Mortgages and the Credit Crunch

In October we wrote ‘So Should We Hang All The Mortgage People?’. It was a general comment on the nature of knee jerk regulations to a crisis. We now can revise the title to say ’Should We Hang All Of The High Flying Federal Reserve People?’ Federal Reserve Bank of New York President Timothy Geithner got a little mouthy today in a speech. He called for greater central bank authority over markets and financial institutions. We agree that some serious work needs to be done….but….this sounds a whole lot like asking forgiveness after the fact rather than permission before hand. When he helped the Fed engineer a $30 billion dollar loan last month to Bear Stearns in 36 hours - he pretty much raised the bar of Fed authority to the highest it has ever been. He, along with others, claimed that they simply did not think they would have been able to clean up the crisis if Bear Stearns failed. The end justifies the means. The age of the Wildcat Fed (or Cowboy Fed - whichever you prefer).

So now we have Mortgage Originators acting like Used Car Salesman and Cowboys, we have Wall Street Investment Bankers acting like Wildcat Bankers and Cowboys, and we have the Regulators acting like Cowboys. This is shaping up to be quite a shootin’ match.

Knee jerk regulation dumped fuel on the fire in setting up the complicated debt instruments in the first place. Knee jerk regulation caused financial firms to value assets daily, and thereby trigger a downgrade, write-off, downgrade, write-off cycle in the first place. What demon will this new cry for blood unleash?

There is room for all kinds of change in this environment - but prudence and patience need to win this time. Over reacting to satisfy the din of public discontent is a movie we have seen over and over - it always ends badly.

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30 year fixed rates are headed higher this week and most everyone, traders and economists alike, believe it will continue even higher. Why?

The 10 year Treasury (which is what 30 year fixed rates follow) has had a rough go of it. People have just stopped buying the poor thing – and that is bad news for mortgage rates.

Remember that the price and yield on a bond move inversely. As the price goes up, the yield drops (and 30 year fixed rates drop). What makes the price go up you say? Buyers. Old school Econ 101. The more people want to buy something, the higher the price goes. But people have stopped buying. The price has been dropping and the yields have been increasing – so up go the rates.

Why have people stopped buying? And what will this mean for mortgage rates and for you?

First, investors have stopped buying. Inflation erodes the value of bonds in general but inflation really erodes longer term bonds like the 10 year. In fact, usually a whiff of inflation in the air will send bond buyers fleeing for the exits. These days, we have had more than a whiff – we have a full blown stench. Commodities rallied this week. Oil surged past $135. Food prices, copper, energy – all higher.

Second, foreigners stopped buying. The Bank of Japan used to buy bunches and bunches. They wanted to shore up the strength of the dollar because they did not want their exports to cost too much. But most foreigners – individuals, banks and sovereign wealth funds – have all the greenbacks they want. They are starting to see other investments in more favorable light.

Third, the government might have to sell more of them to make up for the lower tax revenues in this economic slump. Normally, mamma Fed has been raking in some good cash from all of the tax payers. Of course even with the tax revenue it did not stop the government from selling Treasurys (meaning borrowing from all of us and the world). But these days? They are really going to use that ATM in the sky called US Treasurys in order to feed their appetites. Back to Econ 101. If you increase the supply – the price drops more.

Fourth, the dollar is loosing its golden child status. Its value has been on a long painful skid against the other world currencies. This makes oil more expensive (which is traded in dollars). It exports inflation to the world at the same time as exporting economic sluggishness. After all, for years Americans bought anything the world made – and the world loved to sell it to us. But these days, stuff the world makes is a little more expensive to the average American. That is not good for the growth of foreign economies.

We look for 30 year fixed rates to surge into the mid 6’s by the fall – and jet right on past the mark by 1^st quarter 2009.

Tags: predictions and explanations, What does the mortgage crisis mean? // 3 Comments »

Time to give ourselves a score card on all the predictions we have been making…

Home prices continue to fall. We predicted in September of last year that the housing market would not begin a real recovery until the end of 2009 or the beginning of 2010. Most thought we were crazy then, but now major economic predictors are starting to agree. We don’t want to be right, but so far so good.

Jumbo mortgages (more than $417,000) are still pretty rough. In some cases – as high as 8%. They have not yet begun to ease because liquidity has not yet returned to this market segment. All along, we have predicted that Jumbos will not recover until the 4^th quarter of 2008. So far so good on this one too.

Our predictions about the stock market were WRONG. We thought the major indices would be lower by now (mid May). For example, we thought the Dow would be around 12,500 and instead it closed above 12,900 yesterday. Moving forward, we still think the markets will suffer through the end of July, then take off.

As of March, no US banks had failed in 2008. We predicted 50 by Halloween. So far, 11 failed in April (click FDIC) and 1 last week. We still are feeling good about our prediction of 50 by Halloween.

We predicted the Fed would lower at the last meeting by .25% (they did), and we predicted they will hold at the next meeting (we will see). We will go further and say they will probably hold for the next 2 meetings. Good on this one too…

We predicted conforming rates on 30 year fixed loans would climb to the mid 6’s by the end of this month. We were WRONG on this one! The national average this week for a 30 year fixed no points was around 6.1%, and our average to our clients was about 5.8%. Even with our prediction failing (!!!), we are sticking to our guns that 30 year fixed can not sustain this spot for much longer. We think they will hit mid 6’s by the end of August.

We still believe we are already in a recession, but most people disagree. Not sure how to grade us on this one. Statistically, no one has admitted it yet and the numbers are equivocal. So I guess we can not really grade ourselves yet. If our economy never enters a recession, then we will obviously fail this test. Meanwhile, we are sticking to the R word.

