The Mortgage Manifesto

Fed Action Confirms Fears

In case you didn't already catch the news, the Federal Reserve Open Market Committee lowered the rates on both their Overnight Rate and Discount Rate by 0.5 today.

Before you break out the champagne let's review how this impacts you.

If you have a Home Equity Line of Credit this is good news as that rate will go lower by 0.5 on your next billing statement.  Prime will now be at 7.75%.

Mortgage bonds rallied on this news but still are below their earlier high this month and still below the high for the year.  Mortgage rates are pricing just a little better on the news.  Typically, mortgage investors are very slow to bring pricing improvements and fast to issue pricing hikes.  We need to follow the price action of mortgage bond trading closely for the remainder of this week before we have a good handle on how much more "good news" might come from today's Fed cut.

Yes, the markets got want they wanted today.  However, it is important to note that there is a major risk that Fed easing on monetary policy might stoke inflation.  Not until the next Fed meetings in October and December will we know if this is the beginning of a rate-cutting trend or just a standalone act for the markets sanity.

In summary, mortgage rates are only pricing moderatly better on the news.  Let's see what the rest of the week brings us.

www.BrettGrendahl.com

Pre-Fed Strategy

Okay, so the current consensus is that the Fed will cut their Overnight Rate at tomorrow's meeting.  Some say they will cut 0.25, some say 0.5 will be the cut.

Mortgage bonds are staged for a technical rally (pushing conforming mortgage rates lower).

If bonds begin to rally keep in mind that this rally will not likely be the beginning of years of lower rates.  Most likely, it will be a window of 3-6 months at most of lower rates.  As mentioned by Alan Greenspan in recent comments, expect a return of higher inflation in the years to come.  Inflation is Enemy #1 for bonds and will push rates higher in the years ahead.

This window will be providing the best time to refinance into fixed rate mortgage programs for the next 2-5 years.  In addition, expect falling home prices to pressure and limit your options in the future.  The next 6 months is your time to structure your real estate financing for the difficult real estate market that is only getting started.

If you need my advice, call me at (952) 393-9333, email me at brettg (at) tidalwavecapital.com, or visit my website at www.tidalwavecapital.com.

I'll be posting again tomorrow with post-Fed meeting analysis you won't want to miss out on.

Brett

Hear That? Greenspan Speaks.

The power of the sage.

Even after being out of office for awhile now Alan Greenspan's words catch interest and make waves. Last night we was on 60 Minutes and he recently did an interview with USA Today.  One of the most surprising questions asked by Lesley Stahl on 60 Minutes was whether or not Alan Greenspan thought that he should be banned from speaking about the markets, lest he influence the markets.  Wow!  A journalist supporting limitation of speech.  What happened to the First Amendment?

Now, back to our story.  One of the most important observations Greenspan makes is the prediction that the Federal Reserve will need to raise interest rates to double-digit levels in coming years to thwart inflation.

Hear that?  Double-digit levels.  DOUBLE.

Those have not been seen since the early 1980's.  Say good-bye to the decade low rates of recent years.  If this prediction becomes reality you can anticipate that your rates on any financing that is adjustable (ARM's, credit cards, home equity lines, etc.) will double from where they sit today. 

This statement is significant because it highlights the risks of hyperinflation that are at work in our economy.  Keep in mind that since 1973 we have used the Dollar Standard in our monetary policy.  This means that the U.S. dollar is not backed by gold.  In a "fiat money" system such as this there is always the risk that confidence in the "value" of the currency (the U.S. dollar) erodes and the value falls.  In this scenario the hyperinflation is that what might cost you $1 today might cost you $25 tomorrow.  It is not that the price has gone up as much as the value of the currency has down down.

Maybe this example will hit home.  If you own a home you've witnessed tremendous price appreciation (rising prices) in the last ten years.  While this made you feel "wealthy" as you saw the value of the asset rise did it create true wealth?  As prices rose what was it doing to the value of each individual dollar?  It made each dollar it worth less and less as time passed by.

The Federal Reserve is in a tough spot as they meet tomorrow.  The markets mood is one of "need" for a Fed rate cut.  However, inflationary pressures are still present in the economy so the Fed does not want to stoke the fire of inflation by cutting too much.  Real estate's boom period is over.  A bust is taking form with the final bottom long over the horizon and not within anyone's ability to predict at this time.

Don't get me wrong, people will still buy and live in homes but the decisions they make with their associated financing haven't been this critical in over 70 years.  That is well before I was born and most likely before the birthdates of most of this blog's readers.  Those that take a strategic approach to their financing during this time will be able to weather the stormy seas ahead in the U.S. economy and real estate markets.

