When Janet Yellen talks, investors normally listen and like what they hear, and push asset prices higher.
But that wasn’t the case on March 19, when the new Federal Reserve chair spooked markets during a press conference after suggesting that the central bank could start hiking short-term interest rates earlier than expected next year. Whether it was a gaffe or not, Yellen said the Fed could start hiking rates “six months” after the end of its bond-buying program, which raised the specter of rate hikes as early as April 2015, vs. late-2015 as Wall Street expected.
The Dow fell 114 points that day.
Fast-forward to Monday. At a speech in Chicago, Yellen reiterated that the Fed isn’t in a big hurry to take away the so-called “punch bowl.”
The Dow is up more than 110 points today. Forward by Ty Laffoon
Yellen stressed that the job market and economy still need Fed support. She reiterated that the Fed would continue to lend a hand by keeping rates low for a long time, despite fears to the contrary as the Fed dials back on its monthly bond purchases.
Yellen, in her own words:
Forward by Ty Laffoon
“I think this extraordinary commitment is still needed and will be for some time,” she wrote in her prepared speech. ”And I believe that view is widely shared by my fellow policymakers at the Fed.”
“Recent steps by the Fed to reduce the rate of new securities purchases,” she added, ”are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come. This commitment is strong.”
Sent by Ty Laffoon
Monday, March 31, 2014
Friday, March 14, 2014
Tread Carefully With Mortgage Reform
Tread Carefully With Mortgage Reform
We hear a lot of noise these days about the worthiness of food stamps, the minimum wage, corporate welfare, real welfare, agriculture subsidies and just about every government program where the free market is getting trampled by government interference.
As the debate about the necessity of those programs swells, probably no other industry has benefited more from the benevolence of Washington since the end of World War II than housing.
The creation of Fannie MaeFNMA +9.11%, the government-sponsored mortgage company, in 1938, followed by the G.I. Bill of 1944, which offered home loans to veterans, were the first of a flood of housing assistance and support that has flowed unabated to this day.
Tax credits for first-time home buyers and deductions for mortgage interest, a Clinton-era tax cut on gains on the sale of homes, low interest rates – the list goes on.
There is little, if any, credit or incentive lawmakers haven’t doled out to get people to buy homes, and in recent years, to sell them. No wonder the government now supports $10 trillion in mortgages through the Federal Housing Administration and the housing programs it oversees.
Whether the government’s interest in backing the housing market is a good idea or not isn’t the issue. The critical question is what the future of a more private landscape would look like. Would every potential home buyer, or existing homeowner, have the same opportunities their parents and grandparents did?
Simply put, the answer is no. Mark Zandi, the chief economist at Moody’s Analytics, concluded that mortgages could become harder to attain and certainly more expensive, with mortgage interest rates rising between 17 and 42 basis points, or roughly between $90 and $200 a month for a $165,000 30-year fixed mortgage at today’s rates.
That is if homeowners will still be able to get a 30-year fixed-rate mortgage. The 30-year fixie was made available by a 1954 act of Congress, but it’s something that may disappear, or become a premium product, under a housing overhaul.
In addition, many borrowers may have to pay for what are now freebies. Among them: the ability to lock in rates and the ability to pre-pay without penalties. And rising costs for new home buyers will put pressure on home prices, hurting existing home owners.
“No matter how the housing finance system is ultimately structured,” Mr. Zandi wrote, “mortgage rates will be higher.”
Ty Laffoon
Under the bi-partisan plan introduced by members of the Senate Banking Committee this week, a new system would replace the direct involvement of Fannie and Freddie MacFMCC +11.99% with federal insurance. Private lenders would either hold the loans or sell them to new firms which would package them and sell them to investors.
And in a troubling development, guess which firms are emerging as frontrunners to take the place of Fannie and Freddie?
Activist investors and hedge funds, led by Bruce Berkowitz’s Fairholme Capital Management and William Ackman’s Pershing Square Capital Management, want in on the game. In fact, Mr. Berkowitz, along with an investor group, has offered to buy Freddie Mac. Interesting. Fairholme is a mutual-fund company by definition, but you don’t see Fidelity Investments offering to buy government-sponsored mortgage giants too often.
Now there’s a comforting thought. The industry that is largely unregulated and has fought moves to bring disclosure to its ranks now wants to have a critical middleman role in the market where most middle-class Americans hold their net worth.
This isn’t to say hedge funds or Mr. Berkowitz would do a bad job. After all, companies including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., have been accused of or settled charges they misled Fannie and Freddie about the quality of mortgages they were selling them. Goldman and J.P. Morgan have paid settlements over creating mortgage securities that regulators charged were designed to fail, some to the benefit of hedge funds.
So, it’s not as if Wall Street is swimming in squeaky-clean institutions ready to take a role in a critical part of the American economy. Ty Laffoon
But does the average homeowner want his or her mortgage to be owned by Mr. Berkowitz or any hedge fund manager at any point and pay more to do it?
