A case for Janet Yellen is that as the Fed’s current vice chair, she represents continuity. Based on her comments and past record, she would either continue Bernanke’s policy or even take them up a notch, creating even more new money in order to “help” the economy. A case against Janet Yellen is the flip side of this. Bernanke’s policies have been a complete failure, so choosing an acolyte of his would be the worst possible thing to do.

Bernanke’s policies have in fact failed on many levels. In the first place, he is a Keynesian who thought that more money would increase demand in the economy. Studies have shown that this did not work, that it actually backfired.

Every dollar of new borrowing encouraged by giveaway interest rates was more than offset by a reduction in spending by savers. When savers receive little or no return on savings, they cannot either spend or invest what they do not receive. Moreover, the repressed interest rates have actually discouraged bank lending while destabilizing pension funds and insurance companies.

Interest rates below inflation have succeeded in creating a mirage of prosperity by  fueling a stock market rise, a rise that is looking more and more like another bubble among other Fed sponsored asset bubbles. But bubble or not, there is no demonstrated link in economic theory between a rising stock market and rising employment levels.

Yet even this recital of failure does not get to the heart of what is so tragically wrong with Bernanke’s and Yellen’s ideas. The worst part of their failed policies is that the severely repressed interest rates they have favored represent price controls, price controls blanketing the entire economy, and price controls never work.

There is an irony here.  A large majority of professional economists, including those aligned on the political “left” as well as “right,” respond to surveys by indicating that they generally oppose “government price controls.” The problem  is that most government price  manipulations and controls are not advertised as such. They may be stealthy by design; or they may just take a form that is hard to recognize for what it is.

Ben Bernanke himself told a group of college students studying economics that he opposes price controls. He said that:

    “Prices are the thermostat of an economy. They are the mechanisms by which an economy functions.”

But Bernanke’s Fed has unarguably been the chief price controller of our economy.

Why exactly are manipulated or controlled prices so damaging? A thriving economy is comprised of billions of prices and trillions of price relationships. Consumers rely on honest price signals and so do investors. They tell us what we need to know in order to make sound economic decisions.

If prices are not allowed to communicate accurate and honest information, no economic system can be expected to function properly.  If the price manipulation or control is not extreme, the economy may limp along, impaired, not realizing its full potential, but not in overt crisis. If the undermining of honest prices is extreme enough, the system will visibly falter and may even collapse, as in 1929 or 2008.

Unfortunately price manipulations and controls just lead to more manipulations and controls.. In 2009, the government tried its best to restore the health of banks by finding buyers for their bad mortgages. Generous subsidies were offered to  persuade Wall Street to buy the mortgages. But Wall Street refused all the offers. Why? Because the government had taken over the mortgage market, and in the absence of normal market prices, no one had a clue what the mortgages were worth.

This is a dramatic example, but on close examination too much of what the entire government does in trying to lead or regulate the economy involves a price manipulation or control. It is time to pay heed to some sensible advice from  humorist P. J. O’Rourke:

    “The  price system] is a bathroom scale. We may not like what we see when we step on the bathroom scale, but we can’t pass a law making ourselves weigh 165. . . .”

Norwegian business executive Oystein Dahle reminded us that: [Soviet] socialism collapsed because it did not allow prices to tell the economic truth.”  Janet Yellen, like Ben Bernanke before her, seems completely unaware of the importance of honest prices. How can we expect the economy to recover under her stewardship?

Source: http://www.forbes.com/sites/realspin/2013/10/09/a-case-against-janet-yellen-for-fed-chairman/

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As the hours before a midnight deadline ticked away Monday (Sept. 30), the possibility of a federal government shutdown was creating uncertainty in the recovering U.S. home mortgage market. 

The extent to which home buyers could feel the pain, real estate professionals said, depends largely on how long the budget impasse on Capitol Hill goes on.

New Orleans area real estate and mortgage professionals said the potential impact will be minimal as long as the hiatus doesn't drag on for weeks, but buyers could see delays in getting their loans processed.

