Mortgage Rate Increases Starting to Bite

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Bloomberg reports that that staple of mortgage funding, the 30 year fixed rate mortgage, has seen its interest rate increase from 3.48% a month ago to 4.16% as of yesterday. By contrast, the highest rate the 30 year mortgage reached in the previous year as of mid-March had been 3.85%.

One analyst, Mark Hanson, sees evidence that the dropoff in refinancings has been impressive:

After 5 years of interest rates being forced incrementally lower each year — and everybody that qualifies refinancing over and over again allowing the banks to originate and earn several points off of each gov’t loan churn — the jig is up for a while at least…..three large private mortgage bankers I follow closely for trends in mortgage finance ALL had mass layoffs last Friday and yesterday to the tune of 25% to 50% of their operations staff (intake, processing, underwriting, document drawing, funding, post-closing). This obviously means that my reports of refi apps being down 65% to 90% in the past 3 weeks are far more accurate than the lagging MBA index, which is likely on its way to print multi-year lows in the next month.

Now refis provided some stimulus, since lower mortgage payments means more money to spend. But the effect is likely not as great as you might think. The big winners are the banks and the other fee extractors. As MBS Guy explains via-e-mail:

The refi market is, in reality, a vampire business. It’s a way for lenders, brokers, lawyers and other hangers-on to extract substantial fees, over and over, from borrowers, while giving a modest benefit in return. I have no doubt that the stimulus effect of lower rates was substantially less than many people expected because of all of the refi fees extracted along the way. If most loans were adjustable rate, the stimulus effect of falling rates on borrowers (rather than mortgage brokers) would have been much greater.

And those fired workers? Almost all would be low level clerical staff, and in many cases temps/contractors, working in a high pressure, low discretion, production driven environment. So those job losses in and of themselves is a hardship for those workers, but not a biggie economy-wide.

Now how much any borrower benefitted from a refi depends on how big a rate reduction he got. People who refied repeatedly on the way down (which is common) would give away a lot of the gain, as MBS Guy stresses. The people who may well have fared the best, ironically, were those who had been barred from refinancing in the early years of the rate decline by being underwater but later got access via HARP. HARP refis were just shy of 1.1 million in 2012 and were 440,000 in 2011.

Remember that personal income fell in January, and the growth in subsequent months has been so weak as to be insufficient to make up for the decline, and the sequester is putting a further brake on the economy. So the rise in rates is yet more drag.

The media is finally waking up to the extent to which the housing “recovery” is driven by investors, as opposed to end buyers. On top of that, as we’ve pointed out, some of those buyers are effectively warehousing properties, either by major re-dos or simply inventorying them for now. So the unexpected rise in rates, when you add that to the very conversion of home to rentals already leading to more tenant-favorable conditions in some of the hottest market, is certain to put a damper on speculator appetite.

On the one hand, the cooling of appetite by investors will aid some end-buyers who are mortgage financed and have been unable to compete with “cash” buyers (who may also be using leverage, just not via a mortgage). But higher rates means less buying power, unless lenders start loosening terms. They’ve been pretty stringent up to now. Are they going to help facilitate this investor pump and dump, or will a lot of speculators be left holding the bag?

The bigger fish in the rental business are trying to get out via IPOs of operating businesses. Reuters flagged Colony Capital’s IPO of a portfolio of nearly 10,000 homes, expected to fetch $260 million, and a new filing by American Homes 4 Rent looking to raise $1.25 billion (hat tip Scott). But these plans are already hitting roadblocks with the Fed’s talk of tapering spooking both the mortgage and the stock markets, a double whammy to private equity exit plans. Per the Financial Times:

Colony American Homes has postponed a US float as the sudden jump in market interest rates has damped investor appetite for newly issued shares in real estate investment trusts…

Colony had garnered enough interest from investors to price its shares near the low end of a $11.50 to $13 per share range, according to a person familiar with the offering.

