note: I just provided a link to poway seller’s latest article in my post. I echo the sentiment she expressed in her post.

here’s the link: http://www.californiahousingforecast.com/commentary/mortgage-rates-headed-higher-as-dollar-is-devalued.html

davelj,

I hope you are correct, but let me express why I am not 100% certain that your prediction (that market forces will win out) will come true.

The reason all the pols are scrambling to liberalize the rules on mortgages and mortgage securities for FNMA, Freddie Mac, FHA, OFHEO, FASB, SEC, the Fed, etc. is to keep home prices as high as possible. So if partial measures are seen not to be working as well as they’d like, they’ll move on to stronger measures.

For example, if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.

If ARM resets become too painful in the free market, then short-term interest rates will be lowered, and govt-backed guarantees for re-fis will be expanded until the pressure on prices is lowered.

Most voters will be OK with a 5-10% rollback in prices as necessary medicine, but beyond that voters will push their pols to take stronger and stronger measures. Price declines beyond that could happen, but as they do they will meet ever fiercer resistance.

I am not saying a large price decline is impossible. Ultimately even the strongest counter-measures could yet be overwhelmed. It’s not an exact science, so all these measures could be overcome by market panic or sharp recession or a severe dollar collapse or something else. And the battle may become protracted, with declines dribbling in and becoming large only after many years. But it’s not all decided and inevitable.

Patient renter in OC

“if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.”

That will simply not happen and your last sentence explains why not “FNMA/Freddie mortgages go bust”. Don’t think so. They are already under the gun. Besides once home prices begin falling such as they are now very few will be willing to take out a mortgage without the confidence that home price appreciation is certain. Loosening the underwriting criteria in a falling home market guarantees Fannie and Freddie will go bust.

Very salient posts by davel and patient followed by a great answer by LA renter.

“Besides once home prices begin falling such as they are now very few will be willing to take out a mortgage without the confidence that home price appreciation is certain.”

Just on this blog you can absolutely see the panic went up several notches in the last couple of weeks.Many people are very concerned about the ability to maintain financial security going forward. Who wants to dump a good portion what ever assets they have into a house and assume a mortgage when so many people are actually passing the “R” word and even the “D” word around and depreciation is a given. I agree with LA renter, buyers are the only ones who can muster much of a ” bail- out” and they have obviously said “hell no!”.

You think the rate cut is for you and me? Silly rabbit! Trix are for Primary Broker-Dealers!

It is to help profitability of BANKS.

They borrow short term (from Fed funds et al) and lend long term, earning money on the spread.

Steeper yield curve == more bank profits. As it always has been, as it always will be.

This is to try to make up for the losses to come from upcoming foreclosures and derivative blowups.

“Greenspan said in an interview with Austrian magazine
Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.”

He is just plain freaking lying. And for ideological reasons.

Everybody forgets, but shouldn’t, that central banks have OTHER jobs besides interest rates. Most prominently is the regulation of their member banks in terms of “what counts as capital that they can borrow against”. Different assets (i.e. loans to public) count differently depending on their credit quality.

They should have (and some Fed governors did suggest to Greenspan years ago!) much more seriously investigated the lending standards of the banks and punished or cut them off if they wrote too many obviously foolish loans, regardless of what some model (fit to the last 2 years of melt-up markets) spits out.

Greenspan was against this traditional, prudent time-tested part of the banking business, for ideological anti-regulatory reasons.

In the old days before central banking (and hence no guarantee of solvency of deposits), the free market ‘took care of this’ by runs on the banks. And it was horrible.

And yes, Alan Greenspan could have helped deflate the stock market bubble without so many interest rake hikes which started a recession. (early enough for the 2000 election?)

Why? The Fed also has authority over margin requirements for stocks. (Why? Lessons of 1929, of course, back when people actually seemed to learn things from experience instead of accusing others of being ideologically impure).

In the biggest bubble in modern history, did they do anything about margin requirements? Did they use the single most targeted tool they have? No.

It’s obvious: bubbles ALWAYS come from imprudent use of borrowed money. In the tech bubble increasing your yearly margin rate from 7% to 7.5% per annum does nothing to stop bubble head day traders when they were looking at 10% PER DAY. Do you raise the price of a beer at 1AM to the shitfaced boozer? Hey it’s now 4.25 instead of 4 bucks. No. Bartenders have more sense than Alan Greenspan. You cut them off, period.

That’s what raising margin requirement does. When their broker cuts them off, they’re cut off.

Exactly the same thing for mortgages. It doesn’t matter if Sammy and Joe think they’ll be 30k millionaires by flipping dozens of properties in Vegas. If they’re cut off, they’re cut off.

In sum, the Fed and specifically Alan Greenspan had specific and potent weapons to use against the specific sectors which were having bubbles (while the rest of the economy was limping).

And he didn’t do ANYTHING, and lied and says that the Fed was powerless. Well, go Cheney yourself Alan. We coulda had an Arabian horse breeder running the place just as well. Or why not an airhead super model? At least the business pages would be more pleasant.

Back to the real world of real economy:

a) In the last “recovery”, median full time wages have gone NOWHERE after inflation adjustment. This is completely different from the 1990’s.

b) Chinese exports of cars increased 50% in a year. They are 3rd largest producer now, after Germany. (did they pass Japan?)

Looks like quite a few European politicians are calling for rate cuts. An ECB rate cut would certainly strengthen the dollar against the Euro.

That said, as of this moment, the dollar is in free fall (1.4114 Euro, 2.0289 GBP.) Also, strangely, the 91-day is in high demand, as the discount yield continues to run away from the FFR (yield is now 3.57 compared to the FFR of 4.75.)

Anyone want to take a stab at the reason for the 91-day yield flight from the FFR? Is there a historical precedent?