Do you believe the Fed’s investment policy with Operation Twist will improve California’s housing market?
- No (84%, 37 Votes)
- Yes (16%, 7 Votes)
Total Voters: 44
The Federal Reserve (the Fed) has embarked on a modest investment tactic in an attempt to kick-start the economy, a monetary policy dubbed Operation Twist. The plan is a flashback to the action taken by the Fed in the 1960s when the central bank nudged long-term interest rates down in response to a weak economy and growing national debt.
This time around, the Fed intends to do the same with the anticipation of lowering short- and long-term interest rates to encourage borrowing and spending by homeowners, consumers and businesses.
The Fed has already been trickling investments into long-term Treasury bills (T-bills) over the past couple of years but they propose to be a smidge more risky with Operation Twist. Here are the schematics:
- The Fed will sell $400 billion in short-term T-bills to recover dollars previously invested. This money will be used to buy 6-30-year term T-bills through June 2012 (a shrewd move on the Fed’s part since it saves them from having to expand their balance sheet by printing more dollars – which they may have to eventually do anyway…)
- Short-term rates may increase minimally since there is a high demand for short-term T-bills and the Fed will make sure to keep short-term rates relatively low by implementing other policies.
- Long-term rates will decrease because the Fed will buy the T-bills at higher prices. [For more information on past and present short- and long-term Treasury rates, see the first tuesday Market Chart, Current market rates.]
In addition to buying up long-term T-bills – which will drive down mortgage rates as they are based on the 10-year Treasury with a 1.5% spread – the Fed will also direct more maturing principal from agency bonds and mortgage-backed bonds (MBBs) into the MBB market. The expectation: increased demand for MBBs which in turn will further twist-down mortgage interest rates. [For more information on the pace of changing mortgage rates in the western U.S., see Freddie Mac’s Weekly Primary Mortgage Market Survey (PMMS).]
If all goes according to the two-prong twist-down on both the 10-year T-bill front and the MBB front, the Fed predicts home sales volume will return to normalcy, prices will stabilize, mortgage refinancing will get traction and more disposable income will be available to Americans who take advantage of low interest rates to refinance – this will feed money into the economy and pull us out of this Lesser Depression of joblessness.
first tuesday take: Sounds perfect. Just what the doctor ordered. No kidding! The Fed’s rationale for Operation Twist and its MBB reinvestment plan is grandly sound, but Californians must note: an optimistic forecast for home sales volume and mortgage refinancing in this state is questionable for two reasons.
First of all, California home sales volume is not in the gutter because of interest rates. Interest rates are already low – 4.02% for the 30-year fixed rate mortgage (FRM) in the western U.S. region. They’ve been slipping down for most of 2011 so it is highly unlikely another twist-down will lift sales volume.
Instead, buyer melancholia is a result of high unemployment, low consumer confidence and the inability of agents to spark interest in homeownership which has lost public policy support – you know, all that American Dream stuff. Prospective buyers know it’s a good time to buy but this is the year of debt clearing and pragmatic pessimism – they just don’t feel they are financially able. They’d rather go out for dinner and escape for a moment from their underwater environment rather than sell and buy. [For more information on homebuyer sentiment, see the first tuesday Market Chart, Homebuyers feel ready and willing to buy, but not financially able.]
Second, mortgage refinancing is unlikely to soar as the Fed envisions it will. At least in California it is dubious – though low mortgage interest rates are welcome and appealing for those actually able to act, it will be impossible for the state’s deeply negative equity residential and nonresidential borrowers to qualify for refinancing due to the high loan-to-value ratios (LTVs) following the price plunge on properties after the banker-financed Millennium Boom.
In spite of the difficulties unemployment, public sentiment and negative equity present, the Fed’s efforts are not meaningless. They simply require players in the California economy to get off their bench and join the dance (picture: the Fed is doing the twist, awkwardly and all by itself in the corner of the dance floor).
Thus, with all due respect to Chubby Checker, perhaps a Kumbaya is more appropriate here. Investors must acquire income properties, banks must grant principal reductions for mortgages with LTVs over 125%, California’s government, cities and small businesses must mold budgets to accommodate greater hiring, and of course, brokers and agents must advise and keep an eye out for opportunities to be brought to the attention of their clients (the consumers need awakening from a chronic American mental rigor mortis).
