April 13, 2013

Rates could drop dramatically before rising

April 13, 2013

Rates could drop dramatically before rising

ChrisWhalenHousingWire’s Jacob Gaffney was right when he said this Chris Whalen video is a must watch.

Whalen is managing director at Carrington Investment Services, one of the largest private real estate companies in the U.S. They are the 20th largest brokerage, one of the biggest managers of single family rentals, and were the biggest buyer of non-performing loans in 2012.

A few things that stood out for me (paraphrasing):

– Fannie/Freddie have increased their guarantee fees so much (which are fees Fannie/Freddie charge to lenders in the securitzation process), it has muted the impact of what the Fed has been trying to do with quantitative easing to lower interest rates.

– The cost of funds for all U.S. banks last year was $15b. It’s usually more like $100b. So bank profitability will be severely impacted when the Fed starts to tighten policy.

– Same thing for mortgage banks, which can make several points on secondary transactions in the current policy environment, and when rates rise (as MBS sell), this will thin out dramatically. But the higher expenses from much tighter regs won’t go away.

– Given what’s going on in Japan and Europe, U.S. bond markets market could rally more this year and the 10yr Note could go “down to levels you wouldn’t believe” because assets will seek safety in the U.S. (which, if Whalen is right, would cause rates to drop dramatically in the short term).

Key weekend viewing. Scroll to 1 hour mark for Whalen’s discussion…

Also here are some slides to supplement video.

Follow Chris Whalen on twitter: @rcwhalen