The Mortgage Guy Blog

I think we may have seen the best of mortgage interest rates for the foreseeable future. It’s very possible that we have already visited this year’s lows on fixed rate mortgages. Keep in mind of late, the foreseeable future is about as far away as tomorrow.

Normally in a recession, mortgage rates respond to the Federal Reserve cutting the federal funds rate. This time around, it’s very different. Instead of mortgage rates dropping with the Fed lowering the target rate, mortgage rates are going the other way.

There are reasons behind this anomaly. First of all, mortgage rates never mirror the fed funds’ rate moves. However for the past fifteen years, fixed rates more often than not, moved in the same general direction as the fed funds rate. Presently the rates are going in opposite directions. This by the way, is telling us a lot about the economy.

One reason long term mortgage rates are moving upward is because inflation is raging out of control. It doesn’t matter what the government numbers say, everything is more expensive and some commodities have have skyrocketed in price and I’m not just referring to oil. Long term rates have a history of going up in response to inflation because inflation directly erodes the value of long term debt. In essence, the higher rate is supposed to offset the ravages of inflation.

The dollar’s weakness is also adding to the inflation picture. The dollar buys less of everything we import, which is more fuel for the inflation fire that long term mortgage rates are responding to. Keep in mind, in order to strengthen the dollar, long terms rates would have to go up from their current level or foreign currencies would have to weaken.

That could happen, perhaps due to the recessionary environment spreading globally or some other reason. However, there is little reason to think foreign economies won’t deteriorate because they too are affected by the credit crisis and the implosion of the largest economy on the face of the earth.

The U.S. credit markets are broken. The mortgage debt markets are at the vanguard of the market’s destruction, malfunctioning and ongoing deterioration. Hundreds of billions of dollars in mortgage debt value has evaporated into thin air. Mortgage paper (debt securities) is toxic and no one wants to buy it. This is reflected in the trend and level of current mortgage rates.

Not only are mortgage rates struggling against a steepening yield curve, they are also fighting additional risk of default primarily due to irresponsible underwriting and historic declines in real estate values. Consequently mortgage securities are responding to the additional risk of default with higher interest rates.

Adding to the forces pushing mortgage rates up, the United States banking is system is essentially insolvent. Banks are borrowing heavily from the Federal Reserve to meet their required capital reserve levels. In an attempt to shore up their balance sheets, the banks are dumping mortgage backed securities at fire sale prices. The lower mortgage backed securities prices brings with it higher mortgage interest rates. This price/interest rate pressure would play out even if inflation weren’t a factor, which it clearly is.

Banks have yet to even quantify how much mortgage backed debt they own or the value of it. I don’t know how they do it, but the toxic debt securities are being kept off their balance sheets. Even more discouraging is the regulators know it and don’t seem to care. Right or wrong, perhaps the regulators understand the fragility of our banking system and don’t want to break it by enforcing rules.

I have every reason to believe the conditions causing mortgage interest rates to rise, will only get worse for the foreseeable future. Therefore it is my view that at best, the mortgage rate trend will be flat to higher from this point on. This trend will continue until the credit markets regain their integrity. Unfortunately there is no sign that will happen. The Federal Reserve’s main weapon is influence over short term interest rates. It has nothing in it’s arsenal to fix the systemic problems of the debt markets.

The same holds true for the Federal government’s fiscal policy measures aimed at the crisis. Their use of the tax rebate checks, even for people who didn’t pay taxes, is fighting the last economic war. It won’t work in the “new” economy. Dropping checks from helicopters won’t fix the debt markets. At best that will fuel inflation, thus putting more pressure on long term interest rates which in turn will further exacerbate economic woe.

The heart of the crisis is the broken debt markets. Credit is the oil of the modern economy. There is no way any economy can function without ample credit being available. Lenders are not lending, credit is drying up. Right now the economy’s oil (credit) level is dangerously low and falling. This will lead to the economic engine seizing up completely unless something puts the oil/credit back in. That “something” is not apparent to anyone.

In fact, the entire crisis crept up on everyone responsible for avoiding one, ahem. Yet a regular guy working on Main Street, USA, saw this coming nine months ago. It’s just within days that I am hearing admission as to just how bad things really are and are going to get. What is even more disconcerting, is what is just coming to light now, is the tip of the iceberg. We aren’t but two months into what will most likely be a multi year economic downturn.

