Just Who Are These Serial Mortgage Refinancers?
I caught a snippet about the mortgage weekly application survey over at The Golden Truth blog and I have been thinking about it all day.
From the survey we see that refinance activity increased quite a bit (regular buying applications were falling, but that got skipped over by most media channels, go figure) and this really makes me confused. I need help!
From the press release:
“The recent plunge in rates on US Treasury securities, due to a flight to quality as investors worldwide sought shelter from the Greek debt crisis, benefited US mortgage borrowers last week. Rates on 30-year mortgages dropped to their lowest level since mid-March. As a result, refinance applications for conventional loans jumped, hitting their highest level in six weeks,”Flight to quality makes me chuckle but let's stick with the topic on hand!
Does anyone out there seriously think home re-financers by and large were watching the Euro drama, saw US Treasuries yields dropping, and decided to refi their home? Really? Most people I know do not even know where their mortgage rate comes from much less how to time it.
So let's say I buy the idea that a nation of savvy rate watchers were ready to pounce on lower rates. How much are we talking? From the press release:
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.96 percent from 5.02 percent, with points decreasing to 0.91 from 0.92 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate also decreased from last week.So now I am supposed to believe THE SAME savvy rate watchers scrambled to catch these minute changes in mortgage rates? Mortgage rates (so far against my very confident call!!!!) are still so close to all time lows a re-finance makes no sense at all unless your mortgage note is older than the hills. But these are smart rate watchers so we now they have all refinanced before, right?
The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.32 percent from 4.34 percent, with points increasing to 0.81 from 0.80 (including the origination fee) for 80 percent LTV loans. The effective rate also decreased from last week.
The average contract interest rate for one-year ARMs decreased to 6.86 percent from 7.03 percent, with points increasing to 0.35 from 0.28 (including the origination fee) for 80 percent LTV loans.
I find this to be impossible to square with any reality I know. Two idea I am throwing around:
-Refinancing has become the home ATM again, maybe on a lower scale, but it has returned
-Banks are somehow allowing or alerting folks in mortgage trouble to refi loans to keep them in homes they will lose
Anyone else have a guess? I welcome answers in the comments.
FED Rate Hikes and MBS Sales: Just Shut Up Already
With the re-opening of swap lines with Europe and the never ending purchase of all mortgages through Fannie, Freddie, The FHA and even the Veterans Program it should be clear that the FED will not raise rates nor sell off any of the Trillion plus mortgages they have bought. If you are still trying that one out I am not sure what else can be done for you. Tim Iacono, fresh off his move to Montana, sums it up very nicely:
The FED and Their Silly Talk of MBS SalesI agree 100%!
Really. Does anyone seriously think that the Federal Reserve is going to be selling any part of their $1.25 trillion stash of mortgage backed securities anytime soon? With home prices already embarking on another leg down (due largely to the absence of $8,000 incentive checks from the U.S. government) and the possibility of the European debt crisis crossing the Atlantic, maybe they should be talking about buying mortgage debt that few others want, not selling it.
In another few months – as home sales stall, mortgage rates rise, and the foreclosure pipeline continues to dump its contents into an already saturated market – comments like these will look even sillier, that is, right along with the idea that the central bank will begin raising short-term interest rates anytime soon.
The FED's actions can be termed:
"Talk Loudly and Carry a Toothpick"
Gold and Silver with a Note of Caution
By now regular readers know that I am invested in Gold and Silver. For anyone new, I am invested in Gold and Silver via physical holdings. That brings whatever bias it does and my long term view of the metals is such that I think much higher prices are in the future. On this blog I have always written that an average portfolio should hold 5% in metals with 10% being a bit more aggressive. I hold about 25% of mine in silver and gold bullion (a bit more silver than gold) which is higher than my normal 20% because I found a few deals over the past few months I liked. I have this up front so you know where I am coming from.
As a metal head I love headlines on bullish blogs like these:
via Gold Versus Paper:
Gold Bull, Bitches!
The line "Gold, Bitches" cracks me up every time.
via Zero Hedge (where I think the above line was born):
First Gold, Now Europe Running Out Of Silver
Of course some headlines are not as happy; here is an absurd one from Clusterstock:
Every Doctor, Dentist, And School Nurse Bought Gold This Week
Now I know for a fact that my doctor and my dentist have no gold or silver. They think I am a nut for buying it so this one is over the top. I would also doubt school nurses bought much either. Only one person I know in real life (ie, non blog connected) has any gold or silver. I cannot even get anyone to buy a little though I hammer them all the time. Some do trade in and out of some ETF's, but that's about it. So my own experience is that not many people own gold and/or silver. Results may vary in your circles.
After a strong couple of weeks I feel that it would only be fair to try and offer some thoughts I have regarding the metals that are more cautious in nature. While nothing here is investment advice (nobody in their right mind would listen to me!) I do harp on the metals a bit so some things have me a bit more cautious short term and I thought I would share.
In no particular order:
-Gold right now is being termed a "safe haven". While that may well turn out to be more true than you will believe, in the short term metals are about as safe as shaving with a samurai katana sword. It will work if all goes perfect but.....