The company decided that an IPO fundraising was not vital to its day-to-day operations and felt it could hold off until the credit markets stabilise, the person added. Colony declined to comment…

Bankers have said the recent downturn in shares of publicly traded Reits would hurt valuations for companies in the sector preparing for initial public offerings and secondary share placements….

That pressure has been acutely felt by newly issued shares in Reits with similar business strategies to Colony. Silver Bay Realty Trust has fallen 6 per cent since raising $281m in December, while American Residential Properties has dropped 11.7 per cent since it raised $287.7m from a May float.

This de facto withdrawal of an IPO scheduled to launch (as opposed to repricing or taking an extra day for more book building), particularly for a modestly-sized deal, is major blow to the hopes of promoters for a fast and profitable exit. Unless the Fed does the housing market a favor by talking mortgage rates back down, it will be telling to see whether more IPOs get out of the gate as the fundamentals for the rental play come into question.

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  1. Conscience of a Conservative

    Agree on the cost/benefit of refis, however people engaging in the refi do need to take a look at the cost/benefit of the refi, break-even time and if other banks have better deals.

    As far as investors properties, I consider this a good thing, in that the market is dynamic enough that new buyers were able to come in and fill the void. Seems to me if it were not for the institutional money, we’d be discussing shadow inventory and over-hang in housing supply.

    1. Yves Smith Post author

      We still have shadow inventory, I keep getting reports from various markets. For instance, Florida, which has supposedly hotted up, still has foreclosure timetables lengthening and judges complaining of banks repeatedly delaying court dates. Remember, inventory is not inventory until the bank takes title.

      Moreover, if you look at the history of many of these properties, you’ll see multiple flips since 2010 or 2011. Not clear how well capitalized many of these folks are who are buying properties to flip to institutional investors. If the music stops, you’ll find them trying to unload.

      1. John F. Opie

        There was a post up on ZeroHedge that showed 12.6 million vacant housing units in the US, of which 12.5 million were “structural” and only 52k were deemed “excess”. Normally within the US housing market, vacant units are a very small residual value, since they include units that are between occupancies, not units that are simply not on the market.

        That 12.6 mn vacant units is more than 10% of all US residential housing units. If you add those units that are deliquent in one form or another (but not under water) you end up with 12.6+3.3+2 = 17.9mn units or around 15% of all US housing. Add to that the mortgages under water, and we’re at close to 20% of all US housing as either being vacant, deliquent or underwater.

        You can see that post here minus the endless comments.

        The right-hand side of that chart doesn’t match the left-hand side, as they are showing two different sets of information.

        The idea that housing market is improving is chimerical at best and deliberate obsfucation otherwise. Increasing refinancing rates does not and cannot help things improve. Duh.

        The banks have a seriously vested interest in ensuring that there is no market price for housing based on actual demand and supply: if there was such a price and it is was allowed to clear the market, the banks, on the basis of mark-to-market, would be insolvent. Hence: there is no functioning market. That is a logical result of the great folly of mark-to-market (which per definition increases procyclical volatility), a solution aimed at a lesser evil that has caused greater evil.

        For the banks, it is an existential necessity that those vacant units remain in the shadow inventory, removed from the market in order to distort what they have to revalue their held inventory. That’s the reason as well for the slowing of foreclosure. The banking/mortgage/housing system is deeply corrupted and flawed by this.

        Simply put, until this is resolved, the banking system is in limbo. Gotta hide reality, not deal with it. This will end in tears…

      2. Doug Terpstra

        And lurking beyond shadow inventory is “ghost inventory”, a host of vacant ghouls that don’t show up as either delinquencies or foreclosures.

        Michael Olenick had the best report I’ve seen on the mysterious inventory disconnect here on NC:

        As Olenick notes “One [trend] is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics … have been bidding up and holding foreclosed houses off the market [sequestration]. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. … these policies are obviously not long-term sustainable.”

        “Delinquency rates slowly fell a little but foreclosure activity dropped through the floor. Stranger still, delinquency rates predictably rise and fall in measured movements whereas foreclosure filing volume gyrates wildly.”

        There’s also the enormous gap in officially reported vacancies, the unknowable ghost inventory.

