Points of Interest

Looking at the US National Debt Clock today there is a calculation that states that each citizen's share of the US debt is $30,734.97 with the population just under 304 million people.

Another calculation seen today says that the derivatives market alone represents $116,666.66 per each person on the planet. 

We are living in interesting times.  Should the Fed have dropped the Fed Funds rate a full point yesterday it would have been the most since Paul Volcker slashed the rate 175 basis points in 1984.  Sounds like a lot.  And yet Volcker's move was only a 15% relative move.  A one point move yesterday would have been a 33% move or reduction.  As it was, the rate was reduced by 25%.

It's all relative.

The question that I hear being asked is when will this help mortgage interest rates.  Many are asking, "Isn't housing the problem?"  And although it's really a symptom of a bigger problem, it's where you and I feel the biggest disconnect.  For most of us in the US, our homes are our biggest asset (and liability).  We are most interested in mortgage rates and feel the interest rate cuts haven't made their way through to Main Street.

Fed Rate Cuts Do NOT Necessarily Translate Into Lower Mortgage Rates

Over the last week mortgage rates had been drifting lower and the 10 year bond had been approaching the low it reached on January 23.  Before the rate cut bonds reversed and within an hour after the cut we received the first of many price increases for mortgages.  One lender actually sent (4) four separate price increases.

Yesterday's rate cut will help those with home equity lines of credit (HELOC).  That could reduce a payment stress somewhat.  But for those who are facing an increasing ARM rate it may aggravate the situation.  Last month it was reported that Countrywide and USAA Federal Savings Bank were actually shutting down or limiting the use of existing HELOCs based on the reduced home values.  Imagine having a line of credit you were counting on for emergency purposes and then it's unilaterally closed by the lender.

Oh, the irony of it all...

And as pointed out by Kevin Depew over on Minyanville.com one more twist arrives with the IPO of Visa.  Here's the largest credit card network coming to public market the same day as the Fed is deliberating on the credit crisis with largest interest rate cut in the last 20 years.  Once again, truth becomes stranger than fiction.

The headline from CBS MarketWatch is that "Consumer Inflation moderates in February".  "Led by a quirky decline in energy costs" the CPI was held down by a drop in energy prices.

When we do the math and consider last months gasoline prices and today's, the report will not be the same for March.  Let's say gas prices were $3 last month and today they are easily over $3.25 per gallon.  By our calculations that's over an 8% increase (or tax).  We are not economists, but it would seem that some other energy component for the consumer would have to drop substantially for the CPI to remain flat next month.

Our dollar is dropping in value, a barrel of oil was over $111 yesterday and in either case they are both going the wrong way in our estimation.  We heard an energy trader make what seemed to be a reasonable suggestion yesterday.  The US Gov't should stop buying oil for the nation's reserve and competing with consumers for supply.  No need to withdraw any reserves, just stop buying more.  That alone could crack the upward spiral of speculative pricing.

A colleague in the title business asked me where current rates were this morning.  Another loan officer had told her they were going up.  Hearing all the bad news she had to ask “Why?  Last time I checked, the economy was sucking...”

This battle is brewing between differing factions on the state of the economy and what is to be done.  It’s been an ongoing argument.  On the one side are the folks who have been directly impacted by the souring of the credit markets.  And in a simplistic description there are those who already have a lot or who will stand to lose a lot should the economy slow.

Deflation is good for those who have a lot of debt.  The prospects of refinancing at a lower rate are enhanced under this scenario.

The folks (or institutions) that have a lot ($$) need easy money to keep the deflation demons away.  They don’t want their assets to decline in value.  A mild inflation is actually good for those who control a lot of assets.  Values go up to keep pace with inflation.

Except if that asset is a long dated bond such as the 10 or 30 year Treasury bond.  Then as inflation goes up, the value of bond drops and rates (i.e. mortgages) increase.

What happens when you hold a municipal bond auction and no one comes?

