The Mortgage Manifesto

Running into the Market Headwinds

You've seen the news about the meltdown in the subprime part of the marketplace and now we are seeing the ripple effects in the prime side of the business.

What are these ripple effects?

During the most recent weeks there has been a scramble of new underwriting guidelines with the main tightening coming in the lowering of allowable loan-to-value (LTV) ratios.  The days of super easy 100% financing are coming to an end.  Across all situations for purchases and refinances borrowers these days are running into major headwinds if they need a high LTV transaction.

Proper mortgage planning ahead of this turn in the markets was crucial to making sure you are properly set up to weather these turns.  The same can be said during these times of credit tightness.  It has never been more important to view your mortgage financing as a "living and breathing" financial tool rather than just a debt you are making payments on.

So many people start off with "lowest rate or lowest cost" as their beginning of a new mortgage search.  That is the wrong starting point.  If you start off with the wrong question you cannot expect to have the right results.  Taking time to evaluate all 26 criteria for what determines the loan rate and costs for a particular transaction while integrating that into your life plan is what delivers on-going financial security to you and your family.

Why do I think the subprime meltdown and credit crunch is not over yet?

Because just this month I've lost three deals to some other company that was willing to commit fraud to get the deal done.  Blatant fraud.  If other are so willing to act in ways that could put them in prison we know that there is more pain coming in the financial markets.

Do you remember those "lost another loan to DiTech television commercials?"  Lately, it's been "lost another one to fraud." 

When the state requires more in training to be a hairdresser than a loan originator there is something very wrong.  If a hairdresser makes a mistake your hair grows back in a month or two.  If a loan originator puts their client on a financing program not suited for them the after effects can haunt their client for years and years. 

A lot of changes are still coming.  Stay tuned here for your "peak behind the curtain" to know what is really going on and how you can take action to keep your financial security rock-solid.

www.BrettGrendahl.com

Market Watch

This afternoon will be the release of the meeting minutes of the last Federal Reserve meeting on rate policy.  While the Fed did not change their Overnight Rate and kept the wording of their policy statement the same the minutes give us a "look under the hood" to see what the current debate of Fed policymakers really is.

We are also within the gravity of the monthly Jobs Report, released Friday morning.

Last month's Jobs figure came in below expectations and I expect a similar result this report.  These two events are significant to the next several weeks of direction of mortgage rates.

An Interesting Read in the Wall Street Journal

I just read an interesting article in the Wall Street Journal today.  http://online.wsj.com/article/SB117997159688112929.html?mod=todays_us_nonsub_pj

After ten years of originating new mortgage financing I have been shocked by the amount of fraud and abuse in the industry the past five years.  I have been witness to apalling activities ranging across the participants in the industry including appraisers, Realtors, title company, mortgage originators, national banks, state governments, and even the credit bureaus.

It is a sad time.

When people put their self-interest ahead of their client's interests the result is never ideal.  Unfortunately, this seems to be a common occurence not only in real estate but in our society as well.  I am shocked when I find people that will blindly trust the largest organization just because they are large.  Do we quickly forget the sham pulled over by Enron?

Heck, the credit bureaus (Equifax, Transunion, and Experian) are major culprits.  A recent practice of theirs is to sell off a consumer's private information once a mortgage company pulls a credit report.  They refer to this sales lead as a "trigger lead."  Basically, the use the fact that they just charged a mortgage company to obtain the credit report on an individual seeking new financing and then they sell that information off again, as if they didn't already make money!  That practice is not driven by protecting consumers private information.  That practice is driven by boosting the credit bureau's bottom line.  That is self-interest at it's finest.

Back to the WSJ article, mortgage brokers as a whole are not the problem.  I colloborate with peers across the country that are the utmost professional about their role in helping our clients preserve and protect their financial security.  However, I find this group to be the minority in the industry.  Your task as a consumer is not just focus on rate when shopping for new financing.  The advice and professionalism of the individual that assists you has never been more important.  Choose wisely.

Basically, in the complex financial lives we live these days your only security comes from YOUR decision to work with someone you trust and who looks out for your best interest.

