The Mortgage Manifesto

How Will the Fed Cut Affect Mortgage Rates?

So, the Fed cut their Overnight Rate by 0.25 today.  So far, mortgage bonds are reacting poorly to the news, putting upward pressure on mortgage rates.

What caught my immediated attention when I read their policy statement was the new language of "the pace of economic expansion will likely slow in the near-term, partly reflecting the intensification of the housing correction."  It seems the Feds are finally catching up with what we've known for many months; that we are much closer to the beginning of this "housing correction" than its end.

Hey, wait a minute you are saying, I thought the Fed cut rates so why are mortgage rates rising?  The Fed cut THEIR Overnight Rate.  Mortgage rates are strictly determined by how mortgage bonds trade, not what the Fed does with their Overnight Rate.  The value of mortgage bonds, and their prices on the open market, are dictated by many more factors than just the Fed Overnight Rate, primarily inflationary influences in the economy.

As mortgage bonds weaken on today's news, and throwing in the volatile monthly Jobs Report on Friday, I advise anyone closing on new mortgage financing in the next 30 days to lock your rate now.

www.BrettGrendahl.com

P.S.  Exciting news!  My blog was picked up by www.blogburst.com this past week.

Nah, Subprime Fallout Won't Leak Out!

Remember those days, months ago, when federal officials and market icons assured the American populace that the fallout from the collapse of the subprime mortgage market will remain contained?  Yes, this sounds nice in theory but what has happened in reality?

Just peruse the news headlines to find out.

Consumer confidence was just reported at its lowest point for the year; are you suprised?  After a near daily barrage of negative news about mortgages, the financial markets, Great Depression era runs on the bank in England, and falling home prices confidence is definitely going to be eroding.

Mortgage companies continue to collapse and the financial markets worldwide are teetering on shockwave after shockwave, and industry players are wondering about the big wave that they cannot see just yet.  Will that be the one to send them under?

Back to the point at hand; there is NO WAY the collapse in the subprime and what I call "absurd lending practices" can remain contained.  Why?  Because of the structure by which those loans found the money to get funded in the first place.

Modern day mortgage finance is not like the days of old when banks lent you their money and serviced the loans themselves.  In the complex markets of today, your simple mortgage loan gets pooled with thousands of others into a single security, gets purchased by institutional investors, they package and repackage these (supposedly engineering out the risk), and sell these "collaterized debt obligations" off to foreigners.  Oh, I almost forget to mention, that along they way they added more "bang for their buck" and leveraged these financial instruments to the hilt.  This entire structure is as solidly built as a house of cards.

So, fast forward to the second half of 2007 and we see the linchpin of this whole real estate masterpiece, timely payments servicing the debt, begin to crack.

Oops!

Now we are at the beginning of a restructuring phase.  Those parties, companies, and institutions that benefited the most from the leverage will also be feeling the most pain in the weeks, months, and years ahead.  That's right, I said years.  Unfortunately, given the complexity of the interconnectedness of these financial markets, and lack of transparency of the true happenings (read: off balance sheet conduits) it is still way too early to gauge the full impact.  The Federal Reserve knows this.  The Treasury Secretary knows this.  The CEO's of the big banks know this.  What they know and what they say can frequently be of very different colors.

FOMC Meeting

You can just feel the markets hemming and hawing over "what will the Fed do with rates."  Whether they cut or not is not of the most importance with this meeting.  Watch their policy statement closely to pick up on any clues as to their realization of the magnitude of the problems are economy is facing with the real estate market slowdown.

Conforming mortgage rates are brushing their best levels of this year.  Jumbo mortgage rates still are feeling the hangover from August's market freeze for that financing type.

Some Slap on the Wrist!

Did you see the news of ousted Merrill Lynch CEO getting about $160 million in stock options and retirements benefits on the way out? 

That fact is testament to the broad dichotomy of financial reality that has become the norm in our country these days.  He was shown the way out on performance issues and gets a nice treat bag to "cushion" the hardship of the event!

www.BrettGrendahl.com

Regulators Catching Up to the Crooks

Long-time readers of my musings know the attention I gave to the abuse of the "affiliated business arrangement" that has become so prevalent in the Minnesota real estate industry.  Well, I have some news to share today about how some of the culprits have been caught by by federal and state officials.

As reported by RESPA News Monthly, "Members of a

Minnesota

title, mortgage and real estate affiliated business arrangement (AfBA) recently signed a Department of Commerce (DOC) consent order alleging their relationship was a sham entity as defined by the Real Estate Settlement Procedures Act (RESPA) and state law."

The companies have shut down their operations, their Department of Commerce licenses have been revoked, and they have to pay a $60,000 civil penalty.  For those that like all the finer details you can read the consent order here.

Back in 1974, RESPA (Real Estate Settlement Procedures Act) was passed as a measure of consumer protection.  The goals were to:

1. help consumers become better shoppers for settlement services and
2. eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.

This legislation helped cure the ills of that era but leave it to the "creative" business person to "structurualize" the kickbacks into a sham business arrangement; the Affiliated Business Arrangement A(ABA).

What is funny is that the ABA was first referred to as a Controlled Business Arrangement.  Well, the ominous tone of the word control sure did not sit well with those that wanted to slip this new fangled structure past unwitting consumers that they lobbied hard to get the formal name of these arrangements changed from "controlled" to "affiliated."  Now, that sounds much more palatable!  Doesn't it?