This has been happening across our nation.  Last week the University of Pittsburgh Medical Center (UPMC) was interested in issuing bonds to finance itself.  This is not a company with a product that's piling up in warehouses.  This is the real deal.  This is a brick and mortar hospital facility with life saving procedures not some cyberspace outfit. 

The bids for the bonds were so lousy they generated double digit rates for UPMC to pay for the money.  Tal Heppenstall, UPMC's treasurer, told Bloomberg, "It's outrageous.  We're a AA-rated credit.  We don't need to get financing from loan sharks.''

So, if a mortgage counselor offers you 6% for financing your home in an area where Fannie Mae considers most properties to be in a declining market, be grateful.  It could be worse.  As we all need medical facilities from time to time, let there be no doubt that we all need a place to live day to day.

The last several weeks have completely changed the recent level of activity within the mortgage industry.  The conforming rates that existed the morning of January 23 were the lowest I have seen since the summer of 2003.  But it turned out to be a one day phenomena as by mid-afternoon we were experiencing price changes.  By the next day those rates had completely vanished.

This happened on the day after Martin Luther King’s holiday, the same day after a French bank’s reported loss of millions due to unauthorized leveraged trading.  It looked like the stock market was headed for the abyss.  And sometimes, those moments are the best for mortgage rates.

BAD NEWS = LOWER MORTGAGE RATES

Since then, there’s been a cumulative 1.25% drop in short term rates by the fed (good news), the house, senate and now the president have passed the fiscal stimulus bill (good news, as least for the economy in the short term) and the conforming loan limit is slated to be raised (more good news).  Mortgage rates are higher.

My impression is that the general public thinks rates are still at their lows based on some of the conversations I’ve been having.  Many may end up being right based on the testimony of Bernanke and Paulson this morning.  You see mortgage rates are higher, but in my estimation, if they haven’t gone even higher based on all the previously listed “good news”, bond traders may be thinking there’s another shoe that will drop.

They didn't do it last week.  But when the monoline insurers, those guys whose policies are bought to keep the credit rating on the trashy products that Goldman Sachs, Bear Sterns, Merrill Lynch and others were selling tried to raise capital and could not, the Asian and European markets crashed yesterday while ours was closed for the King holiday.

Even with the Fed cut, mortgage rates for conforming rates are only marginally lower.  And in my opinion it doesn't have anything to do with the rate cut.  I believe it is more a "flight to quality" driving bond rates down.  Big money trying to find a secure place for its capital.

In this market it becomes all too true.  Your credit report is everything.  All pricing and loan program approvals are contingent on what automated underwriting systems are programmed to accept with specific credit parameters.

Most conventional lenders and their loan programs use the lowest middle FICO score of all borrowers involved in the transaction.  This can prove to be problematic when one spouse has good credit and the other has encountered problems and the loan request requires the income of both.

There are specific steps you can take to improve your credit profile in the short term.  But the outcome of any strategy followed is not easily predicted.

And there are steps you must take to protect the privacy of your credit information and history.  This is simple but very effective and you can do it today.

Rates are now low.  Once again.  Not as low as in 2003, but we’re feeling the adverse effects of that wrong, prolonged action.

Through my everyday conversations with borrowers here in Fairfax County, Virginia, particularly those that have an adjustable rate mortgage, too many are considering waiting for lower rates.

This past week in an unprecedented acknowledgement and heads-up from Fed Chairman Bernanke, the economy continues to weaken with credit trouble spreading beyond mortgages.

Bank of America buys Countrywide saving it from bankruptcy.  Their stock prices drop in tandem.

CIT Group, Inc., boosts loan loss provisions to $300 million.

American Express writes off $440 million.  No small number.

Yesterday, Capitol One increased its loan loss reserve for the fourth quarter of 2007 to $1.9 billion.  It's getting bigger.

