The Mortgage Guy Blog

The long awaited details on the expanded loan limits for Fannie Mae and Freddie Mac are now becoming available. Here is the latest information we have on the new jumbo loan guidelines for counties located in Connecticut.

While the limits have been approved and the matrices released, FNMA’s Desktop Underwriter (DU) and Freddie Mac’s Loan Prospector (LP) do not reflect these changes or offer pricing for these loans. We expect those details to follow shortly. DU and LP are the computer underwriting models used to determine borrower eligibility.

Here you can find the FNMA Jumbo Mortgage Matrix

And

Here is Freddie Mac’s Jumbo Loan Matrix

We will post any developments with regard to these new limits as they become available.

Tags: Current Events, Mortgages, Real Estate by The Mortgage Guy
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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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Since the Federal Reserve cut the Fed Funds rate by .50% on January 30, mortgage rates are up at least .75% on the thirty year fixed rate mortgage. For example, our 30 year fixed rate, no closing cost loan offering bottomed out at 5.75% APR just before Bernanke and the Fed lowered the fed funds rate by .50%.

Today our no closing cost rate stands at 6.50% APR. That is a three quarter percent increase despite the fed funds rate being cut by one half of one percent. Rates have responded similarly in other fixed rate maturities as well.

Public perception is that if the Fed lowers rates, mortgage rates will follow. Sometimes that is true, other times it is not. Quite often, those of us in the mortgage origination business,
cringe when the Fed lowers their short term rate. More often than not, we need to re-educate borrowers on the workings of the debt markets and interest rates in general. These re-education efforts are necessary due to the bombardment of misinformation the public receives through advertising and/or simply ignorance.

The actual rate that gets the most publicity, when the Fed addresses monetary policy, is the Federal Funds rate. Here is how the Federal Reserve describes the Federal Funds rate on their New York Fed website. Emphasis is mine.

By trading government securities, the New York Fed affects the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight. The Federal Open Market Committee establishes the target rate for trading in the federal funds market.

The most important thing to take away from this definition, is that it is a very short term interest rate. You cannot get more short term than overnight. This is the rate that is most commonly used by the Federal Reserve to manipulate monetary policy. The Federal Reserve does not control mortgage interest rates. They really don’t directly control the fed funds rate either, rather they set a target rate.

Mortgage rates move independently of short term rates and it is short term rates that the Fed has the most control over. Just because the Federal Reserve moves rates one way or the other, doesn’t necessarily mean mortgage rates are moving in the same direction. The rate activity, over the past three weeks, proves this point.

In this environment, if you are presented with a good and sensible rate for your situation, don’t jeopardize it by waiting for Federal Reserve actions. You can easily lose this bet two ways. You may guess wrong on the direction in which the Fed is moving short term rates and it may be erroneous to assume that long term mortgage rates will respond by moving in the same direction.

One thing is for certain. Mortgage rates and the very short term fed funds rate, never move the same amount in either direction. To clarify, if the fed cuts or raises by say 1/2%, mortgage rates do not move by the same 1/2%. If they do, it’s rare and purely coincidental. In the world of financial instruments, they are two very different animals. The erroneous assumption of lock step interest rate movement is one I have heard many, many times.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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For months the Mortgage Guy has been fighting the flawed perception that those most culpable for the mortgage meltdown are the buyers, realtors and mortgage originators. Conventional wisdom would have you believe they are most and directly responsible for the real estate meltdown and the mortgage crisis.

My contention is that the home buyers, real estate agents and mortgage originators are being wrongly blamed for the mortgage meltdown. Sure they played a part, but I believe their respective responsibilities for the debacle is minimal and leaning toward innocence in nature and intent.

All political and regulatory emphasis to date, has been put on either adding to already burdensome lending regulations or bailing out the “greedy” home buyer. That is until the Securities and Exchange Commission set their sights on the mortgage securitization process. This is where the biggest, most serious and harmful crimes were committed.

A look at this recent Yahoo News article will give you an idea as to what the SEC is concerned with.

The Securities and Exchange Commission is investigating how banks, credit rating firms and lenders valued and disclosed complex mortgage-backed securities that ultimately led to the subprime crisis, a top agency enforcer said on Saturday.

The article points out that while the SEC didn’t name the companies involved, Merrill Lynch and Morgan Stanley have disclosed regulatory investigations pertaining to their role in the credit crisis. In all, there are over thirty firms being looked at. It goes on to say…

Banks, due diligence firms and credit rating agencies are being examined for their role in the securitization process, or how mortgages were sold, repackaged and bundled into special financial products.

The SEC is looking at the valuations and accounting treatments of mortgage-backed securities. It is looking at whether the securities were valued correctly in the first place, what was the level of risk and if that was adequately disclosed to shareholders.