Our present and enduring state of detrimentally persistent high unemployment, rock bottom consumer confidence and 2,500,000 negative equity homeowners – roughly 30% — will keep any mortgage money from dancing about and refinancing and purchase-assist financing will unlikely swing above present levels. Before any enduring movement can ever take place in California, mortgage banks must get a clue to give a nod to the cramdown of principal balances and blow off their existing and shadow real estate-owned (REO) inventories hiding behind delinquencies. California’s attorney general is spot on about these resolutions in her refusal to go along with the Big Bankers’ attempt to avoid their liabilities to California homeowners. [For more information on why California quit the Big Bankers’ plan, see the letter issued by the State of California Office of the Attorney General.]
RE: “Will the Fed’s New Policies Revitalize the Housing Market?” from the Atlantic
Hi! thank you for your update in the Fed’s Reserve -Rates U.S.Treasuries-Money market, but it appears, that Said insert I was not able to print the statements from Brat Yzermans and Steve Herricks, the issues of the FHA, DTI’s, USDA, Commercial Banks, Is there a way that I could access and print the above-mentioned statement. Thank you in advance. Best regards, Monica
“The Federal Reserve (the Fed) has embarked on a modest investment tactic…central bank nudged long-term interest rates…The Fed has already been trickling investments…they propose to be a smidge more risky ”
Modest, nudged, trickling, smidge? None of these words seems appropriate when discussing current banking.
Although the federal government is borrowing more money than was hardly conceivable a short time ago, interest rates are at all-time lows. With an endless supply of money, interest rates are almost meaningless. As long as there is deficit spending, there will be a US Treasury Bond market. As long as that market exists, there will be dealer banks who will “purchase” those securities with debits at the Fed. (They give those banks this privilege in order to facilitate commerce and specifically a workable currency). Those banks then use those securities, purchased on credit, as reserves for doing their own lending business and generally facilitating commerce with cash and checking accounts.
Government spending must come down. And that means the federal debt market is going to contract. Which means the money supply base, US Treasuries held in commercial bank vaults, will also contract, and finally, the 10-1 leveraged loans which are made on the basis of those treasuries.
The debts racked up during the 60’s in Vietnam are a rounding error in today’s budgets. That was the whole purpose of currency devaluation, cheat creditors. The problem is that the situation increases by orders of magnitude over the years. Our trillions of today may look like a rounding error 30 years hence, but only talking in quadrillions etc.
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The move by the Federal Reserve Operation Twist positioned itself to minimize the impact of the US Treasury financing US debt and the impact on long term interest rates. Unfortunately, this wasn’t clearly disseminated to the public and seems to have created more uncertainty and confusion than necessary. Federal Reserve Operation Twist and the flattening of the yield curve in itself signaled the Federal Reserve was tightening monetary policy, this was out of step with said monetary policy, sending mixed signals, hence more confusion. Yet, there are still some questions regarding the future supply of treasury bills and the impact on short term rates, hence a flattening/inversion of the yield curve. The Federal Reserve portfolio of short term treasury’s estimates are lean (less than 400 billion) so the minutes from the September meeting are unclear, and so is future allocation of short term treasury bills from the US Treasury.
Everyone knows this will not work……it’s just making us go further into debt as a nation. Who cares if the rate is 35 if they can’t qualify? Current FHA borrowers cannot benefit from the lower rates due to the increased FHA monthly MI factor. They need to have at least a 1.5 to 2% lower rate to benefit form a streamline refinance.
And the loan level price adjustments on conventional financing virtually guarantee 90% of the people will not actually get the lowest rate possible unless they pay big dollars and buy the rate down by paying the loan level price adjustment fee’s (penalty) upfront.
A better less costly solution would be to allow current FHA loan holders to streamline refinance and keep existing monthly MI factor…..that would be a HUGE help. That’s doesn’t cause FHA to lose any money because on those FHA loans with the lower MI, they already collected a large portion of the MI upfront!.
I say eliminate the need for any down payment and require lower DTI’s, or allow higher DTI’s with a larger down payment. The USDA 100% financing program seems to be able to have a lower default rate and they have a lower DTI requirement than FHA.
I share some of these ideas and industry updates and tips on my blog http://homeloanartist.com
check it out.