Mike Anderson, president of Essential Mortgage, a company of real estate firm Latter and Blum, said his staff was working furiously Monday to request income and Social Security number verifications from the IRS and Social Security Administration, which will cease issuing the records in the event of a shutdown.

Anderson said loans can't close without the income tax transcripts, a requirement put in place after the mortgage crisis in an effort to fight fraud.

"I think if we go two weeks or longer, I think it's going to have an impact," Anderson said.

The Federal Housing Administration, part of the U.S. Department of Housing and Urban Development, insures home loans for low- and middle-income and first-time home buyers.

HUD said in a contingency plan this week that the agency would continue to endorse new home loans in the event of a hiatus, although with a drastically reduced staff of 68 on-duty employees in the housing office.

Anderson said loan officers can use FHA's computer-automated system to get a case number, the first step in the agency's process. But with a limited staff, FHA won't be available to answer questions as the loan moves forward, he said.

Borrowers seeking loans guaranteed by Fannie Mae and Freddie Mac, which together own or guarantee nearly half of all U.S. mortgages, will see business as usual. 

The U.S. Department of Veterans Affairs said it would continue to administer its loan guarantee program.

FHA-backed and VA-backed loans accounted for more than a third of new home loan lending last year, according to the Federal Reserve.

The Department of Agriculture's Rural Development will put on hold on its loan program, Anderson said.

Much depends on where buyers are in the timeline of buying a house and when sales are scheduled to close, said Ross Miller of Miller Home Mortgage in Metairie.

Miller said he hopes sellers "understand that it's not a buyer or mortgage company's fault that this is happening and that they would be accommodating in doing extensions appropriately."

The picture painted by local real estate agents, though, wasn't dire in the short-term.

Claudette Reuther, president of the New Orleans Metropolitan Association of Realtors, agreed. She said she believed lawmakers would reach a last-minute resolution before the industry feels any impact. "It's just one of these things; we just sit back and wait and see what happens," Reuther said.

Terry Roff, a Gardner Realtors managing broker in New Orleans, said he has more long-term concerns that political wrangling in Washington could indicate a protracted freeze.

That would hurt not only borrowers and real estate agents, but also title attorneys, moving companies and others in the industry, he said.

"It has quite a ripple effect," Roff said. "Hopefully, whatever happens will be a non-event or short-lived and we'll get on with business."

LOS ANGELES — Homeowners are doing a better job of making timely mortgage payments, a trend that brought down the national late-payment rate in the second quarter to the lowest level in five years.

The percentage of mortgage holders at least two months behind on payments fell in the April-June quarter to 4.09 percent from 5.49 percent a year earlier, the credit reporting agency TransUnion said Tuesday.

The rate also declined from 4.56 percent in the first three months of the year.

The last time the mortgage delinquency rate was lower was the third quarter of 2008, when home prices were sliding and the US economy was in recession.

Five years later, US home sales and prices are rising, fueled by moderate but stable job gains, still-low mortgage interest rates, few homes for sale, and a slowdown in foreclosures.

Low mortgage rates have made it possible for more homeowners to refinance and lower their monthly payments. And rising home prices have helped homeowners who were ‘‘underwater’’ on their mortgage — owing more than the home was worth — to return to positive equity. That, in turn, has opened the door for those borrowers to qualify for refinancing.

‘‘So as prices come up, more and more of those people come off the cusp and are actually able to take advantage of those low rates,’’ said Tim Martin, TransUnion’s group vice president of US housing.

The rate of late payments on home loans has been steadily improving over the past four quarters. Even so, the delinquency rate is still above the 1 to 2 percent average historical range, an indication many homeowners still are struggling.

Mortgage delinquencies peaked at nearly 7 percent in the fourth quarter of 2009.

The late-payment rate in the April-June quarter improved in every state, with Arizona posting the biggest annual decline.

Florida had the highest mortgage delinquency rate in the nation at nearly 9.9 percent, even though it declined about 27 percent from a year earlier.

