The Mortgage Manifesto

What Has "Breaking News" Become These Days?

Excuse me, I almost spit out my coffee this morning as I was scanning the headlines and found this gem, "Bernanke:  Fed's on the ball."

Okay, so the Fed is "one the ball" and "ready to act as needed."

Are you comforted knowing that they are DOING THEIR JOB!  I'm sorry but the state of the market is pretty weird when breaking news is that a person or an institution is doing their job.  That would be like me sending out an email alert letting everyone know that I am sitting at my desk, with my headset on, ready to answer your questions when they arise.  Is that news-breaking?

Does it provide further comfort to know that the Fed will be paying attention to the "timeliest indicators?"  Oh, that's great.  Aren't we all trying to pay attention to such indicators?  Isn't that pretty much 101 for those involved in the daily ebb-and-flow of the financial markets?

For the past few days, the markets hyped up the anticipation of what Big Ben would say from the annual get together out at Jackson Hole.  This time it seems like that hype bubble deflated with us all wondering, what's new?

Have a great holiday weekend, our final summer weekend up here in Minnesota, and stay safe on the roads!

Brett

These are Historical Times

This quote from H&R Block CEO, Mark Ernst says a lot about the current market dynamics:

"The mortgage origination market is in the midst of the most severe dislocation that it has seen in years, maybe the most severe since the 1930s."

H&R Block, the largest tax preparer in the United States, like many other financial institutions were lured by the boom in mortgage finance and entered the business during the past few years.  They bought Option One Mortgage, a prominent subprime lender across the country.  They have been in the midst of trying to sell Option One and are now trying to renegotiate the sale to private equity firm Cerberus Capital Management LP.

From your outsider review of the news headlines would you want to be a buyer of a subprime mortgage originator these days?  I didn't think so!  Nor does Cerberus Capital Management.  The lure of hefty profits is now gone.

In the past five years not only have other financial service companies entered the mortgage space but so did home builders and realty companies.  They were all opening up their own mortgage origination business units.  In fact, in recent reading I've found data to support what I experienced was true.  The capture rate of the largest home builders, Pulte and Centex homes, were running at 80-90%!  The capture rate is the percentage of consumers who, when buying a home from the builder, agreed to use the builder's financing company to provide the new mortgage financing.

Now, these companies are finding their former profit engines to be bleeding cash from their primary businesses and they are trying to exit the mortgage space and bumping others out of their way as they all try to head for the exits.

The good news for the consumer is that those that remain are the true professionals that understand historical lending guidelines, do not advise people to take on more home than they can truly afford, and fully explain the financing programs so that people do not get stuck on a mortgage program that explodes like a grenade, sending fragments throughout their financial and credit lives!

www.BrettGrendahl.com

A Duo of Notes

Mortgage bonds traded lower today after bouncing against staunch resistance found at the 200 day moving average of their price.  This moving average is a thick layer of resistance to break through, especially on their first attempt to do so in many months.  Expect pricing to bump higher for rates just a touch in the coming days.

Robert Shiller, Professor of Economics at Yale University, continues to note that the current decline in national housing prices is the first instance of such a decline without a concurrent recession or depression.

With our economy teetering on the brink of a recession in the final quarter of 2007 what will happen to housing prices with that adding to the fire?

So many of the economic reports are rear-view mirros indicators, showing us the past.  What gives us the proper foresight for what is just over the horizon?  A review of the past patterns of history with similar macroeconomic events is a good start. 

We live in times of a negative national savings rate, high consumer debt loads, high government debt loads, exploding mortgage programs, falling home prices, runaway military spending, and a currency that is no longer backed by gold (a fiat money system).  When you add those all up what prognosis do you come up with?

These are the things we should be thinking about as our national political circus begins to take center stage.  Who are we electing that has the courage and foresight to tackle this issues head-on?

Well, enough ramblings tonight!  As always, it is those that make the proactive decisions that can navigate the stormy seas.  Let's make sure to keep our eyes sharp to the decisions we are making these days.

www.BrettGrendahl.com

A Look Around the Markets

Let's take a moment to review a couple of the news items that are capturing my attention.

The count of mortgage lenders that have closed shop this year now stands at 142.  CIT Group was the biggest name casualty of the day.

The meeting minutes of the most recent Federal Reserve Open Market Committee, released today, showed that the Fed is still mostly concerned about inflation.  This put a damper on the mood of the equity markets.  The Treasury bond markets actually responded quite bullishly.

We face risks of stagflation.  Stagflation is a time where we see inflation with slowing economic growth, rising unemployment, and recession.

What is most interesting is that mortgage bonds ended the day only up 6 basis points (one basis point equals 1%) while the 10-Year Treasury ended up 53 basis points!  This is a perfect example of how using the Treasury bond market as a gauge on what's happening to mortgage rates is not a sound decision.  Mortgage rates are directly determined by how mortgage bonds trade, and highlighted by recent events, the market's appetite to purchase these bonds.

I have watched the mortgage marketplace go through some dramatic changes these past ten years.  As always, I remain your counselor, seeking to guide you through the pitfalls ahead.  If you want me to address something specifically, just email me at brettg (at) tidalwavecapital.com.

This cartoon tells a lot:

The Tide is Turning

Standard & Poor's reported today that national homes prices fell 3.2% last month.  This was the largest year-over-year decline in the 20 year history that they have tracked these prices.

Contrast that to the 7.5% gains reported this time last year and you can see how the market of 2007 is worlds apart from the market of previous years.