Lastly, and most importantly, all, we believe that if you are getting your mortgage from a stranger in this market, you are putting a loaded gun to your head. If you don’t use Finworth, use someone very reputable please. Ask them tough questions. Ask them how long they have been in the business. And if your ‘used car salesman alert’ goes off in your head….run, don’t walk. We are committed to ethical behavior and interactions, sensible lending practices, and in helping educate through our process. Whether you are buying or refinancing, find someone who knows what they are doing. What you do not know in this market can really, really hurt.

Respectfully and Gratefully Yours,
Steve Curnutte and the folks at Finworth

Borrow Wisely,
615.386.7102

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With the exception of yesterday and today, long term mortgage rates have been surging. Since Bernanke just finished his dog and pony show with congress yesterday, this is a good time to take stock (on second thought, don’t take stock; bad word choice). 

Things you already know: Dow lost 112 yesterday, it is down 300 today. Other markets were similar. Lots of lukewarm economic data (Sprint, Dell, Freddie Mac, etc.). Crude oil keeps jumping, dollar keeps slumping. But you all know this stuff…what is the real deal? 

The real deal is this – there are two things that scare economists and politicians. Recession and inflation. They are not perfect opposites, but almost. One sort of means things are shrinking/cooling off/slowing down/receding. The other sort of means fast expansion/heating up/going too fast/blowing larger. Both of them are like ‘things that go bump’ in the night. Is there really an intruder in here? In other words, just hearing noises that they might be making in the economy is enough to freak out economists and politicians. It is fear linked more to our collective perception of the evil, rather than a clear and present danger. A huge distinction considering the power of psychology on the markets. Are you one of those people that would say ‘if the press would stop harping about the housing market, consumer spending would not suffer so much…they are freaking people out!’ If you have had that thought, then you understand how powerful a word, and how powerful fear can really be… 

Economists worry about sustainable growth, stability, and who will publish their papers. Politicians worry about seeming important and relevant to the people who feed their bloated egos. An economist might want a little recession to clear things up – because in the long run, it might make for more sustainable economic prosperity. A politician does not care what takes place beyond the end of their nose – or term -  as the case may be. Slow downs and recessions shed jobs and make people tighten their belts. If you live and work on a college campus in New England or California, you don’t really care about details like that. On the other hand, if you are born to please at all costs, then you are likely to make a show of raging indignation. Grow!! I don’t care how fast! I want us all to be drunk on depreciating money! Let the people watch a lion eat something in the arena, maybe they will keep liking me! 

Okay, the last part was an exaggeration. But the point is this; these two forces play out as Main Street vs. Wall Street, Economists vs. Politicians, Bankers vs. Factory Workers. Depending on where you are in the economic food chain, even Democrats and Republicans rarely agree on these things. Surprisingly, though it is highly political, it does not often fall along party lines. And it has been going on for centuries. 

So here we are. Foreign markets still have a ravenous hunger for oil, copper, even grain. Since we are all so connected, these markets are applying upward pressure on prices here at home. The housing crisis and total rupture of the credit markets is putting the kibosh on our domestic growth. One message says INFLATION. One message says RECESSION. One message says DON”T LOWER RATES, IT WILL CAUSE MORE INFLATION. One message says LOWER RATES, WE NEED TO SPEED THINGS UP. 

But you want to know about your mortgage!! At Finworth, we had a massive wave or refinances with rates in the low to mid 5’s on 30 year fixed loans. That little mini-party only lasted a few weeks because the rates are about .75% higher these days. Of course, the surge in rates was tempered a little today and yesterday as the bond market celebrated the economic misery of others, but rates still are not that great compared to 10 or 15 days ago. 

Jumbos are still overpriced and sort of worrisome for all of us. Cheap money above $417,000 is still a long shot. The Fed Stimulus package increased the Jumbo limits in certain markets, but precious few. Almost all of them were in California and Finworth does not operate in that Country, I mean State. Again, the jumbo limit increases will not help you at all. Yes, we am bummed too, but it is probably for the best. 

So where are rates headed? 

We got way too cocky. We had been batting 1000 for the last 8 months. If we thought rates were going up – we nailed it on this blog. If we thought they were going down, we nailed it on this blog. We predicted each Fed Rate cut and the change in the yield curve on this blog. We even predicted stock prices dropping 1000 points! But, hey, it was mostly luck. Anyone who tells you different is either arrogant or crazy, or both. 

Rates dropped in a HUGE way a few weeks ago. And even though we jumped on it and helped a ton of our clients, we were almost caught off guard. We did not see it. We had predicted they would rise gently and never uttered a word about the precipitous and relatively sustained drop. So it is with humble pie and bruised hubris that we step back into the game of reading the tea leaves…here it goes… 

30 year fixed rates will drop a little today (maybe 5.875% or 5.75% with no points). Then, those same rates will rise to the low to mid 6’s and hold for several more weeks. With the exception of one or two bobbles, they will then go higher and settle in the high 6’s. Jumbos will hold near their current high levels until at least May 1^st. At that point, we think a little more money lube in the system, the Freddie and Fannie cap increases, the FHA expansions, and the re-entrance of some natural buyers into the arena will bring them down some. We think the Fed will lower rates .50% in March and .25% at the following meeting, then hold. We think the equity markets will be jittery for the rest of the 1^st quarter. We think it is possible to see the broader equity markets loose as much as 400 MORE points. Then, we think the stock market will recover in the 2^nd quarter, then explode in the 3^rd and 4^th quarters. We think at least 50 banks will fail and need bail out before Halloween. But, they will be small banks who did dumb things and over extended themselves in real estate. They probably deserve to fail. We think at least one bond insurer will need to start speaking a foreign language to talk to its board before this is all over. We think the housing market has not hit bottom yet. We think the commercial market will start to see a precipitous drop in the coming months and bottom out after residential hits the floor. We still think there will be a dead cat bounce in both residential and commercial markets (see the other posts for explanation of this). And finally, we STILL believe that we are already in a mild recession. We have been saying that for awhile and only now are at least a few others in agreement. We believe the combo monster of stagflation is unlikely. And that by next spring, the economy will be limping along just fine. And we will repeat our old statement (that sounded crazy 8 months ago and now it sounds less crazy!)…the housing market will NOT recover until the end of 2009 or beginning of 2010. 