Not in my lifetime or my thirty years in the financial industry, have I seen a more dangerous economic environment. There is a real possibility that we are facing something on the scale of the Great Depression of the 1930’s. Which is why I asked, “are the best of mortgage rates as well as the best of times behind us”?

Tags: Current Events, Finance & Economy, Mortgages, Tips & Tricks by The Mortgage Guy
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Every time I sit down to write a post, more significant news on the economy is breaking. Events are unfolding rather rapidly and it’s been difficult to focus on any one event, as they are all related. So in this post, I will post links to stories that have significant meaning to the mortgage industry and the economy. One thing is for sure, if the public isn’t being lied to, it is definitely being deceived.

I am going to start with the apparent insolvency of the United States banking system. Since November of 2007, assets used to meet the required reserve levels by banks has plummeted 150%. Yes you read that correctly, they lost 50% more than what they originally had.

Check out the chart and article at Financial Sense University. Here is a snippet.

Clearly the situation has deteriorated at a rapid pace and is much more serious than the credit scare last August. US banks have no reserves; they are for all intents and purposes, broke. In fact they are beyond broke and as I suggested last year banks are now sub-prime. 150% of the reserves at depository institutions are borrowed. That can only mean one thing, the banks have “lost” 1.5 times their original non borrowed reserves. Not only have they lost what they had, they went on and lost half as much again. If you or I did that, we would be bankrupted and probably arrested for attempting to defraud the lender.

The last sentence of the above quote gives you a sense of the “special” treatment the banks are receiving from regulators.

Moving on…

Bank of America is in secret talks with Congress for the purpose of obtaining a three quarter trillion dollar bailout, courtesy of the U.S. taxpayer. Here is the original article from the New York Times but I believe you will find Mish’s dissection the article much more informative. Here is a link to Mish’s Global Economic Trend Analysis and another snippet.

From the NYT…

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

Mish’s Comment: Taxpayers could be stuck or would be stuck? I think the latter. No one entity or agency can value these things, certainly not Moody’s Fitch, and the S&P. For recent evidence, please see Evidence of “Walking Away” In WaMu Mortgage Pool.

The only proper way of establishing the worth of these securities is by the free market, not guesstimates by bureaucrats who cannot find their asses with both hands at one time, nor by banks willing to sell the government a bill of goods at taxpayer expense.

Mish’s piece is a very good read, stop over there if you get a chance.

CommodityOnline has an interesting article about the Fed, why you shouldn’t expect interest rates to trend lower and why the banking system is beyond repair. Here is a small excerpt from ‘US Fed is playing a risky, secretive game’

The solution requires more price inflation, asset inflation, wage inflation, and spillover, all of which contribute to rising long-term interest rates. Already, we see the rub in higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps.

To support my statement that the public is at the very least, being deceived, let’s take a look at Standard and Poors’ (S&P) recent ratings actions with regard bond insurer MBIA. Bloomberg sums it up nicely. Emphasis is mine.

Treasuries fell for a second day as Standard & Poor’s said it’s unlikely to reduce the credit rating of bond insurer MBIA Inc. soon, reducing demand for the relative safety of U.S. government debt.

The bond insurers are insuring the credit worthiness of portfolios exposed to defaulting mortgages. If they get downgraded, as they should, it puts even more pressure on bank reserves, further weakening bank financials. It appears S&P mindlessly rubber stamped MBIA’s AAA rating.

Mish, once again, makes a strong case for S&P’s lack of objectivity. He contrasts S&P’s actions on Pfizer and MBIA. Below are some numbers on both companies. Guess which company is MBIA that retained a AAA rating.

Compare Financials

• Profit margin -61.76% vs. +17.07%
• Return on Equity -35.54% vs. +12.13%
• Revenue $3.12 Billion vs. $48.61 Billion
• Earnings Per Share -$15.22 vs. +$1.20
• Total Cash $5.73 Billion vs. $20.30 Billion
• Total Debt $17.44 Billion vs. $8.69 Billion

The “bad” numbers belong to MBIA, which maintained it’s AAA rating. The “good” numbers belong to Pfizer. S&P saw fit to downgrade Pfizer by one notch. To prove how absurd the S&P rating is, given a choice, which company would you rather lend money to? It’s not rocket science. They make it rocket science to hide their ineptitude, incompetence and lack of objectivity.