Read the full article here: http://www.marketwatch.com/news/story/us-home-prices-fall-record/story.aspx?guid=%7B02A14CEF%2D2941%2D4404%2D8056%2D418DDA9F0330%7D.

In this article they note how the last time home prices fell this dramatically it took them 8 years to return to the previous highs.

Make sure your financing is properly positioned for the new market dynamics of the next several years.  Decisions you make today can have major impact on your choices and lifestyle tomorrow.

www.BrettGrendahl.com

Conforming Mortgage Rates Improving

Some good news to start the week as mortgage bonds traded higher, capturing their best levels since the middle of May.  From all appearances it looks like we might see them push towards the 2007 lows we saw back in February (about 0.25 lower in rate from current levels).

While this is good news it is important to keep in mind the dynamics that are in play for the current day-to-day movements in mortgage bond trading.

During the past few months, 136 national and regional mortgage companies have closed their doors.  This is historic.  Any unexpected news could make rates worsen and loose their recent gains overnight.

THIS IS NOT A TIME TO BE FLOATING A RATE LOCK ON A MORTGAGE!

Long-time readers of my forecasts will now that I do like to game the market and offer advice on when the best time to lock a rate will be in the upcoming weeks and months.  Make no mistake, the daily news events and state of liquidity in the bond markets are the primary driver of interest rate direction in the coming weeks and months.  The technical signs I normally watch are taking a back-seat to the news.

While floating a rate lock might sound enticing, this is not a time to be greedy.  Keep a historical perspective and know that rates are still at the lowest they have been in decades.  The monthly fluctuations of 0.25 plus or minus do not matter in the long-term scheme of things.

Your best posturing for the uncertainty of these markets is to have your financing on long-term fixed rate products.  For refinances, the time to act is now!  We face a time of declining property values.  Make sure to get your financing set before loan-to-value ratios restrict, as oppposed to enabling, the decisions you make for your financial security.

www.BrettGrendahl.com

Inside CountryLied

Oh, my!  This article in the weekend edition of the New York Times is an eye-opener for everyone.

http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html?ex=1345780800&en=a3245b14209bf8a3&ei=5124&partner=permalink&exprod=permalink

I've seen this company's tactics first-hand and have been appalled.  I've been proud to have developing a client base of people who know that I did not take advantage of them and priced fair deals.  The same cannot be said of Countrywide.

When they are pushing A credit borrowers into B credit loan programs and making 5 points on the deal, that my friends, is the definition screwing your customer.

Brett

The Biggest Con of America

As the next presidential election race begins to move into full swing I find myself pondering our choices.

Choices?  Do we really have any?

The dominance of the two-party system has become a great illusion.  Every four years we get to take sides, maybe you are in a blue state, maybe a red one?  Then we duke it out to claim our victory.  Every 4-8 years dissent amongst the populace swings and the other party takes over.  But do things really change?  Does the power really change hands?

My opinion is that we really have a one-party system but we've been led to believe that it is two.

This fact should jump right out at you as this presidential election race offers us the choice to leave two families in control of our country's highest office for 24 years!  Count along with me, George H. W. Bush (4 years), William Clinton (8 years), George W. Bush (8 years), and now the possible Hillary Clinton (4 years+).  Two decades of rule by two families!  The sad thing is that we go along with it, hook, line, and sinker!

As we approach this next presidential election, let us think about the con being pulled over our eyes, and with our own votes.

I ask you, when we read "We the people....," are you and I part of that we?

Brett

What Has This Industry Become?

I've been originating residential mortgage loans since 1997.  In the ten years that I've been talking with homeowners and helping them with their financing the past five have been some crazy times.

During the past five years we have seen the total number of originators in the U.S go from about 100,000 to a high of 400,000+ at the peak of the refinance boom in the summer of 2003.  Current stats show us back down to 200,000 and that number is rapidly falling as company after company shuts their doors.

One of my biggest gripes has been the lack of professionalism shown by so many that jumped into the industry in recent years.  This gripe is being supported by a recent report from Harris Interactive.  In this report they found that two-thirds of Americans believe mortgage product advertising and marketing lacks credibility.  Amen to that!

So many times I find myself in conversations having to explain and undue the misinformation hawked by someone else in this business who is only "acting" as a professional but not behaving as one.

Since most of those that do the "bait and switch" will never take responsibility I feel the need to apologize for my industry.  I'm sorry guys.  I wish the junk and inaccurate information wasn't out there too.

Brett

Today's Gamesmanship

What a chess game that is getting played out these days!  It is almost unbelievable.

Okay, this morning news hits the wires about Citi, Bank of America, JP Morgan Chase, and Wachovia each borrowing $500 million from the Fed discount window.  This action was "spun" as symbolic.

Then, after the equity markets closed for the day Bank of America is making a $2 BILLION investment in Countrywide.

Is your math as good as mine?  500 million times 4 equals $2 BILLION!

Did Bank of America (Citi, JP Morgan, and Wachovia) just do the Fed's dirty work and pick up the spread in between?  They borrowed at 5.75% from the Fed discount window and lent to Countrywide at 7.25%.  That's a cool $30 million to that 1.5 point spread.

Didn't Countrywide just borrow $11.5 billion on last Thursday?  Where did that cash go?

Make no mistake about it, Countrywide is distress.  The Fed is trying to prop it up.  Only time will tell if their efforts and subterfuge will work.

My main question is, who do they think they are fooling?  Not the readers of The Mortgage Manifesto!

www.BrettGrendahl.com