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Mortgage Bonds Suffer Worst Month In 2 Years As Marginal Buyer Fed Pulls Out

https://www.zerohedge.com/news/2018-11-02/mortgage-bonds-suffer-worst-month-2-years-marginal-buyer-fed-pulls-out

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Mortgage bond investors are about to become reacquainted with ‘moral hazard’ and its inevitable consequences.

As the Federal Reserve continues to pull out of US Treasurys and mortgage bonds (the Fed entered its “peak” monthly unwind phase in Q4, where it will allow up to $30 billion and $20 billion in MBS to roll off and on Oct. 31 its balance sheet declined by more than $33 billion, the largest one-week drop since the start of QE), holders of housing bonds who had grown accustomed to steady returns in a rigged market endured their biggest shellacking in 2 years, as Bloomberg pointed out in a story published Friday.

And while at least one prominent bond investor pointed out that Bloomberg’s warnings about a “bloodbath” in MBS may have been exaggerated…

…the story’s central premise that the retreat of the bond market’s ‘marginal buyer’ is creating headaches for complacent bond bulls is certainly valid, as we’ve said before. It only takes a quick glance at the 10-year-yield vs. the Fed’s balance sheet expansion/unwind to spot the dangers that could lie ahead.

Now, as the Fed-generated tidal wave of liquidity slows to a trickle and the central bank looks to unwind some $1.7 trillion in MBS holdings, “savvy” bond bulls are stuck asking themselves: who the hell is going to step in and stop the bleeding once liquidity dries up further and mortgage bonds continue to fall?

The answer isn’t immediately clear.

Kevin Jackson, a managing director on Wells Fargo’s mortgage trading desk recently told Bloomberg:

“When the Fed announced they were going to buy mortgages, we tightened a lot and rolls performed really well – now the reverse is happening. One should expect widening.”

Indeed, last month, MBS returns lagged Treasurys by the widest margin since November 2016, when rates surged after Donald Trump’s surprise election victory.And, as BBG reminds us, by pulling out of the market, the Fed is leaving investors to grapple with a scenario that hasn’t existed for 4 decades. For the first time since then, there will not be any government entity, including Fannie Mae and Freddie Mac, to help provide liquidity for mortgage backed securities. The market is going to be completely on its own, and this is coming at a time when rates are rising, which will likely slow down buyers and push spreads wider/

Investors, scrambling to look for help somewhere, are reportedly hoping that banks and money managers can help fill the role that the Fed is leaving from. However, there are quirky little challenges (such as the demand not actually existing) for banks and money managers to take on the task.

Ankur Mehta, the head of MBS research at Citigroup Inc., put the problem in clearer terms: “It is not obvious to us where that incremental demand for mortgages comes from. Domestic banks already earn an attractive return on reserves, while money managers are facing headwinds due to outflows and their existing MBS overweights.”

In a sign of just how much these bonds could fall, this is happening at a time when mortgages “are still looking rich” according to Mehta. He noted this in comparison to levels and spreads prior to the 2008 crisis, when the Fed was not in the market. The Fannie Mae 30 year current coupon spread over a blend of 5 year and 10 year treasuries ended October at its widest points since June 2017.

Of course, this outcome has been very thoroughly telegraphed. And we all know that this “solution” will only lead to larger problems, as it forces our economy to swallow this bitter medicine. If there’s a silver lining to be found, it’s that, if the Fed’s recent track record is any indication, they’ll be back in the market soon enough, blowing an even bigger bubble that future generations of Fed chairmen will need to grapple with.

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Mortgage Refinancing: how it can help you

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When people talk about refinancing their mortgage, they are usually talking about swapping their old mortgage at a high interest rate with a new mortgage at a lower interest rate. With rates lower on 15 and 30 year fixed rate mortgages by around a whole half a percent, many families have been taking advantage of rate refinancing. A half of a percent, or 50 basis points(.50), may not sound too significant, but when compounded out over a year, or many years for that matter, you can be looking at a savings of several thousand dollars or several tens of thousands of dollars. So you many want to inquire with you loan holder about refinancing if current rates are lower than the rate that is on your loan documentation.

Refinancing can also be used to do what is known as cash out refinancing. With this type of financial transaction, you need to have access to equity in your home. As an example, if you owe $100,000 on a $300,000 mortgage, you have $200,000 of equity. You can take out $200,000, pay off the remaining $100,000, and the use the remaining money for whatever you like, such as home repairs or additions. Whether or not you’ll be able to take out a full $200,000 depends on the institution that you do business with.

In some instances you may be able to eliminate your private mortgage insurance premiums by refinancing. If when you took out a loan for your home, you were not able to come up with a twenty percent down payment, you could currently be paying private mortgage insurance(PMI). However, if the equity in your home is now more than that twenty percent, you should ask your loan holder if upon refinancing the PMI will be eliminated.

People also refinance to get out of an adjustable rate mortgage(ARM) and into a fixed rate mortgage. Often times one opts for an ARM when rates are low and look good, but the future of rates is uncertain. Now, that fixed rates are relatively low, it may be advantageous to switch into a fixed rate mortgage if you want to know exactly what you will need to pay each month for the life of your loan. One can also attempt to refinance the length of their loan to save money on interest payments in the long term. If a family has a 40 year mortgage,and their incomes have risen in recent years, it may be beneficial to refinance into a 30 year mortgage to pay less interest over the life of a loan.