Have a great Memorial Day,

www.BrettGrendahl.com

Market Reversing

After a couple weeks of sour action in the mortgage bond trading pits we finally saw the light at the end of the tunnel on Thursday, May 24th.

What was that light?  Well, it was a specific pattern of the action of the day as mortgage bonds plunged to new lows in price in the morning but recovered and rebounded to close the day up for the day.  This pattern, at the end of a trend, typically implys that the trend has grown tired.  What this means is that we should see mortgage rates stabilize and set up for a new move lower in the coming two weeks.

What is most important to note is that mortgage rates in general have been stuck in a very small range for the past 6 months.  With inflationary pressures moderating in the near future and an economic contraction (recession) getting more and more likely the longer we stay in an inverted yield curve we shall soon see the Federal Reserve begin walking the market from it's current tightening stance quickly to a loosening (rate cutting) bias.  Once this occurs look for mortgage rates to finally break free of this tight range and break free to lower rates by the end of this year.

www.BrettGrendahl.com

The Simple Truth on Mortgage Rates

So many times I see and hear people with inaccurate views on what determines mortgage rates and where rates will be headed.  It's time to lay out the simple, time-tested truth on long-term fixed rates.

Over time, the 30 year fixed rate mortgage will drift towards 3.5 points above current consumer inflation.

All you need to remember is this fact and you can do your own predicting on where rates are going.  Keep in mind, that short-term economic events can skew rates for awhile put the gravity of the markets will pull the long-term rate back to this formula.

Let's look at where we are today.  Current consumer inflation, as read by the Consumer Price Index (CPI), is 2.6%.  Add 3.5 and you get 6.1%.  Where are 30 year fixed rate mortgage today?  Wow, they are at 6.125%!

Now, you are thinking, where are rates going?

The key to that question is what is the forecast for consumer inflation.  Is it going higher or lower?  Given that we've just come off of the longest running Federal Reserve tightening cycle of 17 consecutive rate hikes (the effect of putting the brakes on the economy) we should the economy cooling in the coming months and take  inflationary pressures down with it.

Real inflation has not been a concern for a long-time.  In fact, when the Fed began the most recent tightening cycle in November of 2004 the 30 year fixed-rate mortgage was at 6.25%.  So, as the Fed continued to raise rates on the short-end the long-term rates have held remarkably stable.  This is because real inflation is not out of control.

Do you still have fears of the double-digit mortgage rates of the 1980's?  Most still do.  However, it is important to remember that in the 200+ years of our country's existence long-term rates have spent most of their time in the 6-7% range.  In fact, from 1776 to 1975 long-term rates never got higher than 7.5%!  200+ years below 7.5% and about 10 above yet most people make decisions based on the fear of the 5% of the time we saw double-digit rates.  If you sat down at a roullete table would you place your only chip on the spot with a 5% chance of success or the 95% chance of success?

In my mortgage planning sessions with clients I see many people begin a conversation with discussion about rates but that is the wrong place to start.  Rates are not the most important reason why someone gets a mortgage.  The same thing can be said about drills.  Most people don't buy a drill because they want a drill.  They want a hole and need the drill to get the hole.  In the same fashion, people don't want a mortgage but they want the leverage that this powerful financing tool achieves.

Mortgages should not be viewed as debts but as TOOLS.  A drill isn't something you spend money frivolously on.  It is a TOOL you use to achieve a goal.  Your goals should drive the planning of any mortgage, not rate.  The focus on rate is what leads people to get on loan programs they shouldn't be on nor understand.  The focus solely on rate leads the crisis we see in the meltdown of subprime mortgages.  A person's home is typically their largest financial asset and debt.  That means that the decisions made regarding this home and it's associated financing can have dramatic impact on their lives.  Bad decisions can haunt your life for years while good decisions can set you up for a lifetime of financial security.  Good decisions come with proper mortgage planning.

What guides your thinking about mortgages and mortgage rates?  There are a lot of views about these that are rooted in the past.  Albert Eintein said, "You cannot solve today's problems with yesterday's thoughts."  Yesterdays views about mortgages and rates solve yesterday's lives but don't fit our lives of today.

