Points of Interest

What happens when you hold a municipal bond auction and no one comes?

This has been happening across our nation.  Last week the University of Pittsburgh Medical Center (UPMC) was interested in issuing bonds to finance itself.  This is not a company with a product that's piling up in warehouses.  This is the real deal.  This is a brick and mortar hospital facility with life saving procedures not some cyberspace outfit. 

The bids for the bonds were so lousy they generated double digit rates for UPMC to pay for the money.  Tal Heppenstall, UPMC's treasurer, told Bloomberg, "It's outrageous.  We're a AA-rated credit.  We don't need to get financing from loan sharks.''

So, if a mortgage counselor offers you 6% for financing your home in an area where Fannie Mae considers most properties to be in a declining market, be grateful.  It could be worse.  As we all need medical facilities from time to time, let there be no doubt that we all need a place to live day to day.

A colleague in the title business asked me where current rates were this morning.  Another loan officer had told her they were going up.  Hearing all the bad news she had to ask “Why?  Last time I checked, the economy was sucking...”

This battle is brewing between differing factions on the state of the economy and what is to be done.  It’s been an ongoing argument.  On the one side are the folks who have been directly impacted by the souring of the credit markets.  And in a simplistic description there are those who already have a lot or who will stand to lose a lot should the economy slow.

Deflation is good for those who have a lot of debt.  The prospects of refinancing at a lower rate are enhanced under this scenario.

The folks (or institutions) that have a lot ($$) need easy money to keep the deflation demons away.  They don’t want their assets to decline in value.  A mild inflation is actually good for those who control a lot of assets.  Values go up to keep pace with inflation.

Except if that asset is a long dated bond such as the 10 or 30 year Treasury bond.  Then as inflation goes up, the value of bond drops and rates (i.e. mortgages) increase.

The last several weeks have completely changed the recent level of activity within the mortgage industry.  The conforming rates that existed the morning of January 23 were the lowest I have seen since the summer of 2003.  But it turned out to be a one day phenomena as by mid-afternoon we were experiencing price changes.  By the next day those rates had completely vanished.

This happened on the day after Martin Luther King’s holiday, the same day after a French bank’s reported loss of millions due to unauthorized leveraged trading.  It looked like the stock market was headed for the abyss.  And sometimes, those moments are the best for mortgage rates.

BAD NEWS = LOWER MORTGAGE RATES

Since then, there’s been a cumulative 1.25% drop in short term rates by the fed (good news), the house, senate and now the president have passed the fiscal stimulus bill (good news, as least for the economy in the short term) and the conforming loan limit is slated to be raised (more good news).  Mortgage rates are higher.

My impression is that the general public thinks rates are still at their lows based on some of the conversations I’ve been having.  Many may end up being right based on the testimony of Bernanke and Paulson this morning.  You see mortgage rates are higher, but in my estimation, if they haven’t gone even higher based on all the previously listed “good news”, bond traders may be thinking there’s another shoe that will drop.