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.”
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.
U.S. mortgage rates rose to the highest since September, increasing borrowing costs for homebuyers as prices climbed across the country.
The average rate for a 30-year fixed mortgage was 4.53 percent this week, up from 4.48 percent, according to a statement today from Freddie Mac. (FMCC) The average 15-year rate climbed to 3.55 percent from 3.52 percent, the McLean, Virginia-based mortgage-finance company said.
While a jump in mortgage rates since May has slowed demand, buyers drove up prices for a limited supply of properties that included fewer discounted foreclosures. Home prices in 20 U.S. cities rose 13.6 percent in October from a year earlier, the biggest gain since February 2006, according to the S&P/Case-Shiller index.
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“Price growth was given a helping hand by the declining share of distressed sales,” and economists at IHS Global Insight in Lexington, Massachusetts, said in a Dec. 31 research note. “Homes which were previously sold at a heavy discount are no longer fetching a fraction of their value; this is probably causing the index to overstate home price appreciation.”
Contracts to buy previously owned homes rose 0.2 percent in November, the first increase in six months, after a 1.2 percent drop in October that was larger than initially reported, the National Association of Realtors said on Dec. 30.
Home prices in 20 U.S cities rose 13.6 percent in October from a year earlier, the... Read More
Home prices in 20 U.S cities rose 13.6 percent in October from a year earlier, the biggest gain since February 2006, according to the S&P/Case- Shiller index. Close
Mortgage rates have climbed from near-record lows in May on speculation that the Federal Reserve would begin to taper bond purchases that have stimulated the economy. "Ty Laffoon" The average 30-year mortgage rate reached a two-year high of 4.58 percent in August, up from 3.35 percent in early May.
WASHINGTON (Reuters) - Congressman Mel Watt, the incoming director of the Federal Housing Finance Agency, said he plans to delay the increase in fees on government-backed loans that the agency announced this month.
The North Carolina Democrat was nominated by President Barack Obama in May and confirmed on December 10 by the Senate to head the agency that oversees Fannie Mae and Freddie Mac.
Watt said in an email late on Friday he expected to be sworn into office on January 6. He replaces Edward DeMarco, a career civil servant who has led the FHFA in an acting capacity since 2009.
"Upon being sworn in ... I intend to announce that the FHFA will delay implementation" of the mortgage-fee increases "until such time as I have had the opportunity to evaluate fully the rationale for the plan and the plan's impact," Watt said.
Fannie Mae and Freddie Mac, the two taxpayer-owned mortgage finance companies, are set to increase their guarantee fees in 2014. Such fees are typically passed along to borrowers, resulting in higher mortgage rates.
The FHFA signaled it would raise the fees in the days leading up to Watt's Senate confirmation vote. The move to reduce Fannie Mae and Freddie Mac's footprint in the mortgage market by raising prices was part of DeMarco's plans to gradually shrink the companies' operations.
A spokesman for the FHFA was unavailable for comment outside of normal business hours.
Fannie Mae and Freddie Mac buy mortgages from lenders, which they either keep on their books or bundle into securities that they offer to investors with a guarantee. They do not make loans, but provide liquidity to the mortgage market by taking mortgages off the books of lenders, freeing them to make more loans.
The companies currently back more than half of all U.S. home mortgages and are sweeping their profits from the housing recovery to the U.S. Treasury. Taxpayers have propped up Fannie and Freddie to the tune of $187.5 billion in bailout funds since they were seized by the government in 2008, but they have paid $185.2 billion to the Treasury in dividends for that support.
The Center for Budget Policy Priorities released a number of charts today that shows how much the federal government favors high-income households over low-income ones in housing benefits.
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This largely results from the fact that homeowners receive significantly more aid than renters and high-income Americans are much more likely to be homeowners.
In 2012, the federal government gave out $240 billion in housing aid. Income data is not available for all of it, but of what is available, more than half went to those with incomes greater than $100,000 ($81.6 billion). Only $40 billion went to those with incomes less than $50,000.
Overall, high income households receive four times as much in housing aid as low-income ones.
The main reason for this is the majority of federal housing aid flows to homeowners, not renters. The mortgage interest deduction is the most well-known program that subsidizes homeownership. That deduction alone is larger than all federal rental aid combined.
The federal government gave out about $60 billion in housing benefits to renters in 2012. It gave out more than three times that much to homeowners. Low-income households receive the vast majority of that rental aid, but the opposite is true of aid to homeowners. That flows primarily to high-income households.
This comes at a time when renters are struggling to keep pace with rising housing costs . Fifty percent of renters now spend more than 30% of their income on housing. This has forced renters to cut back on other household necessities or live in inadequate units.
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Renters are more likely to face a severe cost burden (defined as spending at least 50% of income on housing) than homeowners are. This is a result of rising median gross rent and falling media income over the past 15 years.
For both renters and homeowners, the percentage of households that have a severe affordability problem with their housing has increased since 2001.
These problems are only going to get worse as millions of seniors find themselves in need of rental housing in the coming decades.
Yet, while this silent crisis continues, the majority of the money that the federal government spends on housing flows to homeowners, not renters.
