Mortgage Rates on the Rise.

The 30 yr mortgage rate is on the rise. Sources indicate that fears of inflation are to blame . The latest poll from Fannie Mae and Freddie Mac indicate the going rate for a 30 yr fixed to be roughly 6.12%.

Bonds No Longer On Steroids

Treasury prices have fallen in the last few days, ending  an unstoppable run that drove Bond prices sky high, leaving benchmark 10 year note to yield 3.83 . The bull market for bonds was created as Investors feared economic hardship due to energy and mortgage markets.    

However, word on the street has the Fed lowering prime interest rate at least 1/4 when they meet tomorrow. Lowering the prime interest rate traditionally provides more liquidity in the system, boosting the economy.  

Prime interest rate currently sits at 4.5% , down 3/4 of a point since the Fed halted its historic run of 17 consecutive rate increases. Many experts suggest Bernanke was too hawkish on rates and inflation, while ignoring blatent indicators driving the economy, noticably the coming housing crisis. He is expected widely to continue focusing on the enomony much of 2008.

Wall st is infamous for not even waiting until Bernanke makes his announcement.  The dow has gained several hundred points in the last few days, in spite of some weak economic indicators. This has led to downward pressure on Treasuries, leaving the 10 yr note yielding 4.15% at Mondays close.

Upside Down And Nowhere To Go

Seems like the goverment and various groups are trying hard to stem the tide of foreclosures in the US housing market.  They have introduced FHA secure . Community projects such as NACA, backed by Countrywide, Bank of America and more recently Chase. We now even have Hillary, Henry Paulson and even the Prez himself trying to grab the headlines. Its called the ARM Freeze.

However, none of this addresses the real problems facing the entire real estate industry nationwide. The real problem of course is the most fundamental concept of all. Supply and Demand.

There is an 8month inventory of houses on the market in the United States. The highest it has been in who knows how long. Builders overbuild, buyers overbought, investors overinvested, Lenders overextended themselvs, and Realtors oversold.

But when the inventory reached a certain point, houses were not selling anymore. The demand went down because there was no longer huge appreciations. Naturally this caused the appreciation to stop altogether. Then people started scrambling for cover. Everyone and their dog put their house up for sale, hoping to still sell while prices were high. Same with builders, and investors.

With any ‘boom’ or ‘gold rush’ , the speed of the boom will invariably equal the speed of the CRASH. Lenders could not lend out money to anyone for any reason.  Borrowers could not refinance or sell to get out of foreclosure. Lenders  couldnt count on flipping the property to recoup monies on foreclosure either. Losses started to pile up. Lenders began retracting their dubious products to protect themselves. Without the dubious products, a chunk of the housing market dissapeared immediatly.

But it was too late. All of 2005 and 2006, ‘experts’ were predicting a ’soft landing’ . When we look at the statistics, and history itself, these media release must surely have been a bald faced line in retrospect. 

The biggest thing about any boom is the alarming number of people in the market simply to ‘flip’ the thing for a profit, much like the stock market. If they cant sell the house, then they have to continue to pay the mortgage, and sooner or later simply walk away from it.

All the powers that be stood around and did nothing about this for quite a long time. Until it became painfully obvious the market was crashing deeper and harder than anyone was willing to admit. I bet they knew all along , but was hoping against hope it wouldnt come true.

Now these 1/2 baked programs have come into effect to ’save’ people. Except they fail to mention none of them actually fix the real problem.

There are millions of people whom bought at the height of the housing boom. This means they bought at boom prices. Whether they have a 30 yrs fixed, or ARM payment or whatnot, it still little comfort that their house could very well be worth 50% of what they bought it for .

None of the programs address all these exasperated homeowners who are now ’upside down’ in their house. Regardless of fantastic credit and good income. How long will it be before they realize their home will never be worth the boom price for at least 5 years, and walk away from the thing to save tens of thousands of dollars in property tax, home isnurance, PMI, homeowner association dues, and mortgage payments.

They can simply rent for cheaper, and their credit will be right back up to where it is now after 5years. Nobody predicts another real estate boom within 5 years. So why waste all this money to stay in the house? Homeowners will save a huge chunk of money by handing back the keys and renting until houses stabilize, then purchase the same damn house for 1/2 the price.

Therefore, none of these programs will stop the huge avalanche of foreclosures that are coming, and thus the home prices will continue to fall. Until they help the homeowner underneath their houses, nothing will change in the slightest.  

Bitter Over Bailout

There are a growing number of people whom are opposed to a mortgage industry bailout. Programs such as NACA, FHA Secure, and the new ARM Freeze introduced by Henry Paulson.

While these program are designed to help ditressed homeowners, critics of the programs are not as happy about it. The beef with these new programs is that they reward people whom should have never been a homeowner or lender in the first place. People all across america who paid a down payment and recieved a 30 year fixed loan. They feel that doing the right thing has now become the wrong thing.

Opponents of these plans also site the fact that none of these programs will address the real underlying problem for people who owe more than their house is worth. They cite that those people, whether they are excellent credit risks or less than perfect, will still have no choice but to walk away from their home as there is no real benefit for years.

Many experts predict that the current housing crisis is the worst the country has seen since the great depression, and therefore housing prices will not rebound anytime soon. This may convince many borrowers to walk away whether they can afford it or not. They can rent for much cheaper until the housing market picks up again, perhaps 5 years or more from now.

Hillary Becomes Frigid

Hillary Clinton is sure hot for freezing ARM payments. She has jumped on the bandwagon that banking guru Paulson has worked out with several leading lenders. Unfortunately, its seems the new freezing program is nothing but hot air, and still leaves millions of troubled homeowners out in the cold. There is no doubt this program will cause heated debate, turning up the temperature further on the goverment to do something meaningful .

Paulson’s plan a sham.

According to a recent survey, the majority of Americans are against a mortgage bailout plan. 

And for good reason.

A government led bailout would be unfair and costly to American taxpayers. It is unreasonable to ask people who made prudent financial decisions to pay for those that did not. What’s more, a bailout could never be large enough to stop the impending home price correction and the effect it will have on the economy.

Current home prices are disconnected from fundamentals. It is not right for prices to be so far beyond the level of affordability in so many different areas–it is only natural that these prices correct at a later date.

Paulson’s idea to freeze mortgage rates on adjustable-rate loans before they reset will not stop the inevitable correction, nor will it help the record number of borrowers who are in trouble.

The majority of subprime borrowers are not falling behind because rates are resetting; they are falling behind because they bought more house than they could afford.

Many experts predict this plan will not save nearly enough homeowners from foreclosure. Therefore home prices will drop about the same as without the plan.

Mozilo Demands Freddie Fannie save Countrywide

Today Countrywide CEO and founder Angelo Mozilo called on Freddie Mac and Fannie May to ….” step up to the plate and take action to bring liquidity back into the market”….. While this might help homeowners , it is also comical coming from the very guy who saturated the entire United States with bad mortgages in the first place.

 I personally can’t even believe the guy would have the gall to request such a bailout, let alone demand it in the media.