First we have the mainstream omission of the state of U.S. banking. Now you see outright deception with regard to the ratings agencies. These are the same agencies that rubber stamped subprime mortgage backed securities AAA. Which of course allowed for the pandemic spread of the toxic paper.

The investment bankers, with their accomplices the ratings agencies, are perhaps directly responsible for the economic woe felt around the globe. To think that we are supposed to believe in and trust these ratings companies is ridiculous. Only one question comes to my mind, why aren’t people going to jail?

Banking woes aren’t unique to the United States. Jim’s post on The Great Depression of 2006, shed some light into the banking crisis overseas. In his piece titled, The New Deutsch Mark, he points out two overseas banking flash points.

It looks like the German banking system is starting to unravel. Here is a link from Der Spiegel to the article. A hat tip to Patrick.net

The German government has had to bail out state-owned banks with taxpayers’ money after their managements recklessly gambled away billions on sub-prime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy.

In England, Northern Rock just got nationalized by the government.

Nationalization of banks… Hmmm.

I’ll end this list/post of “should read” articles with strongest and perhaps the most disturbing post from The Common Sense Forecaster. CSF digs into Dr. Nouriel Roubini’s article, The 12 Step Program to a Financial Crisis. Emphasis is mine.

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Roubini’s article is a must read if one would like to assess a “worst case” scenario. With each passing day, Roubini’s scenario becomes more probable. It’s a long but very informative article. The one mistake I made was reading this article at 11:30 in the evening. I ended up falling asleep around 3 o’clock in the morning. Here is a link to Roubini’s “About Us” page of his highly regarded website.

There is a lot of “kool aid” being served up in the media. Try not to get a belly full of it and keep your eyes on what is really happening. Then get your financial affairs in order, while you still have the time.

Tags: Current Events, Finance & Economy by The Mortgage Guy
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Anyone with even the slightest knowledge of things economic, realizes that the stimulus plan won’t work and is nothing more than politicians paying for their re-election votes. As with most things political, the politicians are buying their votes with taxpayer dollars.

It’s refreshing to see that at least one political leader has the courage, integrity and honesty to describe the stimulus for what it is. In a word, it’s pandering. Watch Senator DeMint as he calls a spade a spade.

Hat tip to Hot Air.com.

Senator DeMint on Stimulus Plan

http://www.youtube.com/watch?v=uSTjc-wbcLU

In previous posts, the Mortgage Guy has explained why the stimulus plan misses the mark. The mark is the malfunctioning credit markets. Due to them, lenders won’t lend.

Without lenders lending, there is no way to avoid or find our way out of recession. The government can drop $100 bills to it’s heart’s content and the Fed can drop short term interest rates to zero and it won’t help with the economic problems we face today.

Our political leaders are making a huge mistake not focusing on the real problem. Keep in mind that it was mistakes on this scale, that allowed our political leaders to lead the United States straight into the Great Depression.

Of course this matters little to our political leaders of today. In their view, nothing is as important as their re-elections. Consequently, we are at square one in dealing with this recession and we have lost valuable time as well.

Tags: Current Events, Finance & Economy by The Mortgage Guy
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For a while now the Mortgage Guy has been posting that our product shelf is about 20% of what it used to be. Further we’ve stated that underwriting requirements (credit standards) have been tightening on all types of mortgages and that this trend was spreading to credit cards and consumer debt. The Fed released a survey yesterday that documents these very disturbing trends.

Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed’s quarterly survey of senior bank loan officers, the Fed said.

Plain-vanilla business loans were also much harder to obtain, the Fed said. Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.

Consequently, we’ve been urging our clients, both current and prospective, not to delay any financing activity that they have been contemplating. Such as refinancing to make budgets more manageable for the rough times ahead.

One of the biggest reasons for the current procrastination on borrower’s parts, is the prospect for even lower interest rates in the future. We feel this could be a trap. By waiting for lower rates, home values continue to decline and credit standards continue to tightened dramatically.

Any potential gain from lower interest rates can be more than offset by falling home values and tighter credit policies. Waiting for lower rates not only can make refinancing more expensive, it may make it impossible.