Lastly, and biggest of all, we believe that if you are getting your mortgage from a stranger in this market, you are putting a loaded gun to your head. If you don’t use Finworth, use someone very reputable please. Ask them tough questions. Ask them how long they have been in the business. And if your ‘used car salesman alert’ goes off in your head, run, don’t walk. We are committed to ethical behavior and interactions, sensible lending practices, and in helping educate through our process. Whether you are buying or refinancing, find someone who knows what they are doing. What you do not know in this market can really, really hurt. 

Respectfully and Gratefully Yours,Steve Curnutte and the folks at Finworth Mortgage 

Borrow Wisely615.386.7102

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Will the stimulus package help jumbo rates? Yes, for some parts of the country. But the truth is no one knows exactly how it will play out. Most of our clients own property in either Tennessee or Florida. The answers for each of these areas are different. But here is the general overview and timeline: 

1. Housing market starts to crack
2. Credit markets start to seize
3. People start to worry more about a recession than crazy inflation
4. The White House comes up with a suggestion for a stimulus package
5. The House passed the stimulus package last week
6. The Senate changes it, then votes it down
7. Today (Thursday) the Senate changes it again then passes it
8. After one more stop, the President is expected to sign it next week

Okay – what does this have to do with Jumbo mortgage rates? Well, inside the bill is a provision that would increase the conforming loan limit. Right now, Fannie and Freddie will buy things that are $417,000 or under; loans bigger than that have fewer buyers, more perceived risk, and higher pricing. In fact, pretty rotten pricing in the last few months. Presumably this increase, which would expire 12/31/2008, would allow a bunch of people with jumbo mortgages to refinance. It would also allow a bunch of big houses and condos to sell because more people could afford them. There are three problems with this. Actually, there are a bunch of problems, but only two that matter here. 

First, no one seems to be able to figure out what the heck they are talking about. Is it $625,000? Is it now $725,000? Is it a percentage over the median home values in an MSA? Will it include us? Even when you read the competing versions of the bill – it is remarkably befuddling. You think this stuff would be easy. So maybe it will apply to most housing markets in California, or in Greenwich, CT, or Charlottesville, VA, or even Poughkeepsie, NY, but probably not Nashville. Then again – who knows. 

 ***** update ***** 

The details that emerged last night about the stimulus package confirm that it will not impact borrowers in Tennessee. The only area in Florida that will be impacted will be Miami/Dade, but even then, the Jumbo was only increased to $433,500 from $417,000. Our sources are telling us that the President will likely sign this bill within a few days. But again, it will not increase the conforming loan limit in Tennessee markets beyond the current $417,000.

Second, just because the limit is increased does not necessarily mean that lenders will not still have some premium placed on the pricing. Maybe Fannie and Freddie will place it on the top. Maybe the actual lenders will.  

Third, by the time they get this increase rolled out, where will regular conforming rates be? Last week, a 30 year fixed was in the mid 5’s. Today, they hit the high 5’s. By next week, they may be in the 6’s. So allowing larger loans to have conforming pricing may not matter that much after all – who knows. 

Forgetting for a moment whether or not a stimulus package to Americans is a good idea – most folks that watch this stuff closely agree that it is as clear as mud. Who expects the government’s product to be anything different? 

But the real point here is that your jumbo mortgage could be in a spot to be refinanced sometime in the next few days or weeks. Your house that is on the market for $600,000 or more might move a little faster. And you might be able to finally consolidate that darn combo loan that you had to do last year to get around the jumbo issue. Oh, and since your entire mortgage data is public record, expect a ton of direct mail marketing junking up your mailbox. 

Most importantly, do not be duped or cajoled into something that does not make sense. As always, we would love your business. But if you don’t use us, please use someone who knows what they are doing and someone you can trust. What you do not know here can really hurt. 

Sincerely,

Steve Curnutte and the folks at Finworth

Borrow Wisely

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QUICK SUMMARY 

This post addresses 3 things. First, is the pain in the credit markets and the economy over yet and why should you care? Second, how did 30 year fixed rates drop so fast and will they stay if the Fed cuts the funds rate again? Third, have jumbo rates come back down? 

Is the pain in the credit markets and the economy over yet – and why should you care? 

Back in July, the credit bubble was thin and trembling and completely unsustainable. Like any rupture, its implosion happened with breathtaking speed. Funny thing about the popping of an asset bubble, not everyone seems to hear it when it happens. The sentiment at first was – ‘poor mortgage folks, bet they are really hurting right now’. As the evidence mounted that the contagion was going to hit hedge funds hard, a few people perked up. Later, the headlines talked about credit markets seizing up, rate cuts, and money injections. Still, many people seemed detached – like they were watching a newscast about a hurricane and lived 800 miles inland. 

Most consumers (and just for the record – a lot of smart economists and Wall Street gurus) seemed to be saying, ‘surely this mortgage storm can’t hit us…?’ Now some of the world’s largest banks are in crisis and most of us believe the worst is yet to come (this is explained below). My guess is most people now can look back and remember the sound of that bubble popping…but just in case they need some reminders….

A representative of Wells Fargo, the nation’s 3^rd largest bank, said this is the ‘worst housing crisis since the Great Depression (we think this is a bit of an exaggeration but he was on a roll)’ POP. Major market indices domestically have lost nearly 15% of their value in about 3 months, POP. A chief strategist at Barclays in London said people are fearful of major bank failures in the EU, POP. Citigroup posted its largest loss in 196 years, POP. Housing starts are the lowest since 1974, new home sales have already fallen 26%, POP. Last night (January 21^st), global markets tumbled nearly 5% with the Footsie in London losing 5.5%/60 billion pounds in the largest single drop since the 9/11 terrorist attack, POP.  Recession has replaced inflation as the monster in the closet….ummm, errr…pop.