Volatility can run heavy in metals (especially the miners) so a smooth ride is not really a fair expectation. Silver tends to move much more than gold up and down as well.
-Near term (3-6 months) I think gold $1500 and silver $25 are realistic targets. I also think that at some point gold (to a lesser degree silver) may become a target for government caps or restrictions on price movements. Of course this will only make physical metals go wild to the upside, but the paper proxies like GLD and SLV may fall on really hard times. There could be two metal markets; the paper and the real. It's kind of like the real housing market with no government help and the one we have now. Still, the paper proxies do have some tether to real bullion and this thought does bother me quite a bit. Of course if it comes to this I think it will resolve in gold's favor.
-Gold is money, real money. It has been for as long as gold was mined. Gold is the anti currency. Gold can be seen at times as all of the following:
inflation hedge
deflation protection
anti-dollar play
anti-euro play
pro-euro play
momentum play
waste of time
Volcano insurance
Contrary stock market play
And many more. Obviously gold cannot be all these things all the time. There may well be people buying gold for reasons that make little sense and this could change.
Of course I am still of the mind that over the next year we will see ever more currency issues and debt problems. Gold is "hard money" and it should be clear by now that many debts of all kinds are extremely "soft money" which depend on so much else to be made good. In the face of the wave of sovereign country issues, US state issues, pension issues, and back issues of Sports Illustrated I hold that more paper will be made to keep the system "liquid". The balance will be the metals. Stocks may well go up as well, maybe even more so than the metals, but there is only one true "hard asset" at the base of the value pyramid.
Have a good night.
11 comments:
getyourselfconnected,
You would be proud of me this week.
We had a classroom environment setting were each Lt. in class gave something called an info-brief.
For obvious reasons my topic was "Investing in Precious Metals" by: Lt. G.
I cover as much as I could in 15 minutes but managed to do the right things. The class was filled with other young officers that were intrigued about how valuable metals have become and I gave them plenty of advice and direction on how to learn more and how to get their feet wet. For me this week was a mission accomplished because I had the floor and I got to speak my mind without any retribution or sniping. My visual aids were gold foil covered chocolate coins and a powerpoint presentation. This week was a perfect setting as the markets were on fire from the drop in the stocks and to the "flight to safety" in metals. I even successfully completed my first physical sale at a massive % gain over the original purchase and I still have my entire core investment locked in. Now I can finally expand into a non-physical metal investment to create a level of redundancy in the way I have decided to invest.
Lt. G
PS: I might work for Uncle Sam but he took no part in my financial gains this week.... if you catch my drift.
Well, as far as the refinancing frenzy goes, it's not about interest rates. It's about origination fees.
You have to look at it from the lenders' and mortgage brokers' point of view. They get paid 1-2% for each loan they make. And then there are the appraisers who make $300 a pop for each loan they validate, so they're in on it too.
It might make sense for some borrowers to refinance at a lower rate. But realistically what they pay to take out a new loan, compared to what they save in interest, is high. Would you pay 2% to save .06% in interest?
What bothers me about this madness is the immediacy of it all. Oh, my God, I owe more than my house is worth! Only if you sell into the current market. DUH.
It's the same with my truck. I bought it new back in 1993 and have put 220,000 miles on it. I've probably paid, I don't know, $15,000 in maintanence and repairs over the years. In fact, I spent $1300--tune up, gaskets, valves, brakes, a/c motor--on it last week, after it died at the water department.
How much could I sell it for today? I don't know, maybe $3000. But it's not for sale. If anything happens to the truck, vandalism or some idiot runs into it, I don't care. That's what it's for. It gets me where I need to go--and some of the neighborhoods I have to drive to are not exactly what you would call safe. So I'll drive it till it falls apart.
The RX-8, on the other hand, is a whole nother story. That stays covered and safely parked in pristine condition. I only drive it when I want to have fun, or on those rare occasions when I have a date.
Anyway, as to precious metals, I don't dabble in them. I understand the logic behind buying them. I just don't invest in them. I'm 100% cash.
On his radio show, Karl Denninger talked about gold this week. It was an interesting discussion.
Lt G,
I do indeed understand the uncle sam bypass, my preferred method of physical accumulation as well. Those gold foil chocolate coins are pretty sweet as well! Glad to hear things have gone so well for you, you know I was pulling for you!
Gawains,
I get that banks/lenders would love to rewrite loans all the time, I just do not get who is doing this over and over at the lowest rates in history going on two full years? What's the point? I think Karl hates gold but I am not sure. Any snippets you want to share?
I think that it's important to point out that it's important to own physical gold and silver. Meaning gold and silver that you can access, and that you own, not paper gold.
I believe that there is too much speculation in the gold market per se, with some people believing that they own gold, and in the end, when the SHTF and they want to claim possession of it, they will find that they own nothing. There will be a lot of bag holders out there.
Make sure that if you are going to hold positions in the metal markets that the people you are dealing with are reputable, or deal in owning the metals themselves.
Disclosure: I own physical gold and silver.
Basically, Karl said that gold was not a hedge against inflation. But that it was a good investment in a diversified portfolio, say 10-15%.