In my opinion, the investment banks, with help from others, committed the fraud of labeling credit standard deficient loans as AAA investment grade paper. By doing so, they were able to feed a huge hunger for safe but uncharacteristically high yielding investments. Feeding this appetite for high yet safe yield, allowed for the spread of this toxic paper all over the world.

The investment banks could not pull off the crime of the century without having ample assistance. This is where the ratings agencies and due diligence firms/departments come into play.

It is up to due diligence entities to properly assess the risk and suitability of investments. Apparently, based on the total destruction of our credit markets, these due diligence “experts” couldn’t see that by mixing a pot of AAA mortgages with a pot of DDD mortgages one cannot expect an investment pool deserving a AAA rating as the end result. This is so even if you take into consideration that they bought “insurance” on the portfolio.

The final gate keeper responsible for safeguarding the investment public from misdeeds such as these, are the credit rating agencies. These so called “independent” firms really have the final say as to the grade of any debt security. Yet they also couldn’t see that an investment portfolio with a major exposure to credit standard deficient mortgages should not be rated AAA in safety.

A reasonable person would wonder why the ratings agencies would implicate themselves in what turns out to be the total destruction of our debt markets. The answer is the same for all involved. Money.

At S&P, for instance, no longer will they hand out triple-A’s to issuers who pay them boatloads of fees. They now will employ an ombudsman to listen to complaints about the agencies handing out triple-A’s to issuers who pay them boatloads of fees.

What if General Motors built cars that didn’t run, or your local dairy produced sour milk? What if your bank said it didn’t deposit your paycheck because it lost it, or the electric company just quit supplying your neighborhood?

Then, in response to it all, those companies said: good news, we’re hiring an ombudsman. The ratings agencies in the same fashion have failed on their intrinsic purpose: to judge the likelihood that a debt will default. As of Tuesday they’re about 0 for a few billion.

The quote is from an excellent MarketWatch article that gives insight into the role the ratings agencies played in the destruction of our credit markets. I owe a huge hat tip to The Common Sense Forecaster for bringing my attention to it.

It’s important to realize that events leading to the mortgage meltdown occurred on a “top down” basis. Buyers cannot buy from realtors unless mortgage originators have the loan programs to fit the buyer’s profile. The mortgage originators cannot offer loan programs unless lenders are providing them. The lenders will not provide loan programs unless the securitizers can turn the mortgages into marketable securities and the ratings agencies have the final say as to the grade (the likelihood of default) of those securities.

Proof for this observation is the current state of the mortgage industry. Despite the current demand, no longer are 100% financing for credit damaged borrowers and stated income and asset programs available. This is because lenders cannot securitize these types of loans. They cannot securitize these loans because it has become painfully apparent to investors that these once called AAA investments are nothing of the sort.

Also evidenced by the current state of the mortgage industry, is that without the securitization of mortgages, no one lends and thus, no one buys real estate or borrows money against their house. This makes it clear that it is the securitization engine that drives the entire mortgage process and in turn the real estate markets.

The demand still exists for 100% financing, no income, no asset loans and subprime/alt A loans in general. Being that these programs are no longer available, makes clear that the mortgage business is not driven from the bottom up. The demand is still there, yet it goes unanswered because the securitizers cannot sell the mortgage backed securities. The business is indeed driven by top down forces.

Realizing that the mortgage industry runs on securitization, it’s plain to see who the real criminals are in the mortgage crisis. It is clearly the securitizers, due diligence firms and ratings agencies. They are the major force behind the mortgage industry and it’s destruction.

Without the securitizers lying about the credit quality of the subprime mortgages being securitized, and the winks and the nods from the due diligence firms and ratings agencies, the securitizers could have never sold anywhere near the amount of toxic debt that has been polluting investment portfolios and economies around the world.

The fraud committed by these criminals created the immense capital that led buyers and originators to use the unsuitable mortgage products that have led us into this world wide crisis. They enabled the lenders, originators, realtors and buyers in committing their misdeeds which have led to the total seizing of our credit markets. This in turn has thrust our economy into recession and potentially much worse.

Now it should be clear to all, the buyer, realtor and originators were simply responding to demand that was met by capital that was fraudulently raised. All the buyers wanted was a piece of the “American Dream”. Realtors sought to help them get it and the originators were empowered to provide the financing by the capital raised through fraudulent means.

These subprime/alt A, toxic loan programs simply appeared on our rate sheets. The guidelines specifically allowed for damaged credit, no down payments, no proof of income, assets and in some cases no proof of having a job. There was no fraud involved because the product guidelines allowed for these aspects specifically.