        “…according to Freddie Mac’s Office of the Chief Economist there were never more than two million vacant properties nationwide.

        “In contrast, the 2010 US Census reports 10.3 million vacant housing units, after backing out the 4.6 million seasonal houses. Two million empties – a figure Freddie argues we never reached – is far less than 10 million, the figure the far more objective census reports. Even the OCC data I cited above is suspect, since they report the same number of outstanding first mortgages in Q1, 2009 as Q1, 2010, which seems impossible to believe given the number of foreclosures and tighter credit standards.”

        Such a huge discrepancy can only reasonably attributed to deliberate obfuscation…in support of the “pump and dump”, but such evidence that “free” market supply is so extremely contrived makes the housing recovery dubious at best.

        In Phoenix, the bubble replay has become absurd. From (AZ Republic), “Investors have purchased more than 30 percent of all single-family houses and condominiums sold this year [Phoenix 2012] . . .” And many of those investors (18% est.) are foreign buyers laundering money via the special exception granted to NAR by Congress. While inventory is paltry, more than 15% houses are sitting vacant in Phoenix (1 in 7 houses) most of it held off the market as ghost inventory (foreclosure stuffing). It’s a strange market, up 36% in one year with investor flipping back to 2005 levels — déjà vu all over again,testing Einstein’s definition of insanity.

        Washington’s blog also has good analysis on the latest bubble, including an NC excerpt: “The REAL Reason Housing Prices Have Skyrocketed”

    2. MacCruiskeen

      When we bought our house in 2009, the rate we got as 4.85. At the time we thought, interest rates will never go low enough to be worth bothering with a refi. It turned out we were wrong. We got 3.5 from the credit union with no points. We figure at that rate, we can pay off the loan eight years earlier. I don’t want to think about what would have to happen for rates to go much lower than that.

    3. availablealias

      Investor buyers have been coming in and filling the void, but they’ve also been outbidding buyers who are actual families. In markets where it’s heating up, non-investors are getting frozen out.

      1. Conscience of a Conservative

        Some buyer is always getting frozen out. Often we think the frozen out buyer is more deserving. Case in point(pre-bubble), there were people who wanted to buy a home to live in with money for a down payment getting out-bid by those with lesser credit bidding up with borrowed money they couln’t or woudn’t pay back.

  2. stevewarton

    The stimulus effect: In our strange world don’t forget that there is also a stimulus effect from all the fees paid to lawyers bankers and the like … as the latest round of layoffs amply demonstrates.

  3. tyler healey

    I’m starting to doubt that low interest rates are expansionary.

    My mortgage rate is 3.5%, but I would have just bought a cheaper studio if the rate was, say, 5%.

  4. PQS

    I wonder if some of the tiny increases in consumer spending are due to refi action.

    I know when I refied in 2010, I had an extra $300 in my pocket every month which went directly to the grocery store and car repair shop…..I’ve considered refi-ing again, because I’m at 4.25%, but couldn’t find a good enough deal without a lot of point load, even with “old people” credit scores and no other consumer debt (cars paid off,etc.)

    1. The Rage

      I doubt it, the increases are what you would expect in this level of recovery. Debt is down as well.

  5. McWatt

    Does anyone deserve a “safe and profitable exit” from taking advantage

    of the financial distress of their fellow citizens?

    1. Mel

      I think a week or two ago somebody mentioned “IPO” in this context. Like securitization, that’s a nifty way to be sure that it’s Somebody Else who will lose money once the music stops.

  6. Johnny D

    I’d like to see the Fed help people who need actual housing, which would mean harming investors, or at least sending them elsewhere to invest.

  7. The Rage

    Come on, they aren’t “biting” at all. Posts like these are ruining this blog.

  8. david

    Well I would recommend before getting a refinance or a residential mortgage professional advice is a must. We often forget to explore options available for us. I know about Canada Lend. They have a professional team as mortgage experts who can help you to refinancing and give you the best rates in market. Evaluate your financial conditions and guide accordingly

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