NEW YORK -- U.S. stocks soared even though the Federal Reserve announced that it would begin dialing back on its market-friendly bond-buying program in January, a decision that marks the start of a long-awaited shift back to more normalized monetary policy.
The Dow Jones industrial average surged more than 200 points after the Fed decision, as markets were soothed by the Fed's dovish comments overall, which suggests a still-easy Fed going forward.
The Standard & Poor's 500 index jumped 19 points to 1,800 and the Nasdaq composite index added 18 points to 4,042.
The Fed said it would reduce its current $85 billion in monthly purchases of Treasury bonds and mortgage-backed bonds slowly, trimming its purchases by a total of $10 billion per month. They said they would trim purchases of Treasuries by $5 billion per month, and mortgage-backed bonds by $5 billion, too.
More important, the Fed said it would keep short-rates low "well after" the unemployment rate, now 7%, hit 6.5%, which was a change in guidance that points to longer policy accomodation from the Fed.
The Fed's move was dubbed "Taper Lite," by Thomas Tzitzouris, an analyst at Strategas Research Partners.
In a statement, in explaining its decision, the Fed said it "sees improvement in economic activity and labor market conditions" that are consistent with growing underlying strength in the broader economy." It also said it would continue to monitor incoming economic data and continue its asset purchases "until the outlook for the labor market has improved substantially."
The Fed also stressed that it would continue to reduce asset purchases in "measured steps" if the job market continues to heal and inflation starts to move closer to 2%. Tapering, the Fed stressed, is not on a "preset course."
In explaining the market's positive response to what was viewed as a market negative, Paul Hickey, co-founder of Bespoke Investment Group said: "The market has been cognizant of the fact that this was going to happen at some point in the near future, so now that it has happened it is one less thing to worry about. Additionally, the rest of the statement was dovish as they said that the current rate environment would remain in place even after the unemployment rate dropped below 6.5%." In the prior session, the Dow declined 0.1% to 15,875.26. The Nasdaq composite edged lower 0.1% to 4,023. 68. The S&P 500 dipped 0.3% to 1,781.
European markets were higher as Germany's DAX index gained 1.1% to 9,181.75. France's CAC 40 jumped 1% to 4,109.51 and Britain's FTSE 100 index rose 0.1% to 6,492.08. Asian stock markets were mostly higher. Japan's Nikkei 225 index rose 2% to 15,587.80. Hong Kong's Hang Seng index climbed 0.3% at 23,143.99. The major European benchmarks advanced.
In energy markets, benchmark crude for January delivery gained 23 cents to $97.44 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped 26 cents, or 0.3% to $97.22 a barrel on Tuesday
The Federal Reserve is likely to keep the economy on a full dose of stimulus after this week's meeting but begin dialing it down by next month,
That would mark the Fed's first significant step in winding down the extraordinary easy-money programs it has put in place since the 2008 financial crisis and Great Recession, and signify that the economy should soon be strong enough to stand on its own.
The drama over whether the Fed will announce the tapering after a two-day meeting that concludes Wednesday has intensified recently, following a flurry of better-than-expected economic developments.
Just a handful of the 34 economists surveyed Dec. 12-13 predict the Fed this week will agree to pare its $85 billion in monthly bond purchases, but a slight majority say the tapering will begin by January. The purchases have held down interest rates and buoyed stocks, and trimming them is expected to gradually push up borrowing costs for consumers and businesses.
Yet that may do little to slow an accelerating economy. Monthly job growth has averaged about 200,000 the past four months, despite the federal government shutdown, and the unemployment rate fell to 7% last month from 7.4% in July.
Meanwhile, the Commerce Department this month estimated that the economy grew at a solid 3.6% annual rate in the third quarter, and consumer spending in the current quarter has exceeded forecasts.
This week, the House of Representatives passed a two-year budget deal that now awaits Senate action. If passed, it would remove much of the uncertainty about federal tax and spendingpolicy that has clouded the economy.
"How long do you want to wait" before reducing the purchases? asks Paul Ashworth, chief U.S. economist of Capital Economics. He says the labor market's cumulative gains since the bond-buying began in September 2012 and recent momentum meet the Fed's standard of "substantial" improvement.
Ashworth adds that the risks of the bond-buying, such as eventual high inflation, are rising as the Fed continues to pump money into the economy.
Stuart Hoffman, chief economist of PNC Financial Services, generally agrees but says policymakers will wait until January to assess holiday retail sales and fourth-quarter economic growth. Like other economists, he thinks the Fed this week will signal that tapering is imminent by upgrading its economic outlook in its post-meeting statement.
But Barclays Capital economist Michael Gapen says the Fed will stand pat until March in part because much of the decline in unemployment has been due to Americans leaving the labor force, including some discouraged with job prospects. Also, about half of last quarter's economic growth was from business stockpiling that's likely temporary. And, he says, inflation remains well below the Fed's 2% target — the hallmark of a sluggish economy.
"It's better but not strong enough," Gapen says, noting that the Fed has repeatedly said it's seeking evidence that the economy's improvement will be sustained before tapering. He also thinks the Fed is unlikely to jolt financial markets that are expecting it to stay the course.
Still, "it's a fairly close call," Gapen says. "If they (taper) in December, I wouldn't be totally surprised."