Originators who realized these types of loans were time bombs waiting to explode, could not refuse to sell them. If they did, the consumer would just go to another originator offering these programs. Believe me, there were many originators who saw the writing on the wall two to three years ago. Yet we were powerless to do anything about it. It wasn’t our money being lent, thus we had no say and market forces worked against dissent.

It’s time to end the mis-perception that it was the greed of buyers, realtors and originators that led us into the subprime/credit crisis. Yes to a degree this element played a part in the dilemma but this is not the real cause of the meltdown. It was the titanic greed of the securitizers and their “assistants” that fraudulently created the capital and market forces that have led us to the historic break down of our credit markets and economy.

The first step in restoring confidence in the debt markets shouldn’t be bailouts for the investment banks and insurers. Nor should it be bailing out homeowners through rendering legal contracts as useless. The healing will begin when the real criminals are outed and the perp walks proceed down Wall Street.

Then the world will know our markets are governed by the rule of law, one set of laws for all and no one above the law, as opposed to political cronyism. The perception of political and regulatory cronyism will undoubtedly taint our securities markets forever. This will further weaken the United States’ ability to be a world class economic player.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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Home Equity Lines of Credit, the cash spigot that taps one’s home equity, are scarce, more expensive, harder to qualify for and harder to keep. It’s just a continuing sign of the current extinction of useful mortgage products.

In our office, the number lenders offering home equity lines of credit has been cut in half. The number of lenders offering second mortgages has been cut by around 90%. When you can find lenders offering the products, they are usually more expensive (higher rates) and much harder to qualify for.

For example, Chase is lowering the maximum loan to value on HELOCs from 90% to 70% in some California markets. It’s only a matter of time that policies like this spread to other severely impacted markets.

Through this week, Chase customers in California can tap as much as 90% of the equity in their homes. Starting Monday, however, that limit goes down to 85% in most of the state. In six counties, including three in Southern California — Los Angeles, Orange and Imperial — Chase won’t let homeowners borrow more than 70% of the value of their homes. The bank wouldn’t say how the six counties were chosen.

Indymac Bank exited the HELOC market completely. Hat tip to Calculated Risk.

Not only are HELOCs harder to get, they are also harder to keep. Lender Implode posted this letter from Countrywide on their site.

What’s Happening

A portion of HELOC customers have already or will soon be notified by CFC Loan Administration that their HELOC draws have been suspended indefinitely. These HELOCs were identified as candidates for suspensions for various reasons including:

Significant decrease in supporting property value – If the customer’s current untapped equity (home value minus all mortgage liens) drops by 50% or more from their HELOC opening date, his/her line will be suspended.

HELOC payment delinquency – If the customer’s payment is made two or more days after the grace period ends, his/her line will be suspended.

Product Terms/Conditions Violation – In cases where the customer violated terms or conditions of the HELOC Agreement, his/her line will be suspended.

Examples include, but are not limited to: HELOC on property originated as owner occupied, but now believed to be non-owner occupied or unpaid taxes or insurance on the subject property.

Be aware that there may be other actions that could trigger draw suspensions.

Countrywide is joined by Bank of America and USAA Federal Savings Bank, among others, in tightening HELOC requirements.

Many of these HELOCs were taken out to act as an emergency cash reserve. Well it’s emergency time now and these products are either being taken back or not offered.

Needless to say, there is a human impact caused by the HELOC tightening. For example we had a client who had a small Indymac HELOC. The purpose of the HELOC was an emergency fund. They had a death in the family and finances became strained. Just when the proceeds of the HELOC were needed, Indymac suspended all withdrawal privileges. Consequently, this client went into a financial free fall without the liquidity provided by the line of credit.

This is a prime example of why we are telling clients and prospective clients that they must move quickly when it comes to anything to do with home financing. The rules are changing everyday and not in favor of the borrower/homeowner.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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Entering what could be the worst recession in generations, homeowners can expect to see the values of their homes decline dramatically over the next year or two. Home prices will decline due to a soft market where sellers are lowering their prices daily. Foreclosures will also impact home values negatively and 2008 is expected to be a record year for foreclosures. Foreclosures add to inventory and usually sell at less than market value prices.

I know, cycles come and cycles go but this time it’s different. We aren’t talking about 5% to 10% declines, more like 30% or higher on a national level.

This is from CBS MarketWatch…

Merrill Lynch says U.S. nationwide home prices may fall 30%

Merrill Lynch forecasts nationwide U.S. home prices could decline 25% to 30% over the next three years, as new supply and weak demand weigh on the market. “This sounds dire… but would only reverse part of the unprecedented 130% price surge from 2000 to 2006,” wrote economist David Rosenberg in a research note released Wednesday. Rosenberg added the S&P 500 may decline an additional 20% to 25% to breach the 1,100-point level if the market follows historical precedents at times when the U.S. economy is in recession.