Let's see what the Fed does on Tuesday.  This is the most interesting setup for a Fed meeting in many years.

www.BrettGrendahl.com

More Banks Take a Money Plate from the Fed

Yesterday, banks came to the the Fed's money party and left with a full plate from the discount window, to the tune of $7.2 billion.

That is the second round of banks using the Fed discount window to shore up their short-term finances.  Last month, four banks borrowed $2 billion.  Wednesday's draw brings the total borrowing up to $9.2 billion and is the highest level of outstanding debt on this facility since the terror attacks in September of 2001.

As we are always trying to "read between the lines" how do you take this news?

To me it just adds more credence to our belief that the shockwaves roiling the financial markets are still near their beginning.  A month has passed and banks are not finding their liquidity and cash-flow problems resolving themselves.

One of the culprits of this is that these major banks had a lot of off the books activity that is coming back on their books.  This is exactly the same sort of financial alchemy that Enron was up to before they went bankrupt.

This story just continues to get more interesting and widespread with every passing day.  Check in here often for your insider account.

www.BrettGrendahl.com

The Credit Crunch is Building Steam, Not Waning

A sure sign of the fact that the credit crunch is far from over comes from CBS Marketwatch (www.marketwatch.com).

Today they have added a new daily section with coverage focused on a daily roundup of subprime and credit-crunch-related news.

When a major media outlet like MarketWatch decides to devote resources to this coverage you know two facts.  One:  there is a lot going on that will generate enough news for daily coverage.  Two:  their readership has a very active interest in finding out what is going on with this on-going story.

What is so surprising is how so many people still have not fully grasped what is going on in the financial markets.  I speak with people every single day on these issues and have a good vibe for the common market perceptions.  Many have not owned real estate during a time when the values fall and it is a shock to their system to hear that it can happen.  When a new fact is posed that is so far out of their current paradigm (thought pattern or perspective on the world) it takes many times of hearing this fact before it truly sinks in.

Many people also do not realize that there is a tectonic shift underway in the global capital markets.  Where the U.S. dollar and U.S. dollar-denominated assets were once bastions of safety, this basic assumption is being questioned by investors around the world.  In recent times the U.S. dollar has been our country's #1 export.  What happens if demand for our "top selling product" wanes?

If you own a business what happens if your best-selling product or service loses demand in the marketplace?  Here in Minnesota, after the collapse of our most trafficked bridge (the I-35 bridge over the Mississipppi river) the businesses that surrounded the intersections on either side of the river have seen 30-50% reductions in sales.  Take away demand, for whatever reason, and business slows.

So shall the U.S. economy.  In standard economic parlance, that is called a recession.

www.BrettGrendahl.com

Resistance Behaves as the Name Implies

Resistance.

That is exactly where you expect to see price advances stop.  This is exactly what we are seeing as mortgage bond prices trade lower today after hitting their best levels since mid-March.  While it was good news that they have made it back to these levels for the year I was fully expecting to see the advance get stopped at this known area of resistance.

From here, we will likely see a pullback in prices that will test the 200 day moving average (which is now below the current price) and see if that level can provide SUPPORT.

This price action should occur as the market awaits the Federal Reserve Open Market Committee meeting on September 18th.

Bonds Rally to New Highs

A small rally in mortgage bond trading today has them at their best levels since mid-March.

While this is good news a pullback would not be a surprise from current levels.  My general bias remains to favor the guarantee of rate-locking versus the risks associated with floating your rate.

Half a Million of My Peers Are Out of Work

The skys have turned dark for housing related work in 2007.  You've been seeing gloomy headline after gloomy headline.  Let's take a tally.

So far this year, the total nationwide layoffs in the mortgage and housing sectors total 515,855!*

Soon to be added will be the forecasted workforce reduction at Countrywide.  They have indicated that they might need to layoff 20% of their workforce within the next three months if their workload does not pick back up.

*Source:  MarketWatch, MortgageDaily.com, Challenger Gray & Christmas.

Important News

Mortgage bonds closed the day today at their best level since mid-March as the general markets have caught up with what Mortgage Manifesto readers already know; the U.S. has begun an economic recession.

August Jobs Report = Job Losses

News Bulletin...

As reported in the August Jobs Report this morning, U.S. nonfarm payrolls fell for the first time in four years.  During August, jobs fell by 4,000 when economist were predicting a job gain of 115,000.

The numbers from June and July were also revised lower with a total haircut of 71,000 from the previously reported figures.

Mortgage bonds are trading just a touch higher this morning so we will have to watch the action closely all day to determine what the near-term reaction (the next 1-3 weeks) might be.  Keep in mind, the figures from June, July, and August have not yet captured the totality of the job losses in the mortgage industry in the past 30 days.

I'll keep you posted...