But the $15 BILLION in writedowns forecast by Merrill Lynch just puts the others to shame.  That is gigantic.  What were they smoking?  No wonder they are out globtrotting the world trying to gather more capital.  This sum represents about 13% of the shareholder's equity at the beginning of 2007.  It reminds me of Carl Sagan's famous line, "billions and billions..."  Shameful.

We have been hearing much about the ongoing debate of recession v. inflation and what the fed will do to combat either one to eliminate the possibility of stagflation.  We haven’t heard as much about it as the Iowa primary but a decent discussion has been making it to the airwaves.

The term ‘stagflation’ was coined by a British Tory by the name of Ian MacLeod in a 1965 speech to Parliament.  He said that stagflation represented the “worst of both worlds – not just inflation on the one side or stagnation on the other.  We have a sort of ‘stagflation’ situation.”

This term must drive the Keynesian theorists wild.  For according to Keynes recessions are solved by inflation which in turn is solved by a recession.

In the 1970’s, with the expectation of inflation and higher prices consumers purchased more goods increasing demand and reinforcing inflation.  We were at war then too, so the money supply was increased because wars are expensive.

We have inflation in things we need to power, feed, educate and insure the world and deflation in things we want, such as cell phones, plasma large screen tvs, laptops and second homes.

"Your debutante just knows what you need.  But I know what you want."

                - Bob Dylan's Stuck Inside of Mobile with the Memphis Blues Again

I am not sure if anyone else has noted this, but Todd Harrison says that he continues “to see inflation in things we need and deflation in things we want”.

The things we need include food and energy where recent price indexes are starting to report increasing costs.  Domino’s (DPZ), the pizza chain is reporting that its component costs (cheese, flour, tomatoes) are at a ten year high.  And we all realized when gas prices doubled or the cost of a gallon of milk went up by a buck or more that inflation was alive.  Why it didn’t make it into the reports then is still a mystery.

Those items we want include a fine home where prices have been sliding to some extent and falling in others.  This may be the first year that home prices do not increase nationwide since 1933.  That touches off the deflation component argument regarding the economy.  If one were to listen to the financial talking heads the debate has started regarding which is more important: inflation or deflation.

It’s an important discussion as the cure for either of these could be disastrous should the other ailment be the true problem.  Drop rates to cure the housing issue and fan the inflation fires.  Fight inflation and further exacerbate the housing issue.

All of this may be leading to another situation: stagflation. This phenomenon, defined in its simplest terms is inflation + recession… at the same time.

Next, we will discuss some of the more significant aspects of stagflation.

Note:  I was amused by Alan Greenspan's call that there is a 50-50 chance of a recession.  Talk about hedging your bets.  Now he can't be wrong.  Far different than him keeping the cost money so cheap for far too long and thus creating one bubble after another.

After denying the existence of a problem in the mortgage and housing industry earlier this year, the current administration through the Treasury Department has come up with a plan.

"We believe that any efforts by Treasury, originators, servicers and investors to help families in distress weather the current downturn are welcome and positive developments," Freddie Mac said in a statement.

This isn’t the first plan to help those with interest rate and payment resets and the whole housing / real estate / subprime meltdown.  The House passed “The Mortgage Reform and Anti-Predatory Lending Act of 2007”.  And without discussing the specific merits, good or bad of this legislation it only serves to prevent future credit crisis.  Likewise, the Senate has weighed in and proposed legislation that reportedly would allow bankruptcy judges to modify current mortgages.

This new plan, to be announced later today by Treasury Secretary Paulson, has been characterized as freezing mortgage rates (payments) for homeowners with Adjustable Rate Mortgages (ARMs).  It may sound as if all mortgages with resets will be available for this plan , but that isn’t true.

There will be a litmus test of sorts as borrowers will be placed in one of three classes:

1.) Those who can not pay their mortgage now before it resets;

2.) Borrowers who can pay their ARMs when they reset;

3.) And those who are currently paying but in all likelihood would not be able to pay their new, higher payment after resetting.

