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Dear Congress,

My clients are shopping for mortgages and your ongoing debates are causing problems.  Mortgage rates are rising this week when all the data points to them falling.

This is happening because the whole world is waiting for your vote.

For example, the September jobs report showed extreme weakness in employment nationwide.  The economy shed nearly double the amount of jobs as was expected.  This would normally pull money out from the stock market to the benefit of mortgage rates but, today, this isn't happening.

Everyone is watching you instead.

As another example, the U.S. dollar is headed for its biggest weekly gain ever this week. This would normally be good for mortgage rates because mortgages are repaid in U.S. dollars and a rising greenback attracts bond buyers.  More demand means lower rates.  But, today, this isn't happening.

Everyone is watching you instead.

And as a third example, Fannie Mae rolled back its Adverse Market Delivery Charge yesterday, reducing mandatory conforming mortgage loan fees by 0.250 percent. 

I expected that mortgage lenders would pass on those savings in the form of lower rates but, so far today, this isn't happening.

Presumably, everyone is watching you instead.

Honestly, it really doesn't matter what you do, just as long as you do something.  Your inaction is created tremendous amounts of uncertainty, causing markets to display volatility not seen since another Washington-area favorite -- Earl Weaver. 

You know how markets work -- nobody reacts worse to uncertainty than markets.

Your vote will change the lending industry -- no doubt about that.  You should carefully consider your decision and it should be debated.  However, no matter what you decide, it's not going to change the fundamental fact that people buy homes, and that they need money to finance those homes. 

Regardless of how you vote:

• The newlyweds in Chicago will still buy their starter condo
• The family in Manhattan will still outgrow its apartment
• The P&G employee in Los Angeles will still get transferred to Cincinnati

Until your vote is made, however, the banks are running scared and mortgage rates are rising.

Vote yes, vote no, vote with your heart, vote with your constituency -- it really doesn't matter.  Just vote.  Just do whatever it is that you're going to do so we can all get on with our lives.

The market fundamentals say that mortgage rates should be falling today but nobody's watching the fundamentals right now -- they're all watching you. So, please, let's get this over with so we can all move on with our lives. 

Plus, I'm tired of my family asking me "how are you doing?".  I'm fine, thank you.  Business is going well.

Thank you for your time,

Dan Green
Loan Officer

With mortgage rates moving faster than the Spread HD offense this morning, let's take a few minutes to recap what's going on, and what's causing rates to fall.

First, the bailout.

Late Sunday, Congress drafted the Emergency Economic Stabilization Act of 2008 bill and it goes to vote sometime today.  The key provision in the bill that's helping mortgage rates is on Page 110. 

The passage reads, summarized:

• The U.S. Treasury gets access to $250 billion immediately
• The U.S. Treasury has to ask the President for its next $100 billion
• The U.S. Treasury has to ask Congress for its next $350 billion

Because of how the bill is worded, the U.S. Treasury can't go spending taxpayer money willy-nilly, lessening the likelihood of monetary supply inflation nationwide.  This is good because anytime inflation pressures ease, mortgage rates stand to benefit and this is one of the catalysts for today's rate drop.

Another reason why rates are falling is death of banking giants Washington Mutual and Wachovia.

It's no coincidence that these two institutions shut down within 3 days of each other.  Both were heavy pushers of the now-famous Negatively Amortizing Mortgage, the time-bomb assets of which clogged the banks' respective balance sheets. 

Consider: When Washington Mutual was rescued bought by JP Morgan Chase & Co. and the buyer devalued WAMU's portfolio by a massive $31 billion, it forced investors to reassess Wachovia's mortgage portfolio, too. 

Within minutes, Charlotte-based Wachovia lost a quarter of its value and was a Dead Man Walking.  Then, before even a weekend could pass, Wachovia had been packaged and sold to Citigroup with the help of the U.S. government, leading to another $42 billion in mortgage portfolio writedowns. 

That's $73 billion in mortgage losses practically overnight.

Surprisingly, this is good news for mortgage borrowers because each time a bank acknowledges losses like this, the mortgage market as a whole gets one step closer to discovering what an individual home loan is really worth on Wall Street. 

In fact, it's this exact conundrum that defines the mortgage market domino chain, dating back to July 2007.  If markets could just accurately answer "What is a mortgage worth?", this little credit mix-up thing would be over. 

WAMU and Wachovia hitting the showers brings us one step closer, and at least for today, brings mortgage rates down.

In his weekly syndicated column, Kenneth Harney pulled back the curtain on a nasty piece of IRS tax code that can penalize homeowners with foreclosures and short sales.

For those that don't know, a short sale is when a lender accepts a payoff amount that is less than the amount owed on a home. 