This is also from the Fed survey…

For consumers, banks are tightening up on all types of mortgages, not just subprime loans. And banks are less willing to approve consumer installment loans.

More than 80% of banks - the largest percentage ever — said they had tightened lending standards for commercial real estate loans in response to a weaker economy. Nearly 60% of the banks reported falling demand for commercial real estate loans, and 87% expect the quality of such loans already made to worsen.

Clearly the United States is entering a very severe and equally dangerous credit crunch. It started in subprime mortgages and spread to all types of mortgages and now it’s spreading to installment loans and credit cards. Credit card issuers have tightened their standards just like the mortgage lenders as evidenced by this article in the Wall Street Journal.

Big card issuers such as Citigroup Inc. are requiring higher credit scores before issuing new cards, particularly in states that have been hit hard by the housing downturn, including California, Arizona and Florida. Some lenders, including Bank of America Corp., are offering lower initial credit lines. Other lenders, such as Capital One Financial Corp., are limiting credit-line increases or reducing credit lines for existing customers if they see signs that they are suddenly applying for more credit or are having trouble paying down their balances. And many card issuers are raising late fees and other charges to help offset what they see as higher risk.

Also from the article, this synopsis of various credit card lender initiatives.

Naturally, for an economy that is already reaching recessionary levels, these developments prove to be quite serious. John Mauldin at Minyanville states the following about recessions and depressions.

I have long contended that a recession is a normal part of the business cycle, but it takes a major policy mistake by a government or central bank to create a depression.

The Mortgage Guy has maintained that this recession is due to systemic causes rather than cyclical causes. In our view this recession is being brought on by debt markets that are not functioning properly or at all.

We have criticized the Fed, the Treasury Department and politicians for focusing on monetary policy and stimulus packages as opposed to focusing on the dysfunctional credit markets. Lenders, at this point in time, cannot effectively securitize the loans they are originating thus they are cutting back and refusing to lend.

Monetary policy won’t work in this environment because with failing debt markets and banks refusing to lend, there is no way to get the cheap money that a loose monetary policy provides, to the people who need it most.

Could this be the “major policy mistake” that morphs this recession into a depression? We think it could be and history is our guide. Consider this snippet from Wiki on the Great Depression.

In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.

These parallels are much too close for comfort. What is even more disturbing, is that as I write this today, there is still a lack of attention to our malfunctioning credit markets. All of the initiatives put forth so far by Congress, the Fed and Treasury Department all focus elsewhere and we think this is a major mistake. Perhaps the mistake that transforms the current recession into a future depression.

We have a lot of rough sledding ahead. Will you be prepared or will you become a victim? Now is the time to take a hard look at your financial situation and to make adjustments accordingly. Your financial alternatives are shrinking everyday.

Just because you might be the proverbial AAA rated borrower, doesn’t mean you won’t be affected by this credit squeeze. I’ll close this post with how the Fed Survey illustrates this tightening of credit standards affects all borrowers.

More than half of the banks tightened their standards for prime mortgages, by far the highest percentage in the 17-year history of the survey. Seventy percent expected the quality of prime mortgages to worsen.

More than 80% of the banks tightened their standards for nontraditional loans, including jumbo loans and other loans that do not conform to standards set by Fannie Mae and Freddie Mac. A similar percentage expected more delinquencies.

For subprime mortgages, about 70% of banks that offer such loans had tightened their lending standards, but more than 90% of the banks responding to the survey said they do not offer any subprime loans.

About 60% of banks tightened their standards for home equity lines of credit.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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As I surf the blogosphere, I occasionally come across misconceptions that just need to be addressed. I had to respond to a post made on an article on MarketWatch’s site pertaining to the upturn in refinance activity.

Here is the comment I responded to…

by BobP863 2 hours ago

The obvious question is why not wait till the FED is through lowering interest rates? Unless there are no closing costs, i don’t understand the urgency. Unless, of course, those irresponsible mortgage lenders are desperate and have to oversell their products in order to survive.

Apparently in need of some guidance, I responded…

While you are waiting for the fed to finish lowering rates, house values are declining. Lack of adequate home value can make refinancing more expensive (pmi) or in some cases, not possible at all.

Further, lending guidelines are being tightened everyday. You can qualify yesterday and may not be qualified today.