If you are in the last group you may become eligible for help with this proposal.  Of course, this creates a lot of questions and concerns especially of fairness.  For instance, those that are now paying and abiding by the terms of their loan would not be eligible for the plan.  It would seemingly tempt those with otherwise good payment histories to "game" the offer, maybe miss a few payments and demand help.  Furthermore, there’s the question of who’s ultimately paying for this renegotiation.

Even though a lot of questions remain, there’s no doubt that keeping homes from going to foreclosure will be good for the borrower, their neighbors and the lender servicing the loan and the owner of the mortgage investment.

Media headlines shout out the bad news.  Real estate sales are down. Foreclosures are up.  Banks and other financial institutions are taking losses on mortgage investments.

But some of our customers are taking advantage of this momentary dislocation in the residential housing market.  They are using this situation to their advantage.  Smart buyers in the Virginia counties of Fairfax, Loudoun, Arlington, Prince William and beyond are taking advantage of the prices now being offered.

Take the case of a long time customer of ours.  This person was a successful professional with a solid job history, moving from one position to other more challenging ones with higher compensation.  Our customer, let’s refer to them as Denise, had the good fortune of purchasing a home in the early 90’s.

But not unlike many professionals, it was difficult to accumulate savings on a regular basis.  And in this particular case, Denise’s credit history had suffered during one period of a temporary layoff.  Being single and the only income source, recovering from that hiatus left her credit score in the mid 500’s.  Not the typical second home buyer’s credit profile.

This did not deter Denise from pursuing her dream.  Denise, you see, comes from a large extended family and many of her relatives have a second home in the country.  Denise, too, wanted a place to get away after a hectic week at the office.  Who doesn’t?  Besides that, another tax break couldn’t hurt.

Qualifying for two mortgages is no simple task for most two earner families.  With only one income and no savings to speak of, Denise’s challenges grew with a middle credit score below 580.  Typically, that credit score would demand a substantial down payment or equity.  Due to these factors, Denise and I discussed the potential need for private money financing and the higher costs that are connected with that solution.

When Denise’s late relative’s house dropped in price once again, Denise realized it was time to act.  As an heir to the estate she could use her inheritance at the time of sale as a major portion of her equity.  We ran her application through Fannie Mae’s Desktop Originator (“DO”), an automated underwriting system (“AUS”) available to MetFund.  And to everyone’s great satisfaction we received “Approve/Eligible” findings from DO.  This saved Denise about 5% on her interest rate.

We always try Desktop Originator for every conforming loan regardless of credit score, debt to income ratios or lack of savings.  It’s lucky for Denise that we did.  With a low credit score, inheritance money from the sale of the property that she was purchasing, liquidating some additional cash from an existing retirement account, and negotiating a 3% seller concession to cover the majority of the closing costs, Denise now has a lovely second home in the country.  You can find her there most weekends recovering from the week at the office.

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.

Thinking of refinancing?  Perhaps you are considering this now that:  1) Summer is over and it’s time to get down to business;  2.)  You heard the Federal Reserve reduced rates;  or 3.)  You have some debts that you would like to consolidate into tax deductible payments;  or 4.)  You have an adjustable rate mortgage (ARM), an

ARM THAT IS BROKEN,

a ticking time bomb ready to go off with the next interest adjustment.

It’s always a good time to refi if you can save money.  And when we say save, we don’t just mean reducing or spreading your debt out over more years or eating into your existing equity.  We would not only like you to actually reduce your interest payments but reduce your cash outlay after taxes.

Regardless of why refinancing works for you now, there is one item which will be of genuine concern to your lender: the

APPRAISAL.

And with the market being what it is, we are hearing from appraisers that values for some homes that were bought in the last few years are having trouble appraising.

Don’t let this happen to you.  Get your home evaluated for value now!  Do this before the coming winter market further undermines the possibility of getting the value you need to get rid of your ARM or consolidate your debt.

