Blown Mortgage

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I don’t really want to pull discussions away from Morgan’s thoughts about a fool’s rally because I think he’s got a very good handle on things.   I’m in a market (western Michigan) where we’ve seen a lousy market for a couple of years, but we didn’t have the outrageous price increases that other areas saw (like where Morgan lives).   So, correspondingly, we aren’t seeing the huge decreases that other areas did.   So, if someone is looking at buying a house in my area right now, I’d say that they need to:   1) Plan on holding for at least 5 years,  2) Know the specifics of their portion of the market so that they don’t over pay and 3) If they don’t need to buy now, they should wait.

So here’s the latest on what’s happening in the mortgage/real estate/financial worlds:

1. Banking - Citigroup, Merrill Lynch, Chase, First Horizon and Washington Mutual all reported earnings that were either way down (Chase) or actually losses (everyone else) and the amount of write downs that they took were truly staggering due to the amount of $000’s left of the decimal point.  Remember a write down is where they say that the value of their assets isn’t worth what they thought that it was and that raises some significant capital (cash) issues for banks.

2. Retail sales for December were not nearly as positive as had been hoped for. 

3. Housing starts were down 14% nationally in December.  Let’s put it this way, 3 of my 5 kids weren’t even born the last time housing starts were at that level and one of them is getting her driver’s license in May.

4. The Federal Government is making a lot more noise about a “stimulus package” to try to keep the economy going and avoid the “r” word during an election year.   The true nature of the package and it’s effect on the economy are far from clear at this point.

5. The Feds Funds Futures market is now pricing in a very good chance (that’s a scientific term) that the Fed will cut rates by .75 % when they meet on the 29th and 30th.  There is even a fair amount of people on Wall Street who think that the Fed might cut rates by a full 1%.

So what does that all mean?   A couple of things:

1. If you’ve been following the market for any length of time and reading any of my “stuff,” you know that comparing what the Fed does to mortgage rates is like comparing apples and oranges.   The fact that the Fed is lowering short term rates doesn’t mean that long term rates will move down by the same amounts or frankly even move down at all.   Why not?

    a. They truly are two different financial animals.   What the Fed controls are the “overnight” rates that banks can borrow from the Fed on.    What we pay more attention to are the long term (10 year and beyond) rates.

    b. As we’ve all seen, the profitability of the secondary mortgage market (Fannie Mae, Freddie Mac etc.) isn’t what it should be, so I think that as some other rates fall, we’ll see a widening of “profit margins” on mortgages that will prevent mortgage rates from falling as far as other rates do.

    c. Looking back over the last few years, I remember when prime (currently 7.25%) was at 4% and mortgage rates were in the low 5’s.   Now, prime is soon to drop to at a minimum 6.75%, but mortgage rates are only in the upper 5’s. 

    d. The perceived inflationary risk of lowering short term rates - why are they lowering short term rates?   Frankly to boost the economy and keep it out of a recession.   If they succeed, then as the economy starts picking up, inflation becomes more of a risk.

So, we’ll have to see what happens, but I’m not anticipating a substantial move in mortgage rates in the next couple of weeks because of the Fed.

2. Using the baseball game analogy, how far into the game are we?  Well, with the sale of Countrywide to Bank of America, and rumors that Chase is looking at buying Washington Mutual, I think we’re a little farther along, but probably still only in the top of the 4th inning.   There are a lot more issues to uncover in mortgage portfolios, a lot more adjustable rate mortgages that are going to reset, and a lot more bank owned homes that need to be cleared off of inventory before we get to the bottom of this.

3. Underwriting guidelines - I’m starting to get a “feel” that we’ve probably seen the majority of the underwriting changes that are going to happen.   UNLESS (big IF) the mortgage portfolios start performing even more badly (worse?) than they are, going forward what we’ve got to work with now is looking like it’s what we’re going to have to work with.   Frankly, that’s not a bad thing.   The majority of the loans that I can’t do now (that I could 9 months ago) are ones that frankly probably shouldn’t be done.

A couple of other thoughts:

1. The Bank is closed on Monday in observation of Martin Luther King Jr. Day.   I think it’s a good time for us all to take a minute and admire a man who stood up for his principles and fought for what he believed in.

2. If you’d like to learn a little bit more about me and what keeps me busy when I’m not writing mortgages (and sending e-mails about the mortgage business), check out the article that I wrote for Focus on the Family’s website.   You can find it at: http://www.icareaboutorphans.org/Default.aspx?Menu=7&Article=20.

We aren’t done with this, not by a long ways.   That’s why it makes sense to continue to listen to people like Morgan and take the time to read the comments on this blog and others.   There’s a lot of collective wisdom out there that can help you either make wise decisions on how to navigate through this mess or how to decide when it’s time to get out.

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