The news of the unwinding of the financial scheming within the real estate and financial markets is continuing to unfold and it is also bringing the attention of federal and state regulators.  Remember the class action lawsuit against Coldwell Banker Burnet we discussed many months ago?  Well, that lawsuit is not even on the ABA abuse.  No, that lawsuit goes up a level and addresses the "fiduciary responsibility" a Realtor undertakes for their client.

What has been sickening to me, a person on the front lines of this industry, is to see the pure greed and lack of holding professions to higher standards of advice and performance.  When we systemize financial incentives in a way that prevent objective advice how can we be surprised by the rampant abuse and disconnect felt by the consumer.

Long-time clients of mine know that since day one when I started my business 7 years ago that I refused to partake in these affiliated business arrangements.  They just don't jive with my philosophy of business.

It is nice to finally see those that chose the other path feel the consequences of those actions.  I'm sure the customers who all paid too much along the way will feel the same!

www.BrettGrendahl.com

Lowest Fixed Rates in a Year!

Good morning gang,

Some good news coming amongst the gloom and doom in the real estate markets is that conforming fixed rates have moved to their lowest levels in a year!

This has the benchmark 30 year fixed teetering right at 6.0% and very close to going into the high 5's.

Before we see rates get any lower mortgage bonds need to trade past some significant technical resistance and we also have the next meeting of the Federal Reserve Open Market Committee next week.  Remember, mortgage rates actually edged higher in the weeks following the last Fed rate cut to their Overnight Rate.

We are at an important nexxus and will have to see what this market brings us in the next couple of weeks.

www.BrettGrendahl.com

Lowest Rates Since March

Some good news today, fixed conforming mortgage rates are at their lowest levels since March of this year.  This won't likely last very long as they should pop up again before any chance at making it to the lows of the year (only about 0.125 lower than current levels).

Best Pricing on Rates Since September 20th

Mortgage bonds have traded to their best levels since September 20th this morning.  While this by itself is good news it is important to realize that they are now trading near previous resistance that stopped any continued move higher back in early September.

It is likely that this resistance will remain and prevent much further improvement for mortgage bonds.

The Mortgage Meltdown Hits Near Home

ResCap, the mortgage financing division of GMAC announced a 25% workforce reduction today.  This reduction will affect 3,000 of their current employees.

460 of those job losses will be in the Minneapolis office of ResCap.

A Good Vibe from the Bond Pits Today

Mortgage bonds are rallying today and having the best go of it since mid-September.

From a technical perspective, today's rally is a good bounce off of mortgage bonds 200 day moving average but there is still strong resistance they must trade through before we should get real excited.

On the fundamental level, the day-to-day news of the unraveling of the recent housing boom, and the extent of how much "bust" there will be can always make mortgage bonds trade lower in the blink of an eye.

In summary, there is some positive momentum underway but the overall risk-to-reward balance is still heavily skewed towards risk.  This means you should be locking any new mortgage financing onto a fixed-rate product sooner than later during your effective timeframe to make such a decision.

Have a great day!

Brett

The Building of a Consensus

For weeks, we here have been in a conversation of how we are so much closer to the beginning of this credit crisis in the financial markets than the end.

While many media pundits and financial markets spokespeople have been soothsaying in recent weeks that things are getting better the facts do not lie.  As time passes, more news percolates up to the top and in sight.

Take yesterday for example; Fed Chairman Bernanke, speaking in New York, talked about how the housing market downturn isn't over.  Any Minnesota resident that is trying to sell a property in this market will reply, "NO KIDDING!"

Also, just a few weeks ago, Citigroup announced that they anticipated their financials to return to "normal" in the fourth quarter of this year.  However, the data in their quarterly report shows that the fallout of the complete collapse of the subprime mortgage market, and the shockwave still rippling through the Structured Investment Vehicle (SIVs) marketplace is taking a greater than expected toll on their financial performance and will continue to take an unpredictable toll.  This just speaks to how much uncertainty there is across today's financial markets.

This crisis will continue.

Next up, expect more attention being paid to the rise of consumer credit defaults and late payments on consumer credit card accounts.  As the ATM potential of consumer's homes has evaporated the next source of liquidity for Americans becomes their credit cards.  The easy access to these (i.e. how many solicitations for a new credit card do you receive on a weekly basis?) credit facilities is at an unsustainable extreme.

The final bastion of liquidity, and something you will see reported in the general media more in the coming months, will be consumer's retirement accounts.

Fact:  our country has a negative savings rate at the moment.  So, my question to you is this; if the sources of borrowed cash evaporate and savings ultra low, how long can discretionary spending continue?

The answer to that question is very telling to what might come to pass in our near future.  The economy faces major known challenges ahead.  What about the unknown ones yet uncovered?

www.BrettGrendahl.com

Reuters Picks Up What We Already Knew

Today, Standard & Poor's said "The U.S. subprime housing crisis will not peak until 2009."

This news is catching up to what you've already heard from the front lines as I've been writing for many weeks that this crisis is closer to its beginning than its eventual end.

General news is good for a cursory overview but can never compare to the information you can obtain from a front line observer and participant.  Right?