All you homeowners with a home equity line of credit (HELOC) got a present yesterday in the form of a ½% drop in your interest rate.  That’s good news.  And I’m sure that it will be appreciated by everyone who will benefit from that rate reduction.  Send a thank you note to Ben Bernanke and company care of the Federal Reserve.

It was apparent from the size of the rate cut that the Fed felt the economy and financial markets needed a boost to restore confidence.  But as suggested by Allison Bisbey Colter, Personal Finance Editor from TheStreet.com, it may prove to be no hope for homeowners who need to refinance their mortgages.

And therein is a paradox.  The Fed lowers short-term rates and long term rates rise in response.  I have noted this observation in the past much to the confusion of customers and professionals alike.  It’s a popular misconception that when the Fed lowers rates that mortgage rates will always follow the path down.

But as Keith Gumbinger at HSH Associates points out in the article The Fed’s Cut Won’t Save Struggling Homeowners, "fixed-rate mortgages have been known to rise, despite Fed cuts, particularly if the inflation environment seems troublesome".  And that seems to be what’s happening today.

Even with the Consumer Price Index falling 0.1% in August there is considerable concern with inflation.  Oil is reaching new highs above $82/barrel, other nations are diversifying their holdings away from the US Dollar as it keeps dropping in value relative to other currencies.  A cheaper dollar means that imported goods (oil) are relatively more expensive (inflation).  Inflation reduces the value of long maturity bonds and inversely increases the yield.  Mortgages are more closely pegged to 10 year Treasury yields.

If you are considering refinancing into a new mortgage now may be the time.  You may want to at least consider starting the process and seeing where rates go over the next week.  At the least, you should speak with a professional mortgage counselor to determine your best course of action.

Creative financing does not involve fraud.   It isn’t drenched in deception.  It’s not used to fool the buyer, seller nor lender.  Too often in the everyday world of financing from Northern Virginia around the beltway to Maryland and south to sunny Florida fraud does take the place of being truly creative.  Here’s an excellent definition for creative financing:

“Creative financing is when a loan officer puts to use his vast base of product knowledge and his solid understanding of the guidelines.  A good “creative” loan officer is one who knows how to take a borrower’s uncommon financial picture and find a mortgage loan that meets her needs.  Put a square peg into a round hole; not by force or deception, but with skill and finesse.  Creative financing does not involve the withholding or the misrepresentation of information.  Especially information that is pertinent to the lender making the loan.”

This quote is from Jerome Mayne in TheNicheReport.  Mr Mayne is the founder and President of Fraudcon Inc., a fraud deterrent company.  He is also an ex-mortgage convicted felon.  He has served time in prison.  He knows fraud and the consequences firsthand.

I can't recall a better description of what creative financing truly is.

Seeing all sorts of interesting news of note:

Stockton, CA, home to many of the former subprime mortgage lenders, has been handed the unfortunate distinction of having the highest foreclosure rate of any city in the nation.  Apparently, one out of every 27 households is experiencing this phenomenon.

Oil is hitting new highs above $80 per barrel.

Gorillas are now “critically endangered” and Lamborghini has a car they will sell you for $1.4 million.

Greenspan finally concedes that he didn’t foresee that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

Washington Mutual will close two divisions and cut 1,000 jobs.  A knowledgeable and dear friend is one who gets the ax.

Interest rates on Treasuries are creeping back up.

The dollar is sinking to new lows against other currencies.

And to top it all off, the Kilo prototype is mysteriously losing weight. Not to worry.  Memories of physic’s classes remind me that the kilogram is a measure of mass and not weight.

If one weren’t the slightest bit optimistic, you might consider it was the beginning of the abyss.  The press is now giving more time to discussions of recession.  They say it is not a question of when but for how long and deep. But there are promising signs on the horizon:

Countrywide gets $12 Billion in additional secured borrowing power through new or existing credit facilities.

Bill Gross, the “bond king” of finance and his company, PIMCO, will start a distressed-debt fund.  Someone is seeing value in those beaten down mortgage securities.