After our first posting in July, a small publisher approached us about writing a book on the mortgage business collapse from an insider’s point of view. A good friend of mine said, ‘don’t waste your time on a writing a book – this whole mortgage thing will blow over and be old news in a few weeks.’ Did we mention that was July? When we sent out our first alert to clients to refinance while the markets were holding, we got a few nasty notes that we were being too alarmist.  We called our real estate agent referral sources and told them to prepare for some serious disruption in the mortgage markets for 100% financing deals. One agent called back the next day. She said she had ‘spoken to a friend at Countrywide’ who assured her we were exaggerating. Taking advice from a Countrywide employee is like asking the Captain of the Titanic if everything is okay on the poop deck. 

Our predictions are these: Housing starts will continue to fall some, and new home sales will fall another 20%. Nationwide, home values will continue to fall and bottom out near the end of 2009 (regionalized pockets barely excluded). At some point between now and then, the housing market will post a few good numbers. Everyone will herald the end of the pain – but as those denizens of Wall Street like to say, even a dead cat will bounce. As soon as everyone hears a glimmer of good news, a flood of pent up inventory will choke the market back into reality. Financial stocks will continue to suffer; banks who played the hare will be eaten by banks who played the tortoise. We think emerging markets and global growth will cool in most areas, but continue to exert upward pressure on commodity prices. With foreign equity markets running out of steam, there will be no place left to hide for the scared investor. Inflation pressures will continue on the energy side. Domestic equity markets will slide at least another 5% and probably more. Yes, we think the DJIA for example will drop below 11,000. Disproportionately towards higher end retailers, financial stocks, and service sectors - but even companies with good fundamentals will bleed value as we enter what we think is a bear market. We think a recession is already here – the only ones who do not know it are the ones who are responsible for actually saying it. Five years from now, economists will place the beginning date of this recession (that few have yet admitted to) before this post date. As bad as it has been for banks, we think it will get even uglier. So far, losses from the credit rupture are 0.7% of the entire domestic GDP. That is a big number of course, but not as big as the more than 3% back in the 1980’s. This time around, we have not even had a bank fail – or had to bail one out. Well, we think that 0.7% in losses caused by the mortgage mess will more than double in the coming months for other reasons. This time around, banks are sitting on a powder keg called ‘credit default swaps.’ These swaps were sold to protect investors against the risk of default when they bought giant packages of loans. No one knew how to price them and people sold them like Jell-O shots at a frat party. We agree with the CIO of Allianz/Pimco who said last week that these may collapse in a pile of rubble – taking another $200-$250 billion with them. We doubt there will be too many bank failures – but there may be a few bailouts. This is not good for all of us. Banks provide the lubricant for our financial engine. As banks constrict and go in to survival mode, they are less effective. Without their grease, the clutch in the transmission of the economy will grind off some metal shards. 

Like all of the boom and bust cycles, the hyper acceleration of credit has led to some pain. This time around, the pain may have been delayed because of globalization and the democratization of debt. But it will pass: With or without a stimulus package from Momma Fed. With or without a $1,200 IRS refund check to every household. Election season or not. Recovery will come, and the end of the world is not nigh…just don’t expect another drunken bash for at least 5 years. And just know that your home’s value will be flat at best for awhile. If you have a house on the market, do yourself a favor and drop the price sharply enough that you dip below the declining line of value. Small, fast pain now, is better than drawn out deep pain later. Loans will be tougher to come by for a while. And all of us will collectively feel the nausea from watching the blame game play out in the headlines in the coming months. 

Second, how did 30 year fixed rates drop so fast and will they stay if the Fed cuts the funds rate again? 

What a week for mortgages! 30 year fixed rates touched 5.375% with zero points and zero origination mid week. When the Fed announces that they are going to ‘cut rates’ it has very little to do (if anything) with regular mortgage rates like the 30 year fixed. There is a pervasive misconception in the market that these things are directly linked. The Fed ONLY controls the discount rate and the federal funds rate. By changing these benchmarks, they can impact what banks charge as their Prime lending rate (credit cards, car loans, Home Equity loans, chattel loans, etc.), but all other rates move based on market pressures. Sure, the Fed would like to believe that the levers they pull can act in a definitive way on the broader market, but the few levers they actually control are becoming increasingly less significant (painfully so). In fact, the great irony here is that when the Fed lowers their benchmark Federal Funds rate, the yield on the 10 year Treasury (which 30 year fixed rates follow) often goes UP!! Consumers will wait for the Fed to ‘lower rates’ thinking that they will get a better mortgage rate, only to find out that the exact opposite is true. But how is this possible? 

Remember, the 10 year Treasury moves by virtue of market pressure. If lots of people want to buy them, the price goes up. If lots of people want to sell them, the price goes down. Yield of course moves opposite to price. Last week, a whole lot of people wanted to buy them for three reasons. First, Asian markets lost nearly 4% of their value Thursday before last. Global investors were fleeing in droves to the safety of US Treasurys. As domestic markets continued to fall, even more people sought the warm fuzzy feeling of the 10 year Treasury. Second, in recent weeks, people had been avoiding the 10 year Treasury because they were concerned about inflation. Inflation erodes currency values and makes long bonds like the 10 year Treasury less attractive. But once employment numbers came out and retail sales reports came out, people became more concerned with a recession than inflation (although both are still scaring everyone). So once again, people became more interested in 10 year Treasurys. And third, over the past few months, yields had gotten pretty high on the 10 year Treasury and the price looked pretty good. A bargain is a bargain, even in crazy times. 

