Tuesday, March 28, 2006
Michael Braga
Mortgage rates may rise even if Fed's rates don't
A lot of financial gurus are expecting the Federal Reserve to stop raising interest rates this year.If that happens, real estate agents say it would be good news for the real estate market. Mortgage rates would remain historically inexpensive and people will continue buying homes.But what happens if mortgage rates keep going up even if the Fed stops hiking the Fed funds rate, the rate it charges to banks for overnight deposits?When the Fed started raising interest rates back in June 2004, the rates charged on 30-year mortgages barely budged. While the Fed funds rate went up from 1 percent to 4.5 percent, the interest rate on 30-year mortgages hovered in the 5.5 percent to 6.35 percent range.The reason for the disconnect, experts say, is that banks don't control mortgage rates any more. Ever since the recession of the early 1990s, banks have sold off most of their mortgage loans to major secondary mortgage lenders -- Freddie Mac and Fannie Mae.These giant institutions package the loans into pools of mortgages, which are carved up and sold on public exchanges as securities called "collateralized mortgage obligations," or CMOs.CMOs are bought by buyers all over the world, and have become particularly attractive to Japanese and Chinese central bankers in recent years. That's because CMOs pay higher interest rates than the 10-year Treasury bills, which have traded in the 4 percent to 4.5 percent range.CMOs have also been regarded as fairly safe investments because default and prepayment rates of the underlying mortgages have been low.But if the real estate market continues to decline and the number of foreclosures increases, CMO customers might prefer to hold Treasury bills, which pay less but are backed by the full faith and credit of the United States government.If that happens, mortgage rates might have to keep rising to keep customers interested. And if mortgage rates keep going up, the real estate market will suffer.Mark Vitner, Wachovia Bank's senior economist, said such a scenario is not far-fetched."If the real estate market weakens and there are more credit problems or prepayments, CMOs will become more risky," he said.He thinks the appetite of foreign central banks for dollar-denominated assets such as CMOs will wane in coming years.But Vitner warned against painting a doomsday scenario."It's not like people should read your column and rush
Continued1 2 Next >>
. . and rush out to sell CMOs," he said. "You're right in terms of what's driving the market, but delinquency rates are still quite low and we have a long way to go before we get to a scenario where CMO buying decisions are impacted."Southeast Florida foreclosures on the riseThe number of foreclosure filings rose by more than 25 percent in Broward County in February compared with the previous month, says Default Research, a Mount Pleasant, Penn.-based research firm.Similar filings were up 17 percent in Palm Beach County and 15 percent in Miami-Dade during the same period.This is an indication that the real estate market has cooled and some buyers paid more for properties than they could afford, said Jack McCabe, a Deerfield Beach-based real estate analyst.He expects to see a further increase in foreclosures as the year progresses.So does Richard X. Bove, a banking analyst with Punk Ziegel & Co."There is a major problem with real estate in the U.S.," Bove said. "It is substantially overvalued."Bove is predicting a significant decline in housing prices of 12 to 15 percent this year."That will result in an increase in loan defaults," he said.Meshad buys landfrom Neil Mohamed HusaniDuring the past 15 months, Neil Mohamed Husani has completed eight multimillion-dollar real estate transactions.Six of them have been with his partners, Michael Tringali and Robert J. Martin. But two -- one in July and the other in September -- were with prominent Sarasota attorney John W. Meshad.Meshad made the purchases through his family's limited liability company, Lake Verna LLC, paying a total of $24.8 million for about 80 acres on State Road 70 in Manatee County.Meshad said Husani bought the same land from Cloverdale-4 LLC for $19.5 million at around the same time, flipping the properties for a $5.3 million profit.Husani originally tried to get the sellers to give him an extension on the closing so he could flip the properties immediately to Lake Verna, Meshad said. But the sellers didn't want him to do it that way."They made him close on their deal and then close on ours. So he had double the closing costs," Meshad said.
Mortgage rates may rise even if Fed's rates don't
A lot of financial gurus are expecting the Federal Reserve to stop raising interest rates this year.If that happens, real estate agents say it would be good news for the real estate market. Mortgage rates would remain historically inexpensive and people will continue buying homes.But what happens if mortgage rates keep going up even if the Fed stops hiking the Fed funds rate, the rate it charges to banks for overnight deposits?When the Fed started raising interest rates back in June 2004, the rates charged on 30-year mortgages barely budged. While the Fed funds rate went up from 1 percent to 4.5 percent, the interest rate on 30-year mortgages hovered in the 5.5 percent to 6.35 percent range.The reason for the disconnect, experts say, is that banks don't control mortgage rates any more. Ever since the recession of the early 1990s, banks have sold off most of their mortgage loans to major secondary mortgage lenders -- Freddie Mac and Fannie Mae.These giant institutions package the loans into pools of mortgages, which are carved up and sold on public exchanges as securities called "collateralized mortgage obligations," or CMOs.CMOs are bought by buyers all over the world, and have become particularly attractive to Japanese and Chinese central bankers in recent years. That's because CMOs pay higher interest rates than the 10-year Treasury bills, which have traded in the 4 percent to 4.5 percent range.CMOs have also been regarded as fairly safe investments because default and prepayment rates of the underlying mortgages have been low.But if the real estate market continues to decline and the number of foreclosures increases, CMO customers might prefer to hold Treasury bills, which pay less but are backed by the full faith and credit of the United States government.If that happens, mortgage rates might have to keep rising to keep customers interested. And if mortgage rates keep going up, the real estate market will suffer.Mark Vitner, Wachovia Bank's senior economist, said such a scenario is not far-fetched."If the real estate market weakens and there are more credit problems or prepayments, CMOs will become more risky," he said.He thinks the appetite of foreign central banks for dollar-denominated assets such as CMOs will wane in coming years.But Vitner warned against painting a doomsday scenario."It's not like people should read your column and rush
Continued1 2 Next >>
. . and rush out to sell CMOs," he said. "You're right in terms of what's driving the market, but delinquency rates are still quite low and we have a long way to go before we get to a scenario where CMO buying decisions are impacted."Southeast Florida foreclosures on the riseThe number of foreclosure filings rose by more than 25 percent in Broward County in February compared with the previous month, says Default Research, a Mount Pleasant, Penn.-based research firm.Similar filings were up 17 percent in Palm Beach County and 15 percent in Miami-Dade during the same period.This is an indication that the real estate market has cooled and some buyers paid more for properties than they could afford, said Jack McCabe, a Deerfield Beach-based real estate analyst.He expects to see a further increase in foreclosures as the year progresses.So does Richard X. Bove, a banking analyst with Punk Ziegel & Co."There is a major problem with real estate in the U.S.," Bove said. "It is substantially overvalued."Bove is predicting a significant decline in housing prices of 12 to 15 percent this year."That will result in an increase in loan defaults," he said.Meshad buys landfrom Neil Mohamed HusaniDuring the past 15 months, Neil Mohamed Husani has completed eight multimillion-dollar real estate transactions.Six of them have been with his partners, Michael Tringali and Robert J. Martin. But two -- one in July and the other in September -- were with prominent Sarasota attorney John W. Meshad.Meshad made the purchases through his family's limited liability company, Lake Verna LLC, paying a total of $24.8 million for about 80 acres on State Road 70 in Manatee County.Meshad said Husani bought the same land from Cloverdale-4 LLC for $19.5 million at around the same time, flipping the properties for a $5.3 million profit.Husani originally tried to get the sellers to give him an extension on the closing so he could flip the properties immediately to Lake Verna, Meshad said. But the sellers didn't want him to do it that way."They made him close on their deal and then close on ours. So he had double the closing costs," Meshad said.
