The Mortgage Manifesto

Subprime Ripples are Turning Into Waves

You have great credit, a stable job, and cash in the bank.  This subprime mess won't affect you, right?  Wrong!

The news coming out of the 10th largest mortgage company in the United States shook the equity markets today.  American Home Mortgage (AHM) disclosed a cash shortage, that it has been cut off from it's credit lines, and does not have the cash to fund $300 MILLION of mortgages it agreed to fund in the coming weeks.  Someone say it for me, OUCH!

This is only the beginning that starts a wave throughout the financial and real estate markets.  What do all those home sellers do when their buyers financing falls apart?  What about the other national lenders who are on the brink?  They will be making a run on their credit facilities, much like the savvy airline executives did right after 9/11.  Those that aren't so fast will have their credit lines closed, thus forcing them to not make good on loan commitment they have made. 

There sure are going to be a lot of anticipated home purchase closings postponed indefinitely in the coming weeks.

What about the resulting loan defaults and resulting bank-owned properties?  Take a look around your neighborhood.  Home values, they be a changing, and not in a good way.

Proper advice has never been more important.  The consumer and industry focus on RATE is a major reason we all got ourselves in the mess.  As the ripples turn into waves only those with proper planning will not sink.  Those with holes in their finances will become exposed and sink.

Learn how I can help you at www.BrettGrendahl.com

Inflation Continues to Moderate, This is Good Right?

Core inflation continues to moderate with only a 0.1% rise for last month.  This means that the current inflation rate is the lowest since early 2004.  It appears that the Federal Reserve's long string of hikes to their Overnight Rate has brought the Personal Consumption Expenditure (PCE) under their top threshold of 2.0%.

Althought the Federal Reserve officials continue to speak about risks of inflation accelerating again they are now in a position to also worry about economic recession.  Why?  Surging gas prices.  A housing market that is teetering on the brink of a major collapse.  Consumer spending drying up.  All of these are risk to economic slowdown.

It's been a long time since the last Fed hike to their Overnight Rate.  With each passing month we are one month closer to the eventual first Fed rate cut.  We are seeing this reflected in the way mortgage-backed securities (mortgage bonds) are trading.  Although mortgage bonds are not following historically proven technical patterns at the moment they are likely to quickly snap back and begin a move higher.  This will initiate momentum lower in mortgage rates.

The pace will likely start of slow but might speed up if the equity markets stumble.  These are interesting times indeed in mortgage finance.  Years from now we will likely look back at 2007 and 2008 as very trying times for the U.S. real estate market.  Hopefully, we come through these times with only scratches!

Learn how I can help you at www.BrettGrendahl.com

Continued Ramblings about Subprime

During my daily reading today several things stick out to me as very important.  Let's review these so that they are in your thinking too.

The Chief Economist at Moody's Economy.com, Mark Zandi, makes this forecast:

• Home prices nationwide will fall 10% from their recent peak.
• It will likely be 2010 before we are back in a "normal" housing market.
• About 20% of the subprime loans made in 2006 will fail with the peak of the defaults not coming until 2011.
• Consumer spending is slowing and will slow further.

Think about these forecasts for a moment.  When you look around your neighborhood and local real estate market, what is the mood?  What is happening to home prices?  Do you feel like you have more or less disposable income today compared to a few years ago?

On another note, we are entering a new technical reality in the way that mortgage bonds (mortgage-backed securities) are trading.  This new technical landscape goes hand-in-hand with the volatility and uncertainty we are seeing in today's credit markets.

Easy money, greed, and stupidty have brought about some longer-term problems and risk that our economy faces, the extent of which are not yet known.

One good side effect might be a swift drop in the Fed's Overnight Rate as they feel the need to step on the gas and inject liquidity back into this market.  How hard they press on the gas pedal is the big question?

www.BrettGrendahl.com 

No More Subprime for Wells Fargo

There goes another shop.

Wells Fargo is shutting down it's Subprime Wholesale department.  The ripples continue...

www.BrettGrendahl.com

Mortgage Bonds Heading Up

Good news this morning as mortgage bonds are trading higher and looking to breakout of the current tight range they have been in for weeks.

There is another layer of technical resistance in their path but right now things are looking promising for slightly lower mortgage rates ahead.

My two cents:  the market pyschology is beginning it's turn to a "reality of thought" that the Federal Reserve will move to cutting their Overnight Rate in the coming six months.  It might take 2-3 months for this to gain traction in the minds of the market participants and spill over to the general media.

www.BrettGrendahl.com

Further Ripples into A Paper from Subprime Fallout

Didn't think the fallout and credit tightening as a result of the subprime debacle would affect you?  Think again.