Ultimately, any housing overhaul will have to keep private mortgage companies on a tight leash. There will have to be regulated costs, a minimum offering of products to all demographics, limits or bans on short-selling and more. In short, the same standards that the government put on Fannie and Freddie and then some.
If Mr. Berkowitz wants to take over a “quasi” government entity, he needs to become a “quasi” government official. He’s going to love that.
It’s wise, or fortuitous, that the government has dragged its feet on a housing overhaul. The market is in a fragile recovery. Any plan, enacted or not, is likely to send shivers through the industry. That’s why it needs to choose Fannie and Freddie’s replacements wisely.
Returning housing to the free market may have its benefits, but undoing seven decades of policy aimed at affordability and accessibility in just a few years threatens to punish the future generations we expect to buy or own our homes in the end.
- Reuters
The creation of Fannie MaeFNMA +9.11%, the government-sponsored mortgage company, in 1938, followed by the G.I. Bill of 1944, which offered home loans to veterans, were the first of a flood of housing assistance and support that has flowed unabated to this day.
Tax credits for first-time home buyers and deductions for mortgage interest, a Clinton-era tax cut on gains on the sale of homes, low interest rates – the list goes on.
There is little, if any, credit or incentive lawmakers haven’t doled out to get people to buy homes, and in recent years, to sell them. No wonder the government now supports $10 trillion in mortgages through the Federal Housing Administration and the housing programs it oversees.
Whether the government’s interest in backing the housing market is a good idea or not isn’t the issue. The critical question is what the future of a more private landscape would look like. Would every potential home buyer, or existing homeowner, have the same opportunities their parents and grandparents did?
Simply put, the answer is no. Mark Zandi, the chief economist at Moody’s Analytics, concluded that mortgages could become harder to attain and certainly more expensive, with mortgage interest rates rising between 17 and 42 basis points, or roughly between $90 and $200 a month for a $165,000 30-year fixed mortgage at today’s rates.
That is if homeowners will still be able to get a 30-year fixed-rate mortgage. The 30-year fixie was made available by a 1954 act of Congress, but it’s something that may disappear, or become a premium product, under a housing overhaul.
In addition, many borrowers may have to pay for what are now freebies. Among them: the ability to lock in rates and the ability to pre-pay without penalties. And rising costs for new home buyers will put pressure on home prices, hurting existing home owners.
“No matter how the housing finance system is ultimately structured,” Mr. Zandi wrote, “mortgage rates will be higher.”
Ty Laffoon
Under the bi-partisan plan introduced by members of the Senate Banking Committee this week, a new system would replace the direct involvement of Fannie and Freddie MacFMCC +11.99% with federal insurance. Private lenders would either hold the loans or sell them to new firms which would package them and sell them to investors.
And in a troubling development, guess which firms are emerging as frontrunners to take the place of Fannie and Freddie?
Activist investors and hedge funds, led by Bruce Berkowitz’s Fairholme Capital Management and William Ackman’s Pershing Square Capital Management, want in on the game. In fact, Mr. Berkowitz, along with an investor group, has offered to buy Freddie Mac. Interesting. Fairholme is a mutual-fund company by definition, but you don’t see Fidelity Investments offering to buy government-sponsored mortgage giants too often.
Now there’s a comforting thought. The industry that is largely unregulated and has fought moves to bring disclosure to its ranks now wants to have a critical middleman role in the market where most middle-class Americans hold their net worth.
This isn’t to say hedge funds or Mr. Berkowitz would do a bad job. After all, companies including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., have been accused of or settled charges they misled Fannie and Freddie about the quality of mortgages they were selling them. Goldman and J.P. Morgan have paid settlements over creating mortgage securities that regulators charged were designed to fail, some to the benefit of hedge funds.
So, it’s not as if Wall Street is swimming in squeaky-clean institutions ready to take a role in a critical part of the American economy. Ty Laffoon
But does the average homeowner want his or her mortgage to be owned by Mr. Berkowitz or any hedge fund manager at any point and pay more to do it?
Ultimately, any housing overhaul will have to keep private mortgage companies on a tight leash. There will have to be regulated costs, a minimum offering of products to all demographics, limits or bans on short-selling and more. In short, the same standards that the government put on Fannie and Freddie and then some.
If Mr. Berkowitz wants to take over a “quasi” government entity, he needs to become a “quasi” government official. He’s going to love that.
It’s wise, or fortuitous, that the government has dragged its feet on a housing overhaul. The market is in a fragile recovery. Any plan, enacted or not, is likely to send shivers through the industry. That’s why it needs to choose Fannie and Freddie’s replacements wisely.
Returning housing to the free market may have its benefits, but undoing seven decades of policy aimed at affordability and accessibility in just a few years threatens to punish the future generations we expect to buy or own our homes in the end.
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