Flood insurance program dies if Congress doesn’t act

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Aug 312017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Among the many items Congress must address when it returns from summer vacation is the National Flood Insurance Program, or NFIP, which is set to expire on Sep 30.

Homeowners with a mortgage who live in a flood plain are required to carry flood insurance. The NFIP, created by Congress in 1968, provides this coverage for about 5 million policyholders.

Unfortunately, NFIP is in the hole to the US Treasury to the tune of $24.6 billion, and under the current terms of the program, it’s likely to remain insolvent as flood insurance premiums do not reflect the costs of the program.

In 2012, Congress reformed the program to address this problem by requiring NFIP to raise premiums to reflect true risk of loss. It grandfathered existing policies, but required risk-based pricing on change of ownership. That set off immediate wailing in flood-prone areas as full risk rates were 500 or more percent higher than the grandfathered rates. Congress quickly rolled back the requirement and with it the chance for NFIP to crawl out of its financial hole.

The House has passed legislation to reauthorize and reform the program, and industry groups say it’s on the right track as:

– It will continue to allow NFIP coverage of new homes in the 100-year flood plain;

– It will continue grandfathering of existing policies;

– And it will set the floor for premium rate increases to 6.5%.

Interestingly, the bill seems to reinstate the requirement that grandfathered rates end when a property changes hands. Reports are surfacing that this already is impacting real estate sales in coastal areas.

Rate update: The end of vacation season could stir interest rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The end of vacation season could stir interest rates
Aug 292017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

With one week before Labor Day, we could be at the end of the summer slumber for interest rates. Typically, we’d expect market activity to increase with an end to the vacation season. However, this year, that natural increase is augmented by expectations for central bank announcements.

First up is the European Central Bank, which meets next week. Unlike the Federal Reserve, the ECB still has its money pumping spigot in full geyser mode. With European economies showing signs of life, expectations are that the ECB will begin to reduce the flow. When that happened in the US a few years ago, interest rates spiked for a few months. White ECB actions mainly affect European rates, we’d see some spillover effect in the US.

The Fed meets in the middle of the month, and markets expect it will announce the beginning of its balance sheet reduction plan. While the mechanics of the plan are known, some analysts think markets aren’t pricing in an imminent start point. If that’s true, and the Fed begins the taper right away, rates could bounce higher.

But this week’s economic data could temper all that potential excitement. This is a jobs report week, and we get the PCE data, the Fed’s preferred measure of inflation. If both are weak, especially the inflation data, rates could improve, not only because of the data, but because of its potential influence on the Fed’s tapering plans.

Aug 282017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Former Federal Reserve Chair Alan Greenspan has a warning. Interest rates are much too low, and he thinks they’re likely to move higher and quickly.

In a CNBC interview, Greenspan said he thinks the bond market is experiencing a bubble with long-term rates abnormally low. The low rates are the result of Fed taking short-term rates to near zero during the financial crisis and keeping them there for years.

The Fed has hiked short-term rates 4 times since then, but long-term rates remain near record lows. Analysts cite many reasons for this including political and economic uncertainty and, most importantly, persistently low inflation.

Greenspan says he doesn’t know when rates will start to rise, but he thinks it will be soon, and once they start rising, he thinks they will rise rapidly, which could put the rest of the economy at risk.

Rate update: Eclipse lulls market to sleep

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Aug 222017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates remain in a very narrow range near the lows for the year. Part of the reason for that is the usual summer doldrums. Another reason is the mixed messages coming from politics and economic reports.

On the political front, the Trump agenda, the prospects for which caused the Trump Bump after the election, has yet to gain much traction in Washington. Congress returns from its summer recess soon to face an enormous plate of unfinished business. With Congressional Republicans bickering with other Republicans, the White House dissing Congress, and Democrats just saying no to everything, concern about a government shutdown has legs. I don’t think the market is really trading this yet, but I suspect it’s an anchor that will keep rates from rising much in the near term.

On the economic front, most recent reports show continued, stable growth. However, inflation, which is one of the Fed’s mandates, has fallen by about a third this year. The Fed’s target is 2%, and we’re well below that level now. While low inflation seems like positive, the risk is that inflation turns negative. Japan is the poster child for how deflation can sap a country’s economy.

The one potential market mover this week is the Fed’s annual Jackson Hole symposium. In the past, the event has provided some surprises when Fed governors were more candid with their thoughts about monetary policy. However, the Fed’s current plan seems pretty set: start reducing the balance sheet in Sep and one more rate hike in Dec – maybe. The European Central Bank head also will attend this year, but it was reported that he won’t answer any questions about the ECB’s future actions.

So, absent a truly unexpected headline, the market may just stay asleep. We have two weeks until Congress returns from recess.

Rate update: All eyes on inflation data

 Interest Rates, Residential Mortgage  Comments Off on Rate update: All eyes on inflation data
Aug 092017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last week’s stronger than expected jobs report had a minimal effect on interest rates, leaving them smack-dab in the middle of their recent range. Markets still are waiting for something to motivate them.

The most important motivator these days seems to be inflation data, and we have a couple measures reported this week. The one that probably will garner the most interest is the consumer price index, or CPI, this Fri. While this isn’t the Fed’s favored inflation measure, it has street cred and is widely watched by market participants.

If markets anticipate another weak inflation report, we could see rates lead off slightly lower on Thurs. However, if the report on Fri shows an uptick in inflation, rates could rise very quickly. Given that I think you could lose a lot more ground with a strong report than you could gain with a weak report, the risks of floating probably outweigh the gains.

The other motivator we’ve discussed is political uncertainty, and it’s certainly not going away. It acts as a background anchor on rates, but that could change as we get closer to Sep. Already, we’re seeing dramatic media headlines about the dangers of the fiscal cliff and a government shutdown. The drama only will increase, which means the effect on interest rates could increase, especially if Congress doesn’t start making progress when it returns from recess.

Rate Update: Is it a little too quiet?

 Interest Rates, Residential Mortgage  Comments Off on Rate Update: Is it a little too quiet?
Aug 022017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Bond markets seem to be stuck in the summer doldrums. Either that, or everyone is on vacation. Rates really haven’t moved much in the last couple weeks, and there doesn’t seem to be a lot to accelerate movement in the offing.

This is a jobs report week, and that usually would have markets on edge. However, job growth has been pretty steady all year. Markets will probably shrug at another solid report, and other economic indicators aren’t suggesting a weak report.

The one economic indicator that does seem to have the markets’ attention is inflation. That makes the wage growth component of the jobs report worth noting. However, the Fed’s favored measure of inflation, the PCE index, matched last month’s figure of 1.5%, still well below the Fed’s target of 2%. That suggests wage growth won’t likely be the surprise that makes rates move.

Congress is heading for vacation soon, and that will remove that source of inspiration until Labor Day. I suppose it’s still possible, but I think highly unlikely, that Congress will accomplish something meaningful in the next month. If anything, I think it’s more likely the lack of action will help keep a lid on rates as markets grow increasingly nervous about all that awaits Congress in Sep.

On the horizon, we have the Federal Reserve meeting in Sep at which the Fed is expected to put in place its balance sheet reduction plan. As we’ve noted before, this is a source of negative inspiration for rates, and it could magnify the effect of any headlines that pressure rates upwards. I don’t think floating is unreasonable at this point, but pick a bail out point if rates start to climb.