This will put the brakes on refinancing and any broader real estate recovery. As our friends at the Stansberry & Associates Investment Research noted on Thursday:

Yesterday [Wednesday], the rate of 30-year fixed-rate mortgages hit 5.79%, up from 5% two weeks ago, and lending activity has already fallen off a cliff. Advisory firm FTN Financial says the jump in rates will cut the number of borrowers with an incentive to refinance (generally rates 1.5% to 2% below your current rate constitutes “incentive”) in half. JPMorgan, the third-largest mortgage originator this year, said refinance activity is already “really down” since rates started rising, and noted 4.75% “seemed to be the switch” that spurred activity.The Mortgage Bankers Association (MBA) says refinancing activity is at its lowest level since last November.

Accounting for the two-week increase in mortgage rates, the average homebuyer will pay $100 more per month, about $36,000 over the 30-year life of the mortgage, on a $200,000 loan. Mortgage loan application volume is already down 7.2% from a week earlier.

Meanwhile, a tsunami of losses is gaining strength in the commercial real estate sector. We’ve been banging the drum about the coming catastrophe in commercial real estate. It’s only a matter of time before this becomes reality.

One big problem is the $179 billion in so-called partial-interest only loans that were written between 2005 and 2007 and packaged into bonds. These allowed owners to delay paying principal for the first several years of the loan. Now these principals are coming due. This from Bloomberg:

With soaring vacancies and falling rents, some cash-strapped borrowers will fail to cover the higher costs, said Andy Day, a commercial mortgage-backed securities analyst at Morgan Stanley in New York. About 87 percent of mortgages sold as securities in 2007 allowed owners to put off paying principal for several years or until maturity, compared with 48 percent in 2004, Morgan Stanley data show.

“The worst is yet to come,” MetLife Inc. Chief Investment Officer Steven Kandarian said yesterday in a Bloomberg Television interview. “Typically there’s a lag between when the economy softens and when the defaults actually occur.”

“Investors have already seen prices on top-rated senior debt drop below 70 cents on the dollar from 95 cents a year ago,” according to Aaron Bryson, a commercial mortgage-backed securities analyst at Barclays Capital in New York.

Typically, lower rates are good news for borrowers, as they signal lower mortgage interest rates. That expectation has been turned on its head. The credit crunch has prompted lenders to ignore the will of the central bank and instead look after their own.

The Nationwide is increasing its fixed rate mortgages by up to 0.32% today and Alliance & Leicester are doing much the same tomorrow. And that comes just three days after A&L slapped on 0.35% on the same deals, reports the Times. “Experts blame the soaring coast of Libor, the rate of interest at which banks lend to one another.” Libor continued to rise in the first quarter but has dipped back below its 6% plus high for the year. It’s currently 5.92%.

But while credit is drained from the West and food runs short in the East – public order is at risk in at least 33 countries warns the World Bank – what’s really caught your editor’s attention is globalisation as applied to the beautiful game… Something brought into focus by this year’s UEFA Champions League – Europe’s premier football club competition – quarter final line up. This is a quick run through as I saw it…

Four of the eight teams in the quarter finals were English. An achievement which produced a fair degree of backslapping amongst football’s talking heads. ‘It just shows the quality and dominance of the English Premier League over our European rivals’, they crowed. The qualifying teams were the leading ones in the English Premier League: Arsenal, Chelsea, Liverpool and Manchester United.

On Tuesday night Chelsea, owned by a Russian, with a team managed by an Israeli and fielding four English born players beat Turkish team, Fenerbahce, to win 2-0, with goals scored by an Englishman and a German.

Liverpool also played on Tuesday night, with a team managed by a Spaniard and owned by Americans, fielding three English born players. They won on 3-1 with goals from a Dutchman, a Finn and an Englishman. Their opponents were Arsenal – an English-owned team, but with significant Ukrainian and American minority shareholders either of whom may yet take it over. They have a team managed by a Frenchman and fielded no English born players in the game, though later introduced one as a substitute. Their single goal was scored by a Frenchman.

Last night the fourth English club Manchester United, owned by Americans, managed by a Scot, played Italian club AS Roma. They fielded three English born players, though added two more as substitutes and beat Roma 1-0 with the single goal being scored by an Argentinean.

From a total 44 players in the starting line up of these four leading English teams I make ten of them English by nationality. As to England’s national team, it failed recently to qualify for a major tournament, prompting the English manager to be dumped and replaced by an Italian one.

‘Viva el primero liga! El numero uno in el mundo globalizado’ as they say in I don’t know where… The internationalisation of English football seems a high profile proxy for globalised Britain. The league is highly successful and the envy of others, it is rich from TV sponsorship and can attract the best talent from the global labour pool of the world’s footballers. Standards have never been higher nor have ticket prices. All to the good, unless of course you happen to be a credit squeezed fan, or home grown talent looking for a break.

In the financial world, the success of foreign businesses to Britain, adopts a tennis comparison: the “Wimbledon Effect”. Given the summer tennis tournament hasn’t had an English men’s champion since Fred Perry won for the third time in 1936 or a women’s champion since Virginia Wade in 1977, it provides a pithy analogy for the UK’s financial services industry; an industry that has been highly successful in spite of the dearth of local champions. The dashed hopes of two of Britain’s leading investment banks from yesteryear were a case in point.

Back in 1986, The Economist tipped Kleinwort Benson and SG Warburg as the leading British investment banks poised to become world class financial institutions. It didn’t happen. Kleinwort Benson was bought out by Germany’s Dresdner bank in 1995 which in turn was bought by the German insurance giant Alliance. SG Warburg was swallowed up the same year by Swiss Bank Corporation, now subprime disaster-case UBS. A national champion in investment banking was not to be. But then given the spectacular fate of Bear Stearns, perhaps we should be grateful.

*** Colleague Manraaj Dheensay, editor of Profit Hunter, notes there are those in the developing world not hurting from the credit crunch or rocketing food prices:

“At Christie’s on Tuesday an anonymous buyer paid a record £2.5 million for a single leaf from an ancient Koran manuscript – more than twenty times the auction house’s lower estimate for the lot. Just a few minutes later, a 10th-century carved marble capital from a royal palace of the Moorish rulers of Spain sold for £1.3 million pounds, setting a new record for an Islamic stone carving. Christie’s estimate for the piece had been £50,000 to £70,000. The sculpture was put up for sale by a church in Pennsylvania, where it had been hidden in a barn for more than a century. And at Sotheby’s yesterday, a late 12th-century iron key to the Kaaba in Mecca – Islam’s holiest site – sold for £9.2 million pounds – about 20 times its estimated price.”

“”The number of international private buyers active at the top end of the market demonstrates the increasing strength in depth in the Islamic and Indian Art Worlds,” said William Robinson, Christie’s international head of Islamic art, after the auction. What he was saying is, essentially, what we have been saying here at Profit Hunter – there is a huge amount of money out there in the developing world, and that pot is growing very, very quickly indeed.”

And for the energy producers, never more quickly than with a near-record $111 oil price.

Regards,

Rob Mackrill
The Daily Reckoning