TransUnion, which draws its data from a sample of 27 million consumer records, anticipates the national mortgage delinquency rate will continue to decline in the third quarter, finishing below 4 percent.

‘‘We’re still a long way from what we’d call normal,’’ Martin said.

Source: Boston Globe

 New home sales rose in May to the fastest pace in five years, adding to signs of a steadily improving housing market.

Sales increased 2.1 percent in May compared with April, according to the Commerce Department, which said the new homes sales rate was at the highest level since July 2008.

Earlier on Tuesday, the S&P/Case-Shiller survey of 20 major metro areas reported a strong increase in average home prices with prices rising in all 20 cities.

"We're definitely seeing some good news and some very strong numbers," David Blitzer of S&P Dow Jones Indices told ABC News.

The average of the S&P/Case-Shiller home price index was up by 12.1 percent from last year.

"That's the best number in seven years," says Blitzer. April's price rise compared to March was the strongest monthly gain in 13 years. The strongest increases came in California and the Southwest.

Blitzer said last week's comments from the Federal Reserve that it may begin tapering bond purchases as early as this year and the resulting sharp increase in Treasury yields sparked fears that rising mortgage rates will damage the housing rebound.

"Home buyers have survived rising mortgage rates in the past, often by shifting from fixed rate to adjustable rate loans," Blitzer said in a statement. "In the housing boom, bust and recovery, banks' credit quality standards were more important than the level of mortgage rates. The most recent Fed Senior Loan Officer Opinion Survey shows that some banks are easing credit restrictions. Given this, the recovery should continue."

Zillow's chief economist Stan Humphries said the S&P/Case-Shiller numbers may reflect where the housing market has been in some of the frothier metros, "but they are not indicative of where it's headed."

"The housing market worm has turned over the past few weeks – inventory levels are beginning to show signs of easing, and mortgage interest rates are creeping up. Going forward, both of these factors will help mitigate extreme price spikes caused by very strong housing demand and very low housing supply," said Humphries.

Overall, the national housing recovery is "strong and sustainable," Humphries said, but there will be pockets of volatility.

"Buyers expecting home values to continue rising at this pace indefinitely may be in for a shock," he said.

Another report showed improvement in the manufacturing sector.

American businesses stepped up their orders for long-lasting manufactured goods in May, according to the Commerce Department. Durable goods orders last month rose 3.6 percent, matching April's gain. Most of the increase was due to a surge in commercial aircraft orders, which tend to fluctuate sharply from month to month. Still, businesses also ordered more computers, communications equipment, machinery and metals.

Many housing bears think that the recent increase in mortgage rates is the beginning of the end for the Canadian housing market. I’m not convinced; here are some reasons why.

Fixed-mortgage rates have gone up because they are tied to bond yields, which have been rising lately. That’s because investors are selling bonds and other defensive holdings on signs the North American economy is gaining momentum. In such an environment, they would rather have more of their portfolios in cyclical and growth investments.

What’s also to be expected as the economy gathers steam is growth in employment and household incomes. Importantly for housing, this will serve as an offset to the drag of rising interest rates.

Fears about tumbling house prices at the national level thus seem overblown at this stage. In fact, a recent empirical study found that the majority of increases between 1980 and mid-2010 did not undermine house prices.

Furthermore, variable-rate mortgages, which are linked to the Bank of Canada’s lending rate, won’t be increased until late 2014 according to Bay Street forecasts and futures markets. This should help keep housing affordable while employment and income move into a more supportive position.

Actually, mortgage rates hikes are initially positive for the housing market. They encourage prospective buyers to get off the fence and buy a home in hopes of avoiding further increases.

But it’s premature to say an uptrend in fixed-mortgage rates has started. Usually more than one or two upticks are required. And whether or not we get many more jumps in bond yields is debatable. For one thing, the Federal Reserve will be working hard to head off such increases (or rein them back in) through announcements and actions that allay bondholder jitters over too-rapid an uptake in economic activity. The U.S. Federal Reserve has already started the process by jawboning about its plans to taper off monetary stimulus.

