January 7, 2000

One analyst can move mountains, mortgages

By TOM KELLY
The Real Estate Advisor

There was a time when farmers brought their apples, wheat and corn to town, sold them to suppliers and then put the money in the corner bank. The banker, because he now had more money to lend, typically reduced the interest rate on loans to his customers.

This faint recollection of the old way surfaced again last week when the complex international mortgage market again rose on the fear, not the reality, of inflation. I was also struck with the uneasiness of seeing one analysts opinion sway the way Wall Street performed for an entire session.

Byron Wien of Morgan Stanley Dean Witter wrote in his "10 Surprises of 2000" that he foresees the Federal Reserve raising rates in order to fend off inflation from an increasingly robust economy.

After Wien, an influential market strategist, predicted the Fed will raise rates by a full percentage point later this year, the Dow Jones Industrial Average headed south in a hurry, losing 139 points for the day. Some feel the freefall is only a beginning.

Long term mortgage interest rates then zoomed skyward across the board, reaching their highest levels since last August, according to Bank Rate.com which follows 4,000 banks in all 50 states. The 30-year, fixed-rate average rose to 7.89 percent from 7.82 while the 15-year fixed moved up to 7.48 from 7.43.

Prices on the benchmark 30-year Treasury bond plummeted, pushing the bond yield up to 6.62 percent, its highest level since September, 1997. This was simply one mans opinion. Look what happened in just one day! I realize that Alan Greenspan, the Federal Reserve chairman who some people believe to be the most powerful man on the planet, can bring Wall Street to its knees with a mere reference to inflation while on a family fishing trip. But how many individuals can bring about change without substance? Is this a select group of individuals? And, is this group growing?

Nobody seems to know. Answers vary from "any government official" to "any major brokerage firm." The bottom line is that anything that even hints at inflation causes a stir.

Interest rates tend to rise when the economy is raging. Thats because long-term loans no longer appear to be as attractive as other investments, so the money floods elsewhere. A quick look at the NASDAQ Composite Index, which was up 81 percent for the year before last weeks dive, is an example of one place investors have moved some cash.

Large investors, like pension funds and insurance companies, typically look to mortgage-backed securities to supply one piece of their portfolio. They will shop and consider different avenues and purchase certain securities when the market is right for them.

Bankers originate mortgage loans and then usually sell them in large blocks to huge mortgage clearing houses, which then sell the loans to these investors on Wall Street. The banker usually services the monthly payments, keeps records and acts as an agent who disperses money for taxes and insurance. Some banks also sell the right to service the loans and derive income for the sale. If you are sending your monthly payments to a new place, then your original bank probably has sold your "servicing rights."

A mortgage banker's income comes from origination and servicing fees, and profits of the resale of loans. Because the loans now are sold as long-term securities on the international market, local bankers no longer control long-term interest rates.

If you think the corner banker feels bad when he tells his customers that he "really cant predict" where home-loan rates are headed, think about some of the folks that make a living attempting to make predictions.

For example, James. F. Smith, the National Association of Realtors chief economist, said at the NAR convention in November that 30-year, fixed-rate mortgages should take a dip between Thanksgiving and Christmas - perhaps as low as 6.5 percent - before ticking back up again after the first of the year. That did not happen.

"Interest rates next year will look a lot like they did this year, Smith said. "Youll see high 7s for most of the year. Eight percent will be the line of death.

Well, we are staring straight at that "line of death" and its only the first week of the year.

And, I wonder what will become of his recession call for May, 2002, with fixed-rate loans hitting 5 percent at Christmas that year?

Previous columns:

• A look at house of tomorrow, 12-23-1999
• Home for holidays has a new meaning, 12-17-1999
• Buying and selling over the holidays, 12-10-1999
• New loan removes need to refinance, 12-03-1999
• Scenes from the NAR expo, 11-25-1999
• A look at the future of housing, 11-19-1999
• Your guide to mortgage insurance, 11-05-1999
• Who needs HUD?, 10-29-1999