The Fed’s new program, Operation Twist, designed to lower long term rates by moving the Fed’s $400 billion bond portfolio into longer term bonds from short term bonds, is in full swing. The idea is by purchasing long term bonds, Operation Twist will manipulate the bond market and cause long terms rates to fall – hopefully increasing mortgage activity and business expansion.
My concern is, many homeowners who are in adjustable rate mortgages have been helped by the Fed’s purchasing of short term bonds. If the Fed sells all their short term Treasuries, then (in theory) short term rates may rise – hurting homeowners that are in adjustable rate mortgages linked to LIBOR.
(This is in addition to my other concerns about Operation Twist, including the fact that too many homeowners are underwater to take advantage of lower mortgage rates and many businesses are already sitting on large amounts of cash and are still not expanding.)
In fact the August Mortgage Monitor report released by Lender Processing Services, Inc. shows that foreclosure starts were up in August by nearly 20 percent compared to July 2011, with first-time foreclosure starts reaching 2011 highs.
As banks continue to try to find ways to recapitalize themselves, they are going to become more aggressive in the foreclosure space and have even begun to go after homeowners who have strategically defaulted.
The Wall Street Journal reports that more and more lenders are going after loan defaults to try to recover the difference between the defaulted loan and what was eventually recovered in the foreclosure process. In the past banks have avoided going after defaulters to avoid a PR mess from suing people who just lost their homes.
If Operation Twist causes short term rates to rise and homeowners are not able to afford higher payments, we may see more foreclosures, leading to more inventory in the housing market. Thus putting more pressure on home prices.
Quick snapshot of the current mortgage mess shows not much has improved…
charts courtesy of Calculated Risk