The fed doesn’t control mortgage rates. Further deterioration in the Mortgage Backed Securities market could widen the spread between treasuries and mortgage rates. It’s possible to see treasuries move down in yield and mortgages move up in yield, especially in the current environment.

These are reasons for urgency. Maybe now you can understand. But I doubt you will ever understand that it’s not just a subprime issue anymore and that the most blame for the debacle is to be placed on Wall Street and the ratings agencies.

They (Wall Street) enabled every player in the chain. Without Wall Street lying about credit quality and spreading their fraudent securities around the world, we wouldn’t be in this mess. The lenders would not have lent and the buyers would not have bought unaffordable homes.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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For those homeowners who still can, now is the time to take defensive measures. Home values are dropping at historic rates, lenders are tightening up underwriting requirements for the minority of mortgage products still left in the market place. Unemployment is rising. The stock market is falling.

Now is the time, before witnessing further deterioration, to make household budgets as affordable as possible to weather the coming perfect storm of financial woe.

Adjustable rate mortgages should be refinanced to the current low fixed rates. First and second mortgages could be consolidated. Consumer credit, credit cards and installment loans, should be looked at for consolidations. Overall, the household budget should be scrutinized and made as manageable as possible.

Why this needs to be done now

The United States economy is entering what is shaping up to be the worst recession of my lifetime. To offer perspective, I entered the work force under the Carter Administration. This recession is firming up to be worse than any economic downturn including and since the stagflation era under Carter.

Here are some tell tale signs of the severity of the coming recession.

• The largest residential lender in the country, Countrywide is number 214 on the lender implode list. They were bailed out via a buy out, courtesy of Bank of America for a total of six billion dollars.
• Citigroup, the nation’s largest bank is reeling. Citi cut it’s dividend by 41% after losing $9.83 billion dollars and were forced to write down 18 billion dollars in bad debt. I’ve seen estimates Citi’s exposure to bad debt to be as high as 100 billion dollars. The quarter was so bad for them that they had to sell a 6.81 billion dollar stake of the company to an investment consortium consisting of primarily foreign investors.
• Lenders are refusing to lend. Even to each other.
• Foreclosures are running at a historical pace. The pace is expected to pick up in 2008. No doubt this is putting downward pressure on all home values.
• The supply of real estate is historically high and the demand is historically low. There is very little money available to fuel real estate purchases. An entire segment of the market, those with little or no down payments and dinged credit is no more.
• It is estimated that real estate prices need to fall 30% for the market to reach an equilibrium necessary for the market to recover. At best, recovery is estimated to be a year and a half to two years away.
• The consumer, which accounts for 70% of gross domestic product (GDP) is completely tapped out. They can’t spend from savings because they don’t have any to speak of and their credit cards are maxing out. There is no cash out refinance available to release the credit card pressure on budgets.
• As consumers stop spending, layoffs will increase.
• The credit markets are broken. No one is buying mortgage securities and consequently, lenders aren’t lending. There is evidence that the mortgage credit squeeze is spreading to credit cards and installment loans. Without credit, households and business won’t/can’t spend money to fuel the economy.
• The Federal Reserve and the government is responding to the crisis with liquidity and lowering interest rates. However, with lenders refusing to lend, these actions will prove to be ineffective. Without lenders lending, there is no way for the cheap money to get into the hands of those who need and want it.
• The Fed itself is taking aggressive measures to avoid a recession that is unavoidable. When cheerleaders get scared, you should be too.
• Don’t expect the global economy to save us as they are experiencing the same debacle as we are.

The reasons for taking action right now are numerous. The case for an economic tsunami is real and frightening. But now is not the time to be the proverbial “deer in the headlights”. Negative developments are coming at us at break neck speed. Like a linebacker, homeowners need to read the play and react to it immediately.

Fairfield County, in Connecticut, is already on FreddieMac’s official “Declining Markets List“. That means prices in Fairfield county are declining measurably. Which also means homeowners in this county have already seen their ability to refinance impacted in a very negative way.

We have seen firsthand, clients and friends who have been negatively impacted by the rapidly evolving negative state of the lending industry. We had one client who is currently months down on their mortgage payments, see several approvals go into the trash can due to lenders going out of business or taking programs off the table.

