Points of Interest

Today is the first of a two day meeting where Benanke and company will discuss our nation's economy and decide where short term interest rates should be.  I have mixed emotions regarding the outcome of their deliberations.

How can a mortgage broker not be totally, head-over-heels in favor of a rate cut from the Fed you ask?  Certainly, many of our customers would benefit from a cut with lower rates and therefor payments on their Home Equity Lines of Credit (HELOC).  Credit card interest rates may drop also.  Some car loans.  And anyone who has an adjustable rate mortgage (ARM) may benefit at some point if the index used is the Monthly Treasury Average (MTA).

But as we experienced the last time the cost for fixed rate mortgages actually climbed for awhile after the last cut.  The dollar has certainly dropped in value against other major currencies.  This makes our federal government's debt less appetizing for foreigners or other countries as an investment.  They decide to stop buying our debt and rates will shoot up.

The lower value of our dollar makes imports more expensive and with oil now exceeding $90 a barrel who needs to provide another reason for it to go higher.  Here's a commodity that has essentially doubled and it hasn't mattered yet.  We haven't cut back on its use and the economy is still chugging along.  How long can that go on?

Should the Fed decide to cut, I hope that it is not 50 basis points.  That last reduction was too much and took the markets by surprise.  Anything to keep our currency dropping in value more than it has.  Higher import prices and the risk of our deficit spending not being funded would create volatilities that would not be welcome. 

It is much easier to determine the type of loan and pricing and therefor your qualifications when the markets are stable, perhaps drifting.  Stability is welcome.

There’s a new term I learned this week, one of which we should all be aware: Level 3 assets.  Level 3 assets “are those that trade so infrequently that there are no reliable market prices for them”.  These assets include securitized packages of subprime mortgages, buyout loans and other debt that are not set by market prices but rather are carried on the trader’s books by internal spreadsheet calculated prices.  The “prices” are subject to management’s discretion.

The stock market indices continue to hit daily new highs of late.  Google broke out above 600 and Apple has no brakes, both hitting not just a 52 week highs, but all time highs.  This recent rally after the initial credit calamity seems to have started when Lehman Brothers reported “better than expected” results on September 18.  In this environment, how did Lehman do it while others are crashing and burning?

The smallest number to deal with is $700 million (no small number).  That’s how much Lehman took as a loss in the third quarter on its portfolio of loan commitments and investments backed by residential mortgages.

$6.3 Billion is the amount of subprime mortgage owned by Lehman at the end of its last quarter.  The write-down amounts to just 11% of an asset that is plagued by rising delinquencies and defaults of payment challenged homeowners.

Here’s the biggest number: $22 Billion.  This is the size of Lehman’s Level 3 assets at the end of its second quarter.  Some of these assets have plunged by 20% or more in a month.  The previously announced $700 million write down amounts to only 3.29% of the total of these assets.

It may have been a valid decision by Lehman to not have written off more.  Prices of these assets may bounce back more than anyone could expect.  Of course, by not writing off more the price of their stock jumped 10% the following day.  But since then the stock has given it all back and then some.  If any of you heard an “all clear” these past few weeks it’s still not time to throw caution to the wind.

Don’t chase prices, eliminate your non-tax deductible debt, pay attention to your budget and save for retirement.  Keep liquid, reduce stress, stay healthy.