Dennis' Mortgage Blog

Question of the week:  What is happening?

Answer:  A question that many people are asking if they watch, read or listen to any news.  What is happening in Washington and what does it mean to me as a home buyer, home owner, consumer?

Before I answer with my thoughts and some data to review my background so you are aware of where my comments below derive; since entering college in 1980 I have studied and learned about both economics and politics, initially culminating in a degree in Economics and Political Studies (Pitzer College, Claremont, CA 1984).  Since then I have spent my working career in finance and real estate observing and commenting on economics and politics as they impact each other.  Given my experience and history my comments are not repetition of the comments of others but my thoughts based on the information I gather daily over several decades.

What is happening is that the United States of America has approximately $14,500,000,000,000 in outstanding debt (that is fourteen trillion five hundred billion).  This exceeds the debt limit of $14,294,000,000,000 authorized by Congress and signed into law by President Obama on February 12, 2010.  Because of incoming revenue the United States Treasury has been able to make interest payments to holders of U.S. debt in the form of Treasury bills and bonds, as well as make payments to recipients of U.S. federal funds in the form of social security payments, MediCare reimbursements, salaries, supplies sold to the government, etc.

Secretary of Treasury Tim Geithner has warned the politicians in the Capitol and the White House that on Tuesday August 2, 2011 the United States of America will be unable to pay all of its obligations unless the debt ceiling is increased.  This has been called a potential default on debt by some and has been called an arbitrary deadline by others who feel the U.S. will have sufficient income to pay its debt, but perhaps not enough to pay other obligations such as salaries, entitlement programs, suppliers, etc.

Ramping up the energy, hyperbole, catastrophic rhetoric and crisis environment is a warning by both Moody’s and S&P that should the debt ceiling not be increased by Congress and the White House by August 2^nd then the rating for U.S. debt would be downgraded from AAA to AA. 

To this point the only two proposals have been put in writing.  One was passed by the House of Representatives two weeks ago, known as “Cut, Cap and Balance” the plan would reduce federal deficit spending by a couple of trillion dollars over ten years, cap the amount of spending by the federal government in future years to a percentage of Gross Domestic Product and require a vote in Congress on a Balanced Budget Amendment to the Constitution, and finally lift the debt ceiling approximately two trillion dollars. The proposal was killed on a procedural vote in the Senate on party lines.

Since the Cut, Cap and Balance bill was rejected in the Senate, Speaker of the House John Boehner (R-OH) put together the “Boehner Plan” that was to be voted on in the House last night.  This plan would give a small increase to the debt ceiling in exchange for some small cuts to the federal deficit spending.   If passed it would require the debt ceiling debate to come to the fore again later in the year when the federal debt would bump up against the ceiling.  The plan never came to a vote due to the inability of Speaker Boehner to get enough votes from his party to pass the bill.  Holding out have been most of the 86 freshman Representatives elected in November 2010, most of whom campaigned on pledges to reduce federal spending, deficits and debts.

To this point neither the White House nor the Senate has proposed anything in writing or any proposals that have had specific spending items and amounts attached.   The only proposal with specifics was rejected by the Senate.

What will happen? My opinion is that the House will pass a revised version of the plan that was not voted upon last evening.  The plan will include more cuts and some type of trigger for a balanced budget amendment.  The Senate will most likely reject the plan, waiting to the last minute the Senate will pass a measure the  majority will know will be unacceptable to the majority in the House and dare it to not pass the bill and challenge whether the United States goes into default or not.  Should it pass the bill many House members will face political challenges in their home districts; should it not pass the bill it will allow the Senate majority to blame the House majority for throwing our nation into default for the first time in history and ruining the credit rating.  Hopefully I am wrong and a debt deal is worked out that will pass both chambers of Congress and be signed by the President.  But what if this doesn’t happen?

Regarding default, the question becomes what checks the Secretary of Treasury, on instructions from the President, decides to issue until the debt ceiling is raised.  Debt holders, those who receive interest payments, must be paid first so there will be no missed payments that would be a technical default.  So who does not get paid? I am pretty certain elected government officials and their staffs will get paid, but beyond that do Park Rangers? FAA officials? Social security recipients? The companies that provides cell phones, food for the military, states getting highway funds? 

Regarding the credit rating, regardless of whether the debt ceiling is lifted on or before August 2^nd it will drop from Triple-A due to the amount of debt the United States has outstanding.  While focused on the minutiae of our debt and spending negotiations lost in the vision is what has happened in Greece and other European countries.  Their debt has been downgraded to junk bond status even after passing austerity measures to curtail spending and obligations.  Why? Because the debt is too large of a part of the overall national economy and future spending obligations will continue to push that debt higher. 

This is the same situation we face in American politics and economics.  The debt we are obligated to pay is over 98% of the total Gross Domestic Product.  Think of a  home with only 2% equity, that is our debt position.  Future deficits from spending exceeding revenue from bills signed into law guarantee we will exceed 100% by the end of the year.  The political fight in Washington is not about lowering debt but by lowering the amount we borrow, the deficit continues no matter which plan or proposal is passed and out debt will continue to increase—which is why the negotiations are to raise how much we can borrow.

What is happening in Washington? Arguments and politics over how much more you and I, and our children and grandchildren, will be obligated to repay as Congress and the White House continue to pass legislation that spends more money than we collect.  However this debate is settled the net result will be the same and the United States of America will continue to have an extremely unhealthy balance sheet and income statement.  This will result in further constraints on economic growth and higher interest rates for all borrowing, the question is when?

To see actual numbers on the debt, spending, revenue, etc. check out the very good U.S. Debt Clock.

Have a question for me?  Ask me!

PRODUCT ALERT: DON’T FORGET THAT THE LOAN LIMIT OF $729,750 FOR MOST OF SOUTHERN CALIFORNIA IS DECLINING TO $625,500 MIDNIGHT 9/30/2011

This week’s blog postings:

Don’t Lose the Target  All the debt ceiling talk has caused the focus to be removed from what matters most in our economy.

Debt Clock Ticks While Rates Rise Stocks Dip pretty self explanatory

Markets appear to react today to economic news and not debt negotiations in Washington, in a way that is a relief as economic news has been largely ignored.  The Commerce Department released revisions to the GDP this morning and it was not good news.  First was a revision to the total drop in GDP during the recession that technically lasted from the 4^th Quarter of 2007 to