I cannot stress strongly enough that time is of the essence. Prices are falling and loans are harder to qualify for by the hour.

Thirty year fixed rates are hovering around a very sensible 5.25%. Don’t wait for rates to go lower. Even though they may go lower, falling home values and tighter qualification requirements can sabotage your ability to refinance, either making it more costly or perhaps impossible.

If you have visited the links in this article, you can plainly see we are in for the roughest economic environment since the Great Depression of the 1930’s. In light of this, it’s time for homeowners to become as defensive as possible. Meaning homeowners should shrink and fix their housing costs and perhaps, overall budgets.

The perfect storm is here. Are you prepared to weather it?

Tags: Current Events, Finance & Economy, Mortgages, Real Estate, Tips & Tricks by The Mortgage Guy
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For months now the Mortgage Guy has been concerned about an impending recession and possibly something much worse, a depression on the scale of the 1930’s. It’s been my view that the mortgage meltdown could spread to other types of debt, namely installment loans and credit credit card debt.

Of course if this were to happen, it would be a knock out blow to the consumer and any hopes that consumer spending would help us to avoid a recession or get us out of one.

Well the cancer is spreading to other types of debt as pointed out in this Market Watch article.

“The story of this quarter is consumer loans,” said Zach Gast, an analyst at The Center for Financial Research and Analysis, a unit of RiskMetrics Group.

Until the middle of last year, consumer loan losses were held in check as house prices climbed, allowing borrowers refinance mortgages or take out home-equity loans and use the cash to pay off credit card bills and auto loans.

But as the subprime-fueled credit crisis erupted in August, such activity ground to a halt.

The consumer’s debt pressure relief valve, the cash out refinance, no longer exists. Debt balances are growing and the consumer is struggling to service that debt. There is nothing in the pockets of the consumer to fuel economic growth. Consumer spending represents 70% of gross domestic product and now it’s gone.

With consumer spending now accounting for a record 71% of our gross domestic product, it will take a whopping increase in business spending and exports to keep the U.S. economy out of recession.

With broken debt markets, it’s impossible to avoid recession and or depression. The same holds true for the U.S. banking system, which is alarmingly close to insolvency. The solution, provided by the fed, is to lower interest rates. These lower rates have no way to get into the hands of those who need or want them because the delivery system, the debt markets, isn’t functioning. Zero interest rates does no one any good if the lenders aren’t lending.

No problem can be solved until it is recognized to be a problem. Nor can a problem be solved unless it is completely understood. Joe Sixpack, industry professionals and most certainly our political leaders and regulators either don’t recognize the problem or fully understand it. This just adds to the danger at hand.

The problem is there is no confidence in the debt markets and consequently they aren’t functioning. Unless the debt markets are restored and functioning properly, we are all economically doomed.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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It’s both good and bad news. Good because maybe, just maybe the Fed has come to realize just how serious our situation has become. Bad because, well things are very bad. At least we know the dilemma is on their radar.

Yesterday, the Dow sold off to the tune of 298 points in response to the Fed’s quarter point cut in the Fed Funds rate. Then to today they attempted to address our malfunctioning debt markets. The Dow shot up a couple of hundred points initially on the news but gave all but 41 points back by it’s close.

From Marketwatch…

Ahead of Wall Street’s open, the Federal Reserve announced plans to ease elevated pressures in credit markets, saying it would inject cash into the markets through auction of short-term funds.

The Fed also announced foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The Bank of Canada is also a partner in the liquidity plan. The first auction will be held Monday, Dec. 17.

The Fed’s action is significant because they haven’t deployed a strategy like this since 9/11/2001, as the International Herald Tribune points out.

It was the first time since the Sept. 11, 2001, terrorist attacks in New York and on the Pentagon that these central banks have coordinated their support of financial markets.

That’s right, the mortgage and credit crisis has reached 9/11 stature. It’s about time the Fed and central banks around the world wake up to the economic crisis that we are faced with. The first step in solving a problem is recognizing and understanding it. Perhaps they have taken the first step.

“This is not about particular financial institutions with particular problems,” a senior Fed official said in a background briefing for reporters. “It is about market functioning.”

Nor is it just about economic cycles as I pointed out yesterday. But there is doubt the plan is grand enough to work.

