Rate Watch #1216 – Fiscal Sustainability.

November 18, 2019

By Dick Lepre

dicklepre@rpm-mtg.com

www.loanmine.com

 

Advance Approvals

RPM now offers Advance Approvals. If you are thinking of making an offer on a home this is significant. Our Advance Approval gathers your loan application, credit report, income and asset documentation and is given an actual underwriter approval without a specific property. Once this is done you will get a letter saying that you have an underwriter approval for a loan up to a certain amount with a specified down payment for a “to be determined” property.  This enables you to make an offer to close in 25 days. The fact that you have a RPM Advance Approval and can close in 25 days significantly improves the chance of your offer being accepted.

 

What's Happening?

Mortgage rates still are not consistently connected with Treasury yields.  This is to some extent a result of the Basel III capital accords which 1) have tied up and enormous amount of bank liquidity and 2) given preference for Treasury debt making less of the fixed income investment pool available for mortgages.  An article I wrote on this was just accepted for publication.

Call for a Council on Fiscal Sustainability 

Fed Chairman Powell warned Congress last week that fiscal policy was on an unsustainable path. If he had said what he was really thinking is would likely have been something akin to “How the hell do you expect us to help the economy in difficult times when you folks have been adding, on average, more than a $1 trillion to the National Debt every year for over 10 years. You cannot expect us to have the ability to manage monetary policy to the benefit of the nation’s economy if you refuse to have sustainability fiscal policy.”

Congress understands that its fiscal policy is unsustainable.  The root problem is that voters don’t ask for much less demand fiscal sustainability.  No one gets elected with the promise of fiscal sustainability. People get elected by promising voters that they will spend money on what those voters want. The only solution which will achieve fiscal sustainability is to move the debt ceiling outside the political process.

What taxes are to be raised and what the government spends money on are value issues best left to those elected. But the economics of the size of the debt ceiling and, by implication, the deficit is best handled by economists.

Congress recognizes that the country’s debt path is unsustainable. While the economics of the matter is straightforward – cut spending, raise taxes, or both – the politics is not. And if voters cannot insist, or are not going to insist, on fiscal sustainability, and if Congress is not going to control public finances on its own accord, then one must conclude that the fiscal process is lacking a necessary ingredient. To supply it, we propose the creation of an independent Council of Fiscal Sustainability. Under enabling legislation, its members – presumably economists – would be appointed by the President, and confirmed by the Senate, to nonrenewable 14 year terms and report to Congress twice a year. This is not a revamped Congressional Budget Office, nor a refurbished Council of Economic Advisers, but an independent agency akin to the Federal Reserve.

The CFS would have a single task: It would annually place before Congress a maximum National Debt which is economically sound over the medium to long term. In planning the budget, Congress would look at projected spending and revenue and, if the difference exceeded the CFS number, it would have to cut spending or increase taxes or some combination of the two. Our notion is not idealistic: It just recognizes a fundamental constraint of the current political structure to act in the best interest of the nation’s long-term economic health.

The enabling legislation must mandate that the National Debt cap presented to Congress be accepted unless it is voted down by a resolution of disapproval. There is precedent: The Base Realignment and Closure (BRAC) process regarding military base closures is an example whereby a “this takes effect unless you vote to disapprove” process helped achieve the desired goal in a manner that was politically acceptable. We believe that this process meets the requirement of constitutionality. The constitution places fiscal policy in the hands of Congress. As long as Congress has the ability to reject the suggestions of the CFS we believe that constitutionality is preserved. Creation of the CFS thus gives each member of Congress a new degree of political freedom. “You folks needed those roads, and under the CFS deficit limit, taxes had to increase to pay for them”. Or, “I voted to limit spending because under the CFS deficit limit, the alternative would have been to raise your taxes.”

While establishing a structure to take the political liability out of the fiscal process might be a first step we still face enormous problems. The biggest fiscal problems are the underfunding of Medicare and Social Security. It would make sense to me to make both of these self-funding. Either the inflow of money must be increased or the outflow decreased. Possible solutions might use a combination of 1) increasing the age at which these kick in 2) raising the Medicare and Social Security tax rates 3) removing the income cap on the Social Security tax.

In 1995 a balanced budget constitutional amendment passed in the House of Representatives and fell one vote short of passing in the Senate. Not a lot of people know or remember that.

This is an update of something I wrote 10 years ago in cooperation with Jurgen Brauer who was a Professor of Economics at Augusta State University and is now retired. The necessity to use a BRAC-like process to achieve constitutionality was suggested in a phone conversation with David Vitter a former U.S. Senator from Louisiana.

VI) Technical Analysis from Jim Grauer

The 10-year Note should trade in the 1.70%-2.00% yield level for the coming week.

Detailed stochastic analysis is here http://www.loanmine.com/CustomPage378.x

 

Dick Lepre
Senior Loan Advisor

RPM | MORTGAGE
3240 Stone Valley Rd West
Alamo, CA 94507

Cell: 415.244.9383
eFax: 866.488.2051
BRE License # 01143973

NMLS #302379

Email:
dicklepre@rpm-mtg.com

 

LendUS, LLC dba RPM Mortgage NMLS #1938

Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act

 

 


Technical Analysis from Jim Grauer

The 10-year Treasury closed last week at 1.75% yield.  The 10-year Treasury should trade in the 1.60%-1.90% range this week.

Entire stochastic analysis is here http://www.loanmine.com/CustomPage378.x

 

 

 

Dick Lepre
Senior Loan Advisor

RPM | MORTGAGE
3240 Stone Valley Rd West
Alamo, CA 94507

Cell: 415.244.9383
eFax: 866.488.2051
BRE License # 01143973

NMLS #302379

Email:
dicklepre@rpm-mtg.com

 

LendUS, LLC dba RPM Mortgage NMLS #1938

Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act