Another very interesting way to use a home equity loan is to consolidate credit card debt and make credit card interest a tax deduction for yourself. You can potentially save yourself a lot of headaches if you use your home equity to help alleviate the pain caused by credit cards. But, you should consults a financial professional to see if this is a reality for your situation.

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Mortgage refinancing: a matter of managing the risk

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If there is one best description to depict the operation of mortgage refinance, that would no less than be a deliberated risk. This idea has been grounded to the fact that, these mortgage refinances bear fines in the event that you settle them immediately.

But if there’s one reality regarding this subject that you ought to familiarize yourself with, at best it would be the fact that you need not agree on a Yield Spread Premium. This is the system wherein a cash reimbursement was awarded to a mortgage agent in the event that the interest rate of the loan is greater than what you are eligible for.

Contrary to what you think it is not standardised, and every so often it is deceitful, since mortgage refinancing would entail you to undertake numerous estimations. For a lark that refinancing is thinkable even though have already had bad credit, it doesn’t necessarily follow that it is undemanding. Actually, it is one of those actions that you would really need to think about a hundred fold, still more engage in impetuously.

Talk about perfect timing

Nearly anything that we do, it has been a cardinal rule to do things on the best moment when it has to be done. Same theory applies in mortgage refinancing; you would also need to have the ideal timing when you need to move towards refinancing. This moment as they say is best described when, the interest rates are in a crux that is ostensibly lower than the mortgage rate that you are bearing.

Lessen the expense

In general, it is favourable that you trim down the mortgage burdens that which you are currently carrying. Among the several options that you can take is the cash-out, this is one means when you utilize a home equity, so that you can settle the soaring interest rates of your credit cards or just any other bills which you may have.

For typical families this is a vast outlay and the best alternative for them is to reduce their problem through refinancing. Moreover, it is also a smart way to lessen the monthly recompense of your family.

For the homeowners

Basically, mortgage refinancing is crafted to cater for the needs of homeowners who are planning to confine a lesser fixed rate, and probably break out from the ambiguity of a changeable mortgage rate. Since this option does them better than harm, it is the best alternative they engage in if they want to lessen monthly mortgage rates.

Another benefit brought about by refinancing is the abridging of your mortgage, along with the fact that you may also alter the kind of mortgage you are currently in so that it would fit in to your allowable monthly expenses. Lastly, refinancing permits the borrower to enjoy the leisure of flexibility.

All things considered, this would probably be the best decision for you, if you are about to close your expenses because it could be regained in the earlier 30 months of your loan. The basic nature of loans is to perk up your current lifestyle, so don’t defeat its purpose by settling for an additional burden.

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Mortgage Refinance Loans

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Within recent decades mortgage loans have become an everyday occurrence, spreading over all the groups of the society. The necessity and importance of mortgage loans are doubtless, therefore everyone who wants to take advantage of mortgage should gain a complete understanding of its types, relevant terminology, benefits and such options as mortgage refinance.

Choosing a certain type of mortgage it is important to know to which extent interest rates depend on the value of real estate and what mortgage loan rates evolve from. In general, all mortgages can be divided into secured and unsecured ones. The main types of mortgage are the adjustable or variable rate mortgage and the fixed mortgage. Adjustable rate mortgage allows to change the interest rate within certain periods of time. The intervals depend on a fixed financial index, with the payment rising in accordance with the interest rates. In case the latter are low, this type of mortgage loan gives 100% benefit.

As to the fixed rate mortgages, it is the most widespread type of mortgage loan, while the interest rate doesn’t change during the whole term of loan. Being the oldest type of mortgage, it is especially popular among householders. Other types of mortgage include balloon mortgage, two-step mortgage, jumbo mortgage and hybrid mortgage. Actually the type of mortgage is determined by the mortgage loan program of a certain mortgage loan company.

If the client is going to take out a new loan which permits to compensate the current mortgage, he or she can use the option called a refinance mortgage loan. Having a low interest rate, the refinance mortgage loan is a good choice for those who want to pay back the whole debt in a short term. In addition, a refinance mortgage loan is an ideal opportunity to pay off the debts for those who are no more able to fix their mortgage loan.

Refinance is basically performed using a second mortgage loan which has both incontestable benefits and some significant disadvantages that should also be taken into consideration. Thus, in case the second mortgage loan is not compensated for, the client just loses the property. So, before deciding on mortgage refinance one should determine the affordable interest rate. On the other hand, the interest rates of the second mortgage loans are usually fixed so that borrowers could save their money. Besides that, mortgage insurance isn’t required, if mortgage payments are performed in two steps ñ a first mortgage loan and a second mortgage loan.

Mortgage refinance can be very helpful and effective for borrowers if they are aware of some mortgage tips. Above all, while seeking a convenient type of mortgage loan one should take into account his/her current financial situation. Whatever refinance mortgage loan is chosen ñ with fixed interest rates or with variable interest rates ñ one has to study all the connected data to prevent mistakes which may lead to the loss of real estate. It is also important to find appropriate mortgage loan rates and interest rates among a great variety of mortgage loan companies and lenders. Here, the Internet can be a useful tool for picking the best type of mortgage refinance possible.

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