Even if an uptrend were to emerge, Canada has a greater capacity to absorb increases than the U.S. had in 2007. Close to three-quarters of Canadian homeowners now have fixed-rate mortgages, so rate increases feed slowly into the market since only a portion come due each year. In 2007, about 75 per cent of U.S. mortgages had variable rates and the Fed was aggressively driving them up.

Source: The Globe and Mail

In a free market system the price of a good is determined by the supply and demand for a good. When the supply of a good falls or the demand increases, prices go up. The opposite is true when the supply increases or the demand falls. This basic economic rule holds true for mortgage rates.

Mortgage rates are driven by a very liquid market where millions of transactions take place daily. In this article we’ll talk about this market, and what you, the consumer, can keep an eye on to track rates and perhaps form an opinion on which direction rates might be going.

Shortly after being originated, most mortgages are sold into what is known as the secondary mortgage market. It is this secondary mortgage market, where mortgages are bought and sold,that drive mortgage rates on a daily basis. Supply in this market comes from borrowers who get a mortgage; demand comes from sophisticated institutional investors who buy mortgages. Institutional investors consist of pension funds, sovereign funds, insurance companies, hedge funds and the U.S. Federal Reserve.

Of note is that when a mortgage is sold it doesn’t necessarily mean that the “servicing” of the mortgage is sold. The “servicer” of a mortgage is the company which interacts with the borrower by sending out monthly statements, collecting payments, etc. Many institutions which originate mortgages, sell the mortgage, but keep the “servicing rights.” As a borrower, you should be familiar with the company who services your mortgage; however, the fact that your actual loan has been sold is generally not something to be concerned about.

In the process of being sold into the secondary mortgage market, most mortgages are packaged into a mortgage bond. Like other bonds, a mortgage bond is a claim to future principal and interest payments which can be sold to an investor. For example, the principal and interest payments you make on your mortgage are collected by the company that services your mortgage and then likely passed to an institutional investor which owns the bond of which your loan is a part.

The level of mortgage rates quoted at banks and mortgage companies are a function of the price for mortgage bonds in the secondary mortgage market. Before a bank quotes a mortgage rate to a customer, they know at what price they can sell that mortgage in the secondary mortgage market. When the price for mortgage bonds goes up, mortgage rates go down and vice versa.

On a daily basis billions of dollars of mortgage bonds are bought and sold. Like other bonds, inflation expectations play a large part in the price of mortgage bonds. Inflation erodes the value of the future principal and interest payments mortgage bond investors receive. If inflation expectations rise, bond prices fall and mortgage rates rise, and vice versa.

Currently, the largest investor by far in mortgage bonds is the U.S. Federal Reserve which, as part of their overall strategy to increase borrowing and lending and put a floor under home prices, has purchased well in excess of $1 trillion in mortgage bonds in the last three years, and continues to do so a pace of $65 billion per month. If you understand that rates are driven by the supply and demand for mortgage bonds, you will understand that the Federal Reserve’s huge purchases of mortgage bonds has helped to drive mortgage rates to historical lows.

In conclusion, mortgage rates change daily based on the prices for mortgage bonds. As part of their strategy to try and stimulate the U.S. economy, the U.S. Federal Reserve is currently by far the biggest buyer of mortgage bonds. The Federal Reserve’s demand for mortgage bonds has helped drive mortgage rates to all-time historical lows. When the Federal Reserve stops buying mortgage bonds, mortgage rates are likely to rise. Watch for news on the Federal Reserve’s current bond buying strategies to anticipate potential big moves in mortgage rates. On a daily basis, mortgage rates will vary with overall inflation expectations. There are several barometers of inflation expectations that can give clues to future mortgage rates. These include: the price of gold, the consumer price index and common sense observations about the health of the economy that can be made by anyone who manages a household budget. While it’s impossible to predict future mortgage rates, it is possible to have an educated opinion.