Author's note: If you're new to short sales, consider this to be a seminal moment. It's the first of many times you'll hear the term "short sale" bandied about over the next 12-18 months.  You heard it here first, folks.

Here's an example of a short sale. 

• You owe $400,000 on your home
• You are missing mortgage payments and are 90 days late to the lender
• You have no assets or reserves in the bank
• Your home sells for $380,000
• After paying commissions and taxes, you have $365,000
• The lenders realizes that you can't pay them back for everything you owe
• The lender agrees to accept less than the amount owed because something is better than nothing

So, it appears that the homeowner is getting away scot-free on the $35,000 shortfall to the lender. 

Quite the contrary.

According to IRS tax code, when a creditor agrees to cancel a personal debt of $600 or more, it is required to submit a 1099-C, Cancellation of Debt form to the IRS.  And, when the IRS receives this form, it treats the canceled debt as income.

So, when the lender agrees to "forgive" the $35,000 in the short sale example above, it is required to report that write-off to the IRS.  The IRS, in turn, treats the write-off as income for the homeowner.

Assuming the 28% tax bracket, the homeowner added $9,800 ($35,000 * 0.28) of additional tax liability come April 15 -- even he never physically held the cash, or was paid the cash at all.

But the tax code related to Form 1099-C may not last forever.  Several lawmakers on Capitol Hill are trying to modify the tax code related to cancellation of debt. 

The Mortgage Cancellation Tax Relief Act of 2007 would amend the tax code to forgive debt cancellations on primary residences and is currently before the House Ways and Means Committee, the primary tax legislation body of Congress.

If governments see fit to curb the use of interest only mortgages, I propose a solution for mortgage borrowers everywhere.

The 100-year mortgage.

Using the 100-year mortgage, your payment on every $100,000 borrowed will be just $1.26 higher than it's corresponding interest only payment.

Yes, this post is somewhat tongue-in-cheek.

UPDATE: Sellsius already posted on this, like, three weeks ago.  But, I will not be stopped from taking my rightful place as a mortgage industry visionary.  Behold: the 101-year mortgage.

The first rule of U.S. Dollar policy?  Don't talk about U.S. Dollar policy.  At least, not until you're already on the job.

Former Goldman Sachs CEO Hank Paulson was sworn in today as the nation's 74th Treasury Secretary.  He noted:

"We must always remember that the strength of the U.S. economy is linked to the strength of the global economy."

Most people don't know the name Hank Paulson, nor did they know the name of John Snow, the man Paulson is replacing.  But, what John Snow did for the economy cannot be understated.

Snow played a part in keeping mortgage rates low over the last few years.

John Snow was an ardent supporter of a strong U.S. dollar and that was terrific for mortgage rates.  Strong demand for dollar-denominated securities such as mortgage bonds holds rates down.

If Paulson takes an opposite approach, investors will likely sell mortgage bonds instead and rates will rise.

Paulson did not address economic policy in his speech today, but consider his viewpoints on the dollar to be one more long-term risk to mortgage interest rates.

Meanwhile, in order to preclude any future conflicts of interest, Paulson is forced to divest himself of 3.23 million shares of Goldman Sachs common stock plus other Goldman Sachs securities.  Marketwatch estimates the total value at $496 million.

Source
Paulson Pledges a Strong and Open U.S. Economy, During Swearing-In
Wall Street Journal
July 1, 2006

http://online.wsj.com/article/SB115254409603102355.html?mod=The-Evening-Wrap

Paulson files to sell $500 mln in Goldman stock
Marketwatch.com, Steve Gelsi
July 10, 2006

http://www.marketwatch.com/News/Story/43xRFhd1RRlnqg1H1BkmTP4?siteid=google&dist=TNMostMailed

Goldman Sachs Chief Executive Henry "Hank" Paulson was tapped by White House Chief of Staff and Goldman Sachs alumnus Josh Bolten as the new Treasury Secretary, replacing John Snow.  Paulson now awaits confirmation by the Senate.

Blah blah blah, right?

Does it matter than Paulson will soon be the leader of the federal agency that is responsible for economic and financial prosperity in the United States? 

Yes, but in a round-about kind of way.

According to the U.S. Treasury Web site, the role of the department is eight-fold.  You can read them all at the Web site, but the most important role of the Treasury is:

Advise on domestic and international financial, monetary, economic, trade and tax policy. 

So, in addition to being the guy whose signature is on your paper money, the Treasury Secretary is the principal economic advisor to the President.

Paulsen's predecessor, John Snow, was known to support a strong dollar and that was terrific for mortgage rates.  The reasons are pretty clear if you look at it like an investor: Wouldn't you rather invest in something that will keep its value over time?