The new Fannie Mae underwriting guidelines for all interest-only programs now must qualify the borrower on the full principal & interest payment.  Previously the underwriting approval was based on qualifying for the interest-only payment.

Take the newly graduated, strong credit professional that will have a rapidly rising income stream from their new job.  Where they once could get an interest-only loan that was properly matched to their financial outlook and purchase a home they can truly qualify for they now will have to settle for less.

In addition, Minnesota's new mortgage origination laws that go into effect August 1st reduce competition and sources of financing for strong credit, self-employed borrowers.  This reduces potential buyers in the housing market and that ripples across all neighborhoods.  The result is that if you decide to sell your home it will take longer to sell and you will have to settle for a lower sales price.

What a great law. 

The law is meant to benefit only the largest of banks as they are exempt from the new laws.  Can you guess who lobbied the hardest and gave the most money to the lawmakers?  Follow the money.

I guess the state is saying that we should only trust the largest of companies.  In my experience, the largest companies are the ones that do everything they can to milk every single red cent they can from their prospects and customers.  Think Enron.

These are challenging times indeed and the worst is not yet in our rear-view mirror.

www.BrettGrendahl.com

Subprime Shatters the Market

Ugh!  Double ugh ugh!

The fallout of the crash of subprime mortgage finance continues as Countrywide reports a 33% drop in second-quarter income, read the story at CBS Markwatch:http://www.marketwatch.com/news/story/countrywide-quarterly-profit-drops-losses/story.aspx?guid=%7B88821AE2%2D27FE%2D4E74%2DA96A%2D0FE326B14B29%7D).

This does not suprise me as I've been first-hand witness to Countrywide making deals work by overlooking normal underwriting guidelines.  Short-term "get the deal done" thinking brought on loans that never had the proper risk assessment and appropriate finance rate on them.

I do not think we are anywhere near the bottom of the fallout of this subprime storm.  Do you want to catch a falling knife?  I didn't think so.  Nor do so many others and that is why we see an absence of home buyers and falling home prices.

www.BrettGrendahl.com

Mortgage Bonds Breaking Out

We've got a nice morning and sunshine shining for mortgage bonds this morning as they are breaking up and out of the recent trading range.  We should see slightly improved pricing on mortgage rates next week but we are still in a very solid technical range that should keep mortgage rates within +/- 0.125 until the markets fully anticipate an easing Fed in the near-term future.

We are not at that reality just yet but that is the catalyst that is needed to initiate a longer-term move lower in mortgage rates.

An easing Fed is coming by the end of the year as we should begin to see economic growth in the U.S. slowing and moderating inflation pressures.

In recent conversations with clients we've discussed how for a long time it has been pretty boring watching mortgage rates as they've remained in a very narrow range and below the historical mean. 

www.BrettGrendahl.com

The Real Power of Web 2.0

If you've seen the explosion of YouTube and wondered how these "social networking" aka Web 2.0 tools can create more value than a library of video footage, of which most should never have been caught on tape, look no further than www.LinkedIn.com.

This social network tool is AWESOME!

It acts as a contact manager on steriods as it reallly is a relationship building tool.  I'm one with a love of the Internet and for finding new uses of this information technology to create richer lives.  LinkedIn is one of the best real-world applications that excite me enough to get off my seat and tell everyone I know about it.

If you haven't already LinkedIn, what are you waiting for?

www.BrettGrendahl.com

Is The Consumer Still King?

A quick note regarding the big rally in the Dow Jones Industrial Average yesterday.  That 2.09% gain for the day was impressive but what is the basis for it?

Remember how over the past 5-6 years we've always been told that the consumer is driving our economy.  Well, with the economic data showing a slowdown in consumer spending how can the stock market be rallying?

Listing to this clip from MarketWatch:

.com/tvradio/playerfull.asp?siteID=mktw&guid=%7B8CF13AAA%2DDCB3%2D4824%2DAB9E%2D147E4301E1F3%7D

I am thinking the same thing.  Ask yourself this; what is the continued driver for higher prices ahead? Consumer spending numbers are slowing down. The real estate market has tremendous risk ahead. Inflation is moderating albeit at a very slow pace. What is the next super growth industry? Is it still the Internet? Web 2.0?

The bullish story we are being told is suspect.  Ask around your personal sphere of friends, family, and co-workers.  What is the current pyschology regarding the real estate market and everyone's feeling of "wealth" as they see a slow real estate market and falling real estate prices?

www.BrettGrendahl.com