Mish loves gold. Dave Ramsey hates it.
I'm indifferent.
Oh, and there's an interesting article over at Zero Hedge this morning about the Austrian mint, and probably others, depleting its gold and silver reserves. Panic buying by Europeans who fear the collapse of their currency is draining the reserves.
This makes sense. The thing about gold is that there really isn't that much of it, not in physical existence anyway. Did you know that all the gold ever mined in history would fit into two Olympic size pools?
There is a lot of paper gold, 100x actual physical gold, to be sure. In other words, the vast majority of "gold" being traded is actually paper. To my mind, that makes it a false market, trading paper for paper and calling it gold.
The problem is that physical gold really cannot be used as a medium for exchange. There isn't enough of it, it's too expensive to produce and coin, and it's cumbersome to store. This is why modern economies use paper currency, because it's cheaper and easier.
But a currency must be backed by something of value. Today all currencies are backed by nothing but debt. That is the crux of the crisis.
I doubt the world will ever return to the gold standard, mainly because I don't think it's possible to do so. However, something of value must be used to back the issuance of currency. What that would be at this point I have no idea. Whiskey perhaps?
By the way, there was an interesting blurb in BusinessWeek the other week about one investment that has way outperformed the stock market, and just about everything else. Do you know what it is? Wine. But that's even more difficult and expensive to store than gold.
I look upon physical gold in much the same way as I look upon real estate, as a capital savings account with expenses. The difference being that you can improve real estate to increase its value.
But there are many factors to consider when investing in real estate. It's not simply a matter of when to buy or sell, but also of what. A condo or a rental will never return as much of a gain as say acreage on the outskirts of town, as long as you have the capital to wait for growth and development.
But it's also a question of financing, interest rate, taxes. The main consideration though remains, as always, location, property type and condition or quality of construction.
Using a credit card to buy gold doesn't make much sense, any more than taking out a toxic ARM to buy real estate. The key to investing is in knowing what you're doing. Sadly, these days most people don't.
Debt on top of debt, paper in exchange for paper, that's the current global economy. The only survivors when the whole thing comes crashing down will be those who invested intelligently.
It's not that I'm anti-gold or pro-real estate. It's that I favor making informed decisions as to what to do with money.
Though i know a bit about this Gold, Silver what i could observe from my days is that its a good investment option.
I agree Refinancing has taken a good time again. Only thing needs to be looked at is how strong will it hold it roots again? ... Will there be any turmoil again ?
Gold is NOT deflation protection. If there is deflation, GOLD is a cross and you have now crucified yourself.
In deflation (defined either as falling prices, or the closely related definition of a decline in the volume of currency transactions), gold, like all other hard assets will be disfavored.
In deflation, currency will be hard to come by. However since you still have a functioning government (a la Japan) you have to have cash to service your debts - and to pay for goods and services in everyday life. Sure, you can try to tell your creditors to accept gold, but not all will. Moreover, since your loan agreement says you will pay in currency (and because there is still a soverign govt that will enforce that agreement) you have to raise cash. Thus, in deflation the demand for cash increases.
Likewise, in order to meet that demand for cash, people have a tendency to sell assets in order to get the cash they need to service their debts, and one of those assets is gold. As we all know, when everyone is selling, and few are buying, prices fall. Hence if there was true, long term deflation, gold, like all assets would get crushed.
Note, in order to have deflation, you have to have a stable government that people dont believe is going to implode any time soon. Even if a govt chooses not to print money, if people believe the government will soon not exist (a la the Confederate govt at the end of the civil war), people will not take currency of that government because they know soon there will be no soverign standing behind it. Hence you have inflation even without widespread debasement.
This is NOT whats going on in Japan. Over there, you have a declining population (i.e. less people to circulate money and fewer earners to pay their share of the national debt), and a govt that the vast majority of its citizenry believes is not going to simply disappear anytime soon. Hence Japan is one of the few examples in the world where there is deflation.
As an aside, since we dont have that condition in the US, thats why I dont believe we have deflation now - and apparently, no one else does either.
http://inflationdata.com/inflation/images/charts/Annual_Inflation/annual_inflation_chart.htm
Thus, right now, you are on the right side of the trade as this is clearly inflation. Still, if we dipped below that deflation line again, and went into a true deflationary spiral, make no mistake, gold, like all other assets, would get crushed.
Sorry but if gold was an inflation AND deflation hedge, you would have found the item that covers all situations at all times - the veritable "magic bullet" of investing that people have been searching for since the beginning of time. So unless you believe you have now found that magic bullet, logic would dictate you re-evaluate your thesis about a inflation AND deflation hedge, and realize you are quite wrong about one portion of it.
Anon,
I think if you re-read what I wrote I was saying that some think gold is the best choice no matter what happens and that I thought that was not correct. I do think gold, on a relative basis, can do well in deflation but it depends on quite a few parameters.
Geez, I try to write a cautious metals post and it still came out bullish! I cannot win!
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sell gold for cash
Hey Dude,
Really your thought will be a great mainstream for those who are looking for Mortgage Note. As it sounds very good though i would like to light it at the wall of my facebook.
Buyer Mortgages
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