When foreigners believe that U.S. dollars will not lose value, they are more likely to invest is U.S.-demonimated securities such as stocks, real estate and bonds -- including mortgage bonds.

Demand for these securities pushes their value up.  When demand for bonds increase, the yield on bonds decrease.  So, more demand creates lower rates all around.

If foreigners believe that U.S dollars will lose value, they will expect a higher return because the underlying asset will be inherently devalued.  Therefore, mortgage rates go higher to attract more investors.

So, John Snow tried his best to keep the dollar strong, and mortgage rates remained low.  Then, the effects of having a strong dollar began to take effect.  Americans bought foreign goods because they were "cheaper" versus U.S. goods and the trade deficit ballooned. 

How Hank Paulsen handles the dollar could portend your future mortgage interest rates.  Will he be strong on the dollar, helping to keep rates low?  Or, will he allow the dollar to weaken?  So far, he is staying mum on the issue.

Even though the Treasury Secretary does not make policy for the government, his opinions absolutely influence it.  So far, traders are reacting tepidly; mortgage rates are slightly lower in advance of the Fed Minutes released in a few hours.

Cliff Clavin Fact of the Day: The average length of tenure, dating back to Alexander Hamilton in 1789, is 2.97 years.

Source
Secretaries of the Treasury
United States Department of the Treasury

http://www.treasury.gov/education/duties/treas/sec-treasury.shtml

BankRate.com reminds us that mortgage rates are now at a 4-year high.  But not many other people are talking about it.

For example, the television news programs haven't latched on to the story.  Probably because it's not "sexy" enough.  Not many Americans care about the macroeconomic factors the impact mortgage rates on a day-to-day basis.

CBS News' new news anchor isn't talking about it.  And neither is NBC News' departing morning news co-anchor. And I don't think Fox even has a news program.

It's unfortunate that economics can be so dry because there is some real drama heating up. 

A few headlines culled from the Wall Street Journal this week (cue "The West Wing" music):

• "Dollar Finishes at 2-Month Low Against the Euro"
• "Snow Gets Muted Bush Support, Fueling Talk He Will Leave Soon"
• "Libby Says Bush Authorized Leaks"
• "Treasuries Slide Amid Rate Worries"

There have been no economic releases since Monday, and mortgage rates continue to climb. 

Some action is from investors placing bets in advance of tomorrow's Non-Farm Payrolls report.  But that can't be the sole reason.  More likely is that traders are fearful of a White House overhaul. 

Here's a quick recap of what's been spooking them lately:

1. Card was replaced by the anti-Snow Bolten. Traders hedged for a weaker dollar. 
2. Bernanke commandeered his first FOMC meeting -- traders hedged for higher interest rates. 
3. White House insiders rat out the President about intelligence leaks (which may prove to be false).  Traders hedged for political instability.

And mortgage rates reach their highest levels since 2002.

For as much as the media loves to talk about a real estate bubble, it's somewhat strange that this story about mortgage rates is not getting coverage.  After all, a higher cost of borrowing may be the true deflator of the housing market in the end. 

The press isn't connecting the dots on that yet.

Gold bullion prices are near all-time highs and it may be tied to speculation surrounding Andrew Card's resignation as White House Chief of Staff. 

Card's replacement, Joshua Bolten, is reportedly calling for the resignation of Treasury Secretary John Snow. 

This matters because Snow has fought to keep the U.S. Dollar strong versus other currencies.  If Snow is replaced, investors believe that the U.S. Dollar will lose some of its value. 

So, rather than watch their investments decline in value, investors move to rid their portfolios of as many dollar-denominated securities as makes sense.  Mortgage bonds, don't forget, are denominated in dollars.  This is one reason why mortgage rates are higher this week.

Meanwhile, watching gold's run-up is a terrific example of the the Domino Effect. 

First, Card resigns.  Then, Bolton is rumored to want Snow gone. If Snow is gone, the dollar may fall.  So, traders sell dollars in exchange for gold.  Gold prices rise.

I have greatly simplified this lesson, but if you want to read more about the history of Gold and its role as currency, pop over to Paul van Eeden's report "The Gold Price" on Silver Bear Cafe.

Sources
Gold, Silver Rise to Highest Since Early 1980s; Palladium Jumps
Bloomberg.com, March 30, 2006 13:19 EST
http://quote.bloomberg.com/apps/news?pid=10000006

The Gold Price
Paul van Eeden (edited by James Turk)
http://www.silverbearcafe.com/private/gold101.html

The I-Line: News from the Lab
August 2004
http://www.ivstandards.com/newsletter/archives/aug04.html