More evidence of this trend is the number of properties in foreclosure. Here are some numbers from California.

DataQuick Information Systems reported yesterday that foreclosures rose 353 percent to 7,349, while default notices – the start of the foreclosure process – increased 128 percent to 20,138. The numbers were the highest since DataQuick began keeping track of county foreclosures in 1988 and defaults in 1992.

Here is what is happening in Wisconsin.

“When I started in 1998, there were fewer than 800 for the entire year, maybe 20 or 30 a week,” said Eileen Carlson, a civilian employee of the Sheriff’s Office who helps supervise the weekly sale of foreclosed property.

“We’ve already issued 1,000 docket numbers for 2008. We’re already booking sales into March.”

Close by in Massachusetts, it’s just as discouraging.

Mortgage companies foreclosed on 7,563 Massachusetts homes last year, almost nine times the number in 2005, when the housing boom peaked, and almost three times the number in 2006.

It’s pretty much the same for the Northeast in general.

The pending sale index’s drop in states including New York, New Jersey, Massachusetts and Connecticut was triple other U.S. regions and demonstrates home sellers are having to lower expectations as the real estate slump worsens…

…“The northeast is getting hit hard,” said Paul Rinkulis, an agent at Keliher Real Estate in Boston. “It’s at least as bad as it was in the late 1980s, early 1990s, and that was bad.”

Here in Connecticut, it’s pretty much more of the same.

A slower housing market and the proliferation of risky mortgage products continue to drive up foreclosure rates across Connecticut. Preliminary figures for February gathered by RealtyTrac Inc., a national online marketplace for foreclosure properties, show a total of 1,451 foreclosure filings in Connecticut, a 61 percent increase over the corresponding period last year.

Your home’s value is directly affected by the price of homes sold in your immediate area. When a home is appraised, several comparable sales are used in determining the value. If sellers in the area are lowering prices, your home’s price would more than likely be affected as well.

It’s plain to see values will fall over the foreseeable future. Now is the time to take care of refinancing and cashing out if you still have enough home value and can meet ever tightening lending requirements. The market situation can make it more costly to borrow and in some instances, the occurrence of which is happening more and more, impossible to borrow.

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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Due to the holidays, year end house cleaning and illness, I haven’t posted in a couple of weeks. Well the new year is here and having taken care of the above issues, I am back to posting.

The question mark in the post title is no accident. This will be, without a doubt, the most challenging year we have ever faced in the mortgage industry. Will it be happy? Only time will tell.

The mortgage industry continues to shrink with the lender implode list reaching 210. Subprime product offerings remain slim. Essentially, there is no subprime as we once knew it. I have clients and friends that I cannot help due to products being discontinued. It literally keeps me up at night, knowing that a year ago, their problems would be solved but now they will only get worse and there is nothing I can do about it.

Alt A isn’t much better. The jumbo price spreads remain unusually large and product offerings in this class of loans are shrinking like the subprime offerings.

That leaves conventional loans. Fannie and Freddie pricing is pretty attractive right now. However, underwriting in this class of loans has tightened significantly as well. We are not an FHA shop so I won’t address that market other than to say, it’s not a panacea for the ills the industry faces, not that anyone said it was.

Let’s not forget that mortgage lending is collateral based. The collateral being real estate, the value of which is plummeting at record paces. Without adequate collateral, mortgages cannot be made. I don’t know how far real estate prices will fall but I can tell you this. Until the mortgage industry is repaired, values will decline in a historic manner.

In order for this year to be good for the mortgage industry, the process of securitizing mortgages must be repaired. The mortgage industry cannot survive without it. Real estate prices will need firm up as well. However as long as the mortgage industry is broken, that will not happen.

Another ingredient for a good year is for our government leaders to get a clue about what is going on and how to deal with it. Every government action to date clearly miss the marks needed to turn the situation around. Their so called solutions reveal their total lack of understanding of the situation at hand. It’s all show. “I care so re-elect me.” Meanwhile their actions will shrink an already devastated industry making consumer choices fewer and more expensive. It’s good thing they care.

Let me just say that when I started this blog it wasn’t my intention to become a gloom and doomer. That isn’t my nature. I am and always have been a “can do”, optimistic guy. But I am foremost a realist. I accept reality at face value in order to deal with it efficiently. The reason for the negativity in this blog is because in reality, we are faced with a very negative outlook.

There’s more to come. So let’s work at making 2008 a happy year. Good luck, we are all going to need it.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate 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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