Economists and market specialists welcomed the Fed’s intervention but expressed some skepticism whether it would be enough to allay the biggest problems in the credit markets related to the sharp drop in the value of U.S. mortgage securities.

I agree, I doubt it’s enough to cure the disease. Especially when it’s rumored that Citigroup alone is holding 100 billion in SIV’s or structured investment vehicles. That’s just one player. So you can see 10 billion here and 20 billion there are mere bandaids on an open chest wound.

One thing we do know. The mainstream media, the politicians, the CEO’s and of course the central bankers haven’t shot straight with the public. Nor are they now. If they say it’s this bad, assume it’s ten times worse. The information is out there, but you need to dig for it.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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In an effort to avoid a recession in 2008, the Federal Reserve cut the Federal Funds Rate by .25% today. The rate reduction was quickly rejected by Wall Street as evidenced by today’s 298 point fall. The stock market apparently was hoping for a .50% cut.

In my opinion, it’s much ado about nothing. Further it shows that the stock market and the Fed just don’t get it. This problem is much more than addressing an economic cycle.

Without a properly functioning debt securities market, there is no way to avoid a recession or grow the economy, which could very well lead us to a depression.

We have a severely broken debt market that may lead to the failure of our banking system. This is a far bigger issue than economic cycles. Jim over at the Depression of 2006 blog notes…

What is really happening at the Bernanke and Paulson level? The banking system could collapse. Unless they can keep the homeowner making payments the game is over. In order to keep the banks from dropping dead, the really bad stuff cannot be allowed to be marked to market.

With regard to our banking system, therein lies the issue. We don’t know how much bad paper they are hiding. A bomb could be dropped any day now. This can also be an explanation for why the banks are reluctant to lend to each other. They know the game and they know it’s possible they won’t be repaid.

We can weather economic cycles when equipped with a healthy, or at the very least functioning, banking system and debt market. Without them, I’m not so sure.

Besides fanniemae, freddiemac and the FHA, there isn’t much happening in the mortgage market and we’ve all heard the bad news on fannie and freddie. Millions of people can no longer access their wealth, which is disappearing daily, through mortgage lending. My product shelf has literally been decimated. It’s getting worse too, not better. The end of the mortgage crisis is a long ways off. In fact, we are in the very early stages.

Now you have the mortgage debacle spilling over into the revolving and consumer debt industries. Soon credit lines will be tapped out and delinquencies will reach the levels of the mortgage industry. Then these avenues for accessing credit will shut down too.

The reach of the credit crisis is global. It will negatively impact global economies like it’s affecting ours. With the US in recession, global economies won’t have the US economy to feed their growth. Further, their banking systems and debt markets will suffer in ways that parallel ours. For what it’s worth, as the contagion spreads globally, I see the dollar strengthening.

Today’s measure will do little in avoiding a recession in 2008. The problem is mechanical, not cyclical. The Fed will be ineffective using monetary policy to fix a mechanical economic breakdown . Quarters and half points matter little when there is no delivery system in place (the debt market and banking system) for the “discounted” money.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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Some are handicapping the odds of recession at sixty five percent. Today consumer sentiment came in at a fifteen year low. The highly suspect and often revised jobs creation number came in at 94,000 jobs created in November, while the outlook was for 84,000.

Many have already determined that the Bush/Paulson mortgage bailout will do more harm than good. We are facing massive amounts of foreclosures next year and the year after that. The Fed is expected to ease rates next week. The only question is by how much.

So looking at all of this, it’s apparent that things aren’t going so well for the economy, which usually bodes well for bond yields. Well due to an extra ten thousand jobs being created, the ten year treasury bond added twelve basis points (.12%) to it’s yield. The ten year treasury sits at 4.12% as I write this. Go figure.

I expect a modest downward trend in treasury rates. I expect mortgage rates to follow suit. However we can be surprised with weakness in the U.S. dollar, which could cause rates to rise. Additionally, lenders might tighten up even more on lending, which could widen the spread among treasuries and mortgages. If the spread widens, you could see treasury yields go down while mortgage rates remain level or go up.

The bottom line is we should see decent rates but don’t get greedy because there are influences at work that can sabotage this scenario. If it makes sense and it’s a good rate, grab it. Pigs get fed and hogs get slaughtered.

Tags: Finance & Economy, Mortgages by The Mortgage Guy
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