Have a great weekend!  It's my birthday so I am hoping for some good weather and some fun in the sun!

www.BrettGrendahl.com

CPI Near Expectations

The Consumer Price Index (CPI) report this morning came in just below expectations and so far mortgage bonds are only trading slightly higher on the news.  Mortgage bonds have moved below their 200 day moving average in the past 3 days.  This moving average has been a strong floor of support from which bonds have moved higher and we've seen mortgage rates improve a bit each time.

Will this happen again?

As I've been mentioning in recent phone conversation with clients the outlook for the rest of the year has become murky the past couple of months.  From a technical standpoint we should see mortgage rates improve once the markets have clear signals that inflationary pressures have cooled below the Federal Reserve's upper thresholds.  However, as bond yields have been rising in Europe we are seeing less and less foreign purchasing of our bonds.  This lowered demand is a fundamental pressure to keep yields (and rates) higher here in the United States.

Which force will prevail?

That is very hard to determine at the present moment.  Keep coming back here for more clarity during the next several months.

www.BrettGrendahl.com

The Fed's Predicament

Here we go again with a policy statement this afternoon from the Federal Reserve Open Market Committee (FOMC) to be released at 2:15 PM CST.

You've been seeing a lot of noise about "what will the Fed do with rates," etc.

First, let's step back for a second.  The Fed isn't doing anything with "rates."  It only influences all other rates by moving it's Overnight Rate higher or lower.  This is the rate that large banks pay to borrower funds overnight from the Fed to balance their accounts.  The only mortgage finance rate that is directly affected by a change in the Overnight Rate is the Prime Rate.  Prime is always 3 points over the Overnight Rate and moves in lock-step with any changes the FOMC makes.

Second, mortgage rates are influenced by two major factors which are (1) the current rate of inflation and, (2) the current demand for mortgage-backed securities (mortgage bonds).

The complexity of modern financial life requires the smart homeowner to use their mortgage financing as a tool and not just look at it as a debt.  The proper understanding of where we are in economic cycles is critical when I give advice to my clients.

The FOMC meeting today will likely be a non-event with no expected change to the Overnight Rate and barely any wording change to their policy statement.  The economic reports that the FOMC is watching do not show moderation of inflationary pressures below their top threshold.

In a few months we are likely to see continued talk and worry about staglation.  Stagflation means a period of price inflation with slower economic growth.  That is the predicament the Fed faces now because their monetary tools for steering our economy cannot attack both of these scenarios at the same time.

That is a predicment indeed!

www.BrettGrendahl.com

Ponder This for a Moment

As the next presidential race begins to heat up I've been doing some reading about the state of our society and ran across something that really got me thinking.

It can be said that the fall of the Roman Empire was the result of three main things:

1. The erosion of moral values.
2. An over-extended military presence.
3. Fiscal mismanagment.

How would YOU rate our society on these three areas?

Brett Grendahl

Yep, That's Right! I Am Ahead of Chris Moneymaker & Christopher Gardner.

Always liking a challenge I ventured to try test my trading skills in CNBC's Million Dollar Portfolio Challenge.

After eight weeks of trading I am currently ranked in the top 2% of about one million stock trading fanatics like me.  In fact, CNBC brought in a bunch of celebrity traders.  As I was checking in on my portfolio tonight (see www.brettgrendahl.com/CNBCMay1.pdf) I see that I am beating out ALL of the celebrity traders handily.  This includes Christopher Gardner (The Pursuit of Happyness) and Chris Moneymaker (World Series of Poker).  See how the Celeb's are doing at http://contests.cnbc.com/milliondollar/celebrity.do.

That put on big smile on my face.  :)

How did I do this?

Well, I will be covering this in more depth in my living textbook, Tidalwave Trader, sometime in June.  Stop on by during your browsing today and sign up for a 60 day trial on me (www.TidalwaveTrader.com).

With two weeks left to go it's going to be hard to get into the top 10 but I am surely going to give it my best effort!

Brett Grendahl