So the yields fell and 30 year fixed rates fell with them. At Finworth, we notified clients who were in a position to refinance. Many clients took advantage of the surprisingly low rates and we locked millions of dollars in loans in a few short days. They were converting adjustable rate mortgages to fixed rate mortgages. They were combining a first and a second mortgage and locking everything into one fixed rate. And they were refinancing any 30 year fixed at or above 6.5%. But some clients decided to wait thinking rates may go lower. Our belief is that the Fed will cut their benchmark by ½ percentage point, maybe even more. We are looking for at least 1.5% drop in the funds rate before the kids are out for Spring Break (we might be the only ones calling for this much of a cut and just for the record we think it is a mistake). This will raise the specter of inflation in the eyes of institutional investors. The current high price will make selling seem attractive. We believe that the 10 year Treasury will suffer with a rate cut, and 30 year fixed rates will jump. Overall, we anticipate rates to rise out of the mid 5’s to the low 6’s and then hover in the 6’s through next two quarters. 

On the underwriting side, banks will continue to get more and more conservative. Greater down payment requirements, higher credit requirements, and more stringency with second homes and investment properties will be the norm. Builders are feeling the double pain of a soft market and scared banks. When their construction lines are up for annual renewal, banks are insisting that they make large principal reductions (which builders may not be able to do), or dramatically cut the price of their homes on the market to move inventory faster (which cuts all the profit out for the builder), or the banks are insisting that builders auction off the properties. All in all, the only people who are loving life right now are those with lots of cash who are looking for a bargain and are in a position to hold property for at least 5 years. 

Third, have jumbo rates come back down? 

Jumbo mortgage rates over the last 6 months have been particularly puzzling. Jumbo mortgages are those that are larger than $417,000. Finworth specializes in these loans, and even we have had to scratch our heads over where this market may go. None of us predicted the complete dislocation of the jumbo market this summer when the sinking of the subprime ship sucked jumbos into the vortex. But some of the buyers for these loans are gingerly stepping back in to the market and the rates are beginning to follow. We believe time is the principal driver here. Psychology has panicked this market more so than other markets – and confidence is a fickle thing to restore. The issue now is not so much that jumbos are viewed as too risky (excluding of course the Alternative-A products). The issue now is uncertainty. Will the $417,000 conforming limit for Fannie Mae and Freddie Mac be raised? Will FHA limits in certain areas increase? Will the high end consumer feel the pain of recession more than in the past? When baby boomers sell their big fat houses and buy more big fat second houses, will that help or hurt the lending component? Too much is at stake for lenders to be wrong so few will hazard a guess. The good news is that Jumbo 30 year fixed rates are back into the mid 6’s. If you have a Jumbo ARM, and you think the rest of this post is poppycock, at least take from these ramblings this advice; refinance your jumbo ARM to a fixed rate now. There are too many unknowns to roll the bones on this one… 

And lastly – the strangest thing about all of the predictions above, and all of the predictions we have made to date about this debacle, is that we want to be wrong. We will gladly eat some humble pie if our dire prognostications are off the mark. But history here is pretty clear – there is no party without a hangover. Managing the flow of credit to businesses and consumers is a strange alchemy to say the least. Too little access to credit, and there is no growth, no progress, no prosperity. No money to invent a drug, or clean a shoreline. No homeownership, no job creation. Too much access to credit sparks an explosion of debt, a numbness to risk, an unhealthy avarice, an increase in money supply, and a devaluation of money. But good things often walk a razor’s edge – thank goodness for the free markets and those willing to try. 

One central question here is whether or not this financial slough of mud is any worse than the others in history. We think the answer is no; the credit expansion and collapse is not unique, just amplified in new ways. There are huge economic forces at work globally that no one has ever seen. In some cases they defy historical wisdom, in some cases they diffuse risk, and in some cases they amplify risk. In fact, we believe that the crisis has less to do with sub-prime mortgages and more to do with the creation of new debt instruments, the arbitrage of global currencies, and the hyper acceleration of credit which artificially ran up housing prices domestically. Risk was thought to be diversified and democratized. As it turns out, it was only levered to a dangerous and highly amplified degree. The unwinding was like the harmonic convergences that are known to destroy bridges for example. The wind can pluck one note on a bridge cable and then everything deteriorates in unpredictable ways. The cut will go deeper and longer for at least 12 months – and the healing will take at least 24-36 more months. Then we will need to find something else to write about. 

For years, mortgage companies and media reports have been shouting that ‘rates are at an all time low!!’ Well, most of the time they were crying wolf. Now that rates REALLY ARE THERE, no one is listening. But check out this link with data compiled by the Fed. It is clear, and very easy to see the trend:  http://research.stlouisfed.org/fred2/data/MORTG.txt 

If you or someone you know may be a candidate for refinancing, clearly we would love to earn the business. But no matter who you use, our belief is that now is the time to move from the fence and take action. Please feel free to call or e-mail us with questions. 

As always,
Borrow Wisely,
Steve Curnutte and the folks at Finworth Mortgage
615.386.7102
http://www.finworth.com/ 

Tags: What does the mortgage crisis mean? // Add Comment »

Not afraid to go out on a limb here. The Fed will cut the Federal Funds Rate .25% tomorrow and simultaneously issue a stern warning to the market not to expect anything more in the near future.

* * Update* *

From the Wall Street Journal 10/31/2007 3pm

“The Fed cut its target for short-term interest rates a quarter of a percentage point to 4.5% but sought in its accompanying statement to dispel expectations of more rate cuts. The move follows a half-point reduction last month.”

The stock markets will be flat or down in the morning, then rebound some by close. The DJIA should close up 75-150 points with financial stocks among the leaders. Oil will jump from the mid $90 range today to mid $93 or even $94.

* * Update* *

From the Wall Street Journal 10/31/2007 3pm

Major Stock Indexes Ended Higher, with the Dow industrials rising 1% or 140 points, after the Fed delivered its quarter-point rate cut, but the move placed more pressure on the dollar. Crude-oil futures settled at $94.53 a barrel, a new record close…shares of the big five investment banks posted gains ahead of the Fed decision and stayed in the black thereafter. Lehman Brothers rose 3.2%, Goldman Sachs gained 3.2%, and Morgan Stanley added 2.7%. Bear Stearns and Merrill Lynch rose 0.7% and 1.2%, respectively.

The 2,3 and 5 year Treasurys will make reasonable gains and the 10 year Treasury will loose ground on fears that inflation might erode value.

* * Update* *

Two out of three is not bad. We missed this one. All the Treasurys suffered today. All mortgage rates from ARM loans all the way to 15 year fixed and 30 year fixed.

Why all these predictions? The euphoric mania of the housing and credit bubble proceeded along a near textbook path. However, the ensuing collapse will be more problematic. The recent credit expansion was fueled by complicated financial instruments that increased the money supply in new ways and penetrated more deeply and more rapidly than ever before. The unwinding of this is likely to be more like the rapid and random deflation of a large balloon darting around in a china shop rather than the bursting of a soap bubble. The Fed must not cut a half point because the long bonds will suffer at the hand of inflation risk. The Fed must not sit still because this is far deeper than anyone is yet willing to acknowledge. But the Fed must warn capital markets that they will not be led by the nose…and that no more rate cuts are forthcoming. The solution is in deep policy changes at the Federal level, not in tinkering with mood and with the Fed Funds Rate.

Respectfully,
Steve Curnutte
Finworth Mortgage
Borrow Wisely

Tags: Fed Decisions (predictions and explanations) // Add Comment »

A natural consequence of any failure the size of the mortgage debacle will be an outcry for more oversight and regulation. In this case, folks are already calling for uniform Federal licensing for mortgage companies and related jobs that reside outside the banking system. Sounds good – but historically, these programs and others like it don’t work very well. Anytime hard walls are placed in highly complex systems, people figure out ways to sidestep those walls. The only way to fix the sidesteps are more hard walls. Just look at the Federal Tax code.

In fact, Florida has a much more onerous licensure process than Tennessee for Mortgage Brokers and Mortgage Lenders; fingerprinting, mandatory 2 day classes, mandatory tests, continuing education requirements. The results are bogus classes that teach only how to take the test, a test with no relation to the real world, and continuing education classes done on line with a 10 minute click-and-pay-and-diploma process. The businesses supplying the system make money, but the system itself is strained and made more cumbersome and costly than ever. Even with all that regulation, Florida still has a far higher instance of mortgage fraud and abuse than Tennessee.

There is absolutely no doubt that major changes need to take place – but those changes need to address the source of the problems rather than the surface. Start with a massive reform of the bloated Federal RESPA guidelines. Simplify the process and make it more transparent for consumers. The solutions are greater clarity and less regulation.

The facts are these: A massive credit expansion was caused by domestic monetary policy (avoidable) and the evolution of new investment debt instruments that effectively increased the money supply and hyper accelerated credit extensions (partially avoidable). These factors created manic behavior with investors around the world and rational people/markets behaved irrationally (unavoidable). The system collapsed under its own excesses and because of the extraordinary connectivity of the global markets in the modern era, penetrated deeply and broadly (unavoidable).

Of course, none of this will keep people from trying to name a human villain to string up – but we will most certainly come to regret having played the blame game in the coming decades.

Respectfully,
Steve Curnutte
Finworth Mortgage
Borrow Wisely

Tags: What does the mortgage crisis mean? // 2 Comments »

‘Superfund’ sure sounds good. Any self respecting buzzword needs a little pith and punch in order to get press, right? In fact, The Wall Street Journal headline read “Fund Aims to Avert banking Crisis.” At 100 billion dollars, it certainly seems like it might fix the credit crunch, right?” But why should a real estate agent care? Or a homeowner? Or a financial planner? Or a builder? Let’s see…

Citigroup, JP Morgan Chase and Bank of America say they will set up a 100 billion dollar fund that they hope will act like a defibrillator to the arresting commercial paper world. The fund would raise money, and then use the cash to buy a bunch of failing or struggling Structured Investment Vehicles (SIV’s). Overly simplified, SIV’s are recently deployed financial instruments that BUY LONG DEBT by SELLING SHORT DEBT and take the spread for profit. If you are in this game when the spreads tighten, you are very unhappy. And if you are unhappy, you may want to dump other things you are holding at a fire sale price in order to get your hands on some cash. If some of the things you dump are stocks, it could hurt the markets. So the Superfund is supposed to keep SIV’s from stumbling. The strangest part about the news is that the Treasury Department backs the idea. Huh?

Here are some things that the Superfund IS NOT…

This IS NOT a deal that includes all the big banks. Goldman, Morgan Stanley and Lehman Brothers are not yet on board and so far there is no indication they will join.

This IS NOT a clean deal. Citigroup and Bank of America have a bunch of SIV related business, so they would benefit from a little love in the SIV world. Added to that, the participating banks will earn ‘Hamptons-sized’ fees to sell the pieces of the Superfund.

This IS NOT a bailout of the investors who bought all the terrible loans that were booked. In fact, if the Superfund gets set up in the next 90 days as they say (doubtful), there are no plans to buy any of the CDO’s and SIV’s that have bad loans from the subprime world and the Alt-A world. In fact, they really can not buy any of the bad loans in order to ‘bail out’ investors, because they would be forced by regulators to immediately write off the bad debt and that would be ugly for shareholders.Here are some things that the Superfund IS…This IS a very clever way for banks to buy drastically undervalued assets and turn them for a profit. There is really nothing wrong with some of the SIV’s. They are comprised of good loans that are performing well. It is just that no one is consistently buying their short term debt offerings to keep them chugging along. Think about a car dealership with a lot full of BMW’s. The only way they pay the bills and stay in business is to keep selling all the BMW’s that keep coming off the trucks from the auto maker. If all the BMW buyers vanish for a few months – it means the BMW dealership is not going to be sending out any Christmas turkeys. In fact, they would be desperate to sell any warm blooded person a BMW even if they had to take a loss. Well, the buyers for SIV’s are gone, but the SIV’s have to keep moving along. This is a great time to get a couple of ‘em. Have a few million? This IS sending mixed signals. Believers in the free market think this will be seen by many as a bail out, as an intrusion, or as flat out dumb. The fact that the Treasury is somehow asking for this to happen, or that they are somehow arranging the deal really smells strange. The Treasury has never really done this in the past and for some it makes the Big Government litmus paper start to turn colors.

Back to mortgages, and to you. The 10 year Treasury is in pretty good shape right now so regular 30 year fixed rates are still in decent shape. Even 30 year fixed loans that are jumbos (more than $417,000) are coming back into line a little. Of course, getting 100% financing is much more difficult than before, and getting any loan if your credit is bad is nearly impossible, but overall it is not a bad time to convert your ARM to a fixed rate, or combine 2 mortgages into one at a fixed rate. However, there is a rub. A big one….property values are still easing and it is not over by any means.

When we predicted more than a year and a half ago that the housing market was much softer and much deeper than anyone was willing to admit, it sounded like we were striking a panic bell. Now, those predictions are unfolding. We still look for values to drop at least through the end of 2008. Following that, the real estate market nationwide is likely to remain anemic for another four or five years. That does not mean real estate is a poor investment. Nor does it mean that all areas will follow the same line. Real Estate Markets are fractured, localized, and extremely difficult to quantify. We simply believe that the bottom is not yet here, and that the recovery will be longer and more difficult than the current opinion seems to indicate.

If you are selling you home, please be realistic and listen to your agent when they ask you to drop the price. They are not trying to make an easy sale. They are trying to save you from riding the market down to the bottom and hemorrhaging carrying costs along the way. Agents, stay vigilant with the approval letters – some are virtually worthless. Start talking to your buyers about other options like gift money. Don’t just use any old mortgage person right now – there is little room for error these days. Find the very best and most knowledgeable mortgage professional in your area and stay in constant contact.

Builders, talk to your bank now about extending your construction financing because you may not be able to talk to them in a few months. Many of them will be announcing plans to force principal reductions and still more are going to force you to drop the price in order to renew. Work with them now to set things on longer terms before they implement the plans to restrict lending and reduce exposure.Financial Planners, if your clients have investment properties or second homes, talk to them about restructuring the debt in a sensible way, perhaps even squaring the loan amounts with the current appraised values (like structuring all investment properties at the sweet spot of 75% Loan to Value). In other words, the comparable sales may not support a value that will allow your client to refinance it 1 year. Now is the time for them to get the debt house in order so to speak.And last – here are a few quick bullets:Yes, the press as a whole has been a prophet of doom on the whole mortgage crisis. Yes, it would be better sometimes if the whole thing were not blown out of proportion. But it is bad, and it is getting worse. We have been talking about some pretty bad scenarios in our articles and on the blog – and we are not happy to say that most of it is coming true. We still believe that values will fall more, that underwriting standards will continue to tighten, and that ripples will be felt for years.

At the beginning of October, the U.S. House of Representatives approved legislation that would exempt mortgage debt forgiven by lenders from income taxes. The bill would offset the estimated $650 million in lost tax revenue by imposing new restrictions on capital-gains tax exemptions on second homes. The bill is supported by both the Mortgage Bankers Association and the Bush administration, though the latter is pushing for a three-year exemption period instead of making the measure permanent. So if I have a loan for 200 on my house, and I am in foreclosure, the bank might agree to something called a short sale. That is to say, they might let someone come up the sidewalk and buy the thing for 180, and agree to let the 180 settle the debt and release the 200 lien. The 20 difference is bad debt that I might have to declare as income. If I am in foreclosure, it is not likely I can foot that bill. This measure gives these folks a hall pass.

A new report from employment firm Challenger, Gray & Christmas states that mortgage lenders have eliminated 69,664 jobs this year, accounting for more than half of the 130,000 positions that have been eliminated across the financial industry. The total number of mortgage jobs lost to date if you include the little guys is probably closer to 100,000.

As of last week in Nevada, 1 person out of every 185 is in foreclosure. About 6000 more people each month are loosing their home to foreclosure in that sate.

The big rating service Moody’s put three new executives in charge of global ratings. Rating agencies are becoming the whipping post for the crisis because they rated the CDO’s and the SIV’s pretty high so investors thought they were safe. Whether or not you can pin on the woes on them is another story – but it is good to see that they are at least making moves that appear to be in the right direction. 

Bernake told the New York Economic Club in the last few days that the housing downturn is likely to remain “a significant drag” on economic growth through early 2008. We think it is more like late 2008. In fact, we predict that the DOW may loose as much as 1000 points (it opened today around 13,800) in the next 30 days. The decline in residential construction has directly shaved three-quarters of a point off economic growth for the last year and a half. Wow.

Hope this information helps in some small way to clear the murkiness of the issues a bit. Take care.

Respectfully,
Steve Curnutte
Finworth Mortgage
Borrow Wisely

Tags: What does the mortgage crisis mean? // 1 Comment »

The phones at Finworth got a work out yesterday with the Fed’s move. All this talk in the press of macro economic policy is great, but our clients just want to know simply, ‘what does this mean for mortgages.’ The short answer is that it will help mortgages like Home Equity lines that are based on prime, and it will help some of the other short term instruments that follow the 2 year, 3 year, and 5 year Treasurys; like 15 year fixed loans. However, it is likely to hurt the 30 year fixed rates. In fact it already has. Yesterday afternoon, the 10 year treasury (which is what the 30 year fixed follows – why can’t they make this easier?) had a bad afternoon while everyone else was deliriously happy. Today is shaping up to be a rather bad day for the 10 year. The yield is up to 4.55% which is a respectable spike.

The long answer, for those wanting to dig deeper, has the typical convolutions and equivocations of economic theory. But before jumping in, read what the Wall Street Journal had to say this morning about the rate cut in relation to the mortgage market:

Wall Street Journal - September 19, 2007; Page D1 - By JANE J. KIM and RUTH SIMON
Consumers should soon start feeling the impact of the Fed rate cut, including reduced payments on many home-equity lines of credit, credit cards and some car loans. But the rate cut doesn’t offer much help for the key problems bedeviling many mortgage borrowers. Perversely, however, some economists say it could lead to higher rates on fixed-rate mortgages down the road if bond markets expect the Fed move will spur higher economic growth or inflation…the Fed cut could boost rates down the road for 30-year fixed-rate mortgages. These rates are typically influenced by rates on 10-year Treasurys, which have moved lower recently in anticipation of a quarter-point cut in rates and because of a flight to quality in bond markets. But if markets expect a higher level of economic growth than previously anticipated, or a pickup in inflation, borrowers could see higher rates.

So on to the more in depth answer. There are only a few interest rates on the planet that are actually set in a static way by humans. The rest are all determined by the powerful forces of markets. The Federal Funds rate is determined by the Fed (yes they are humans). There are a few rates that follow lock-step, like the rate that the banks call Prime, but most all the other interest rate indices move when people buy or sell the bonds they reflect. So here is the confusing part, if the Fed cuts the rate that they control, what happens to all the rates that the market forces control? The answer is…it is different each time, so who knows????? Take mortgage rates for example. The market might like what the Fed is doing and therefore become more bullish on buying up Treasurys. If they buy up a bunch of 2 year and 3 year Treasurys, the rates on ARM loans might drop. If the market buys up a bunch of 5 year Treasurys, then the 15 year fixed rate might drop. And if the market is bullish on buying up some 10 years…then the good ole 30 year fixed might drop. If the markets dislike what the Fed is doing with rates, then bond folks might get bearish and start selling. The mortgage rates would then rise.

Now throw a wrench in that plan. What if I am a bond buyer and I think that the 2 year and the 3 year will benefit from the Fed move, but the 10 year will not? That is what happened yesterday. Everyone loved the short term bonds and they bought like maniacs. Remember Econ class? If everyone wants something, the price goes up. If the price goes up, the yield goes down. When the yield goes down the rates go down. So it was a good day for 15 year fixed loans. However, the bond buyers did not like what the Fed move might mean for the long term, so they shunned the bonds like a pariah. No one wanted them, so the price fell. The price fell and the yield went up. So…it happened. The Fed cut the Federal Funds rate and the 30 year fixed rate actually spiked. Wow. Can you imagine our phone calls yesterday?

The forces that are acting in the market are so different that they sometimes seem to take the same action even though their goals might seem incompatible. In recent years, lots of people have wanted America’s debt (which is what a Treasury is by the way). The Bank of Japan loved to buy Treasurys for example. Why? Well, if they buy Treasurys it can help prop up the dollar against the yen. They don’t want the yen too strong against the dollar! That would make the price of their cars and electronics too much for the American consumer to digest. So they buy Treasurys on strategic days.

Other people buy Treasurys too. Hedge Fund folks, Mutual Fund folks, Pension Funds – each of them have a plan to spread the love around in their portfolios to mitigate volatility and risk. Sometimes, these types of buyers like to buy a bunch or Treasurys right before they have to give a prospectus to investors. Sort of like cleaning up your house from the party before Mom and Dad get home. We all like to know our money managers have tidy little asset allocations.

Sometimes, people buy Treasurys because they need a safe haven investment. We all like to buy them before a long weekend in case there is a terrorist attack. Sometimes, we like to buy them right before we go to the Hamptons for the summer so we don’t have to sweat the market while we are at P’Diddy’s party.

Ultimately, all these buying and selling forces aggregate and move things one way or another. Last year, it was a lot of foreign buyers wanting to prop up the dollar. Last month, it was the flight to safety buyers who were freaked out by the roiling credit markets and liquidity constriction. All this buying has kept our good ole 30 year fixed pretty low. But things changed the moment Ben Bernake uttered the words yesterday. Because now people are worried about inflation.

What? Inflation? I thought the Fed has been worried about inflation all along? Surely they would not do something that might make inflation worse? Well, yes they did. The Fed was unable to reconcile the unsustainable disconnect between not enough money, and too much money. Yes, the Fed is very worried about inflation as are we all. But when money got tight a few weeks back, the banking system was seizing up. So the Fed pumped some billions into the economy. That’s right. Increased the money supply and thereby increasing the risk of inflation. Now, the liquidity constriction is not better, so the Fed had to make another move to lubricate the machine and head off a potential pinch for the American consumer.

So they lowered their benchmark rate. But boy oh boy is this bad news for the value of a dollar and the increasingly gruesome specter of inflation. So the long bonds are stumbling because inflation would really erode their value. So 30 year fixed rates are heading north for the time being. Of course, if you have a home equity loan based on prime, or a bunch or credit card debt, or if you might be nuzzling around for a new car, the rate cut is probably welcome news. More on this next week as things unfold.

By the way – the two brand promises of Finworth (and our core message to our clients) are ‘Expect More’ and ‘Borrow Wisely.’ Back when everyone was drunk on their ability to loan and to borrow, the Borrow Wisely thing made us seem like party poopers. Right now, we are hearing more and more from our lending relationships and our clients that we really might have been on to something all along.

Respectfully and Sincerely Yours,
Steve Curnutte and the folks at Finworth
Borrow Wisely…

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