters (part 2 of 3):


Dear Yahoo,

I've never heard anyone say, "I don't know, let's Yahoo! it..." just saying...




Dear Windshield Wipers,

Can't touch this.


That Little Triangle


Dear Rose,

There was definitely room on that Door for the both of us.



PS, you let go


Dear girls who have been dumped,

There are plenty of fish in the sea... Just kidding! They're all dead.




Dear Nickleback,

That's enough.


The World


Dear Mary,

Just admit that you slept with someone else. This is getting out of hand.




Dear World of Warcraft,

Thank you for ensuring my son's virginity.


Parents Everywhere



If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at The current blog is, “Mortgage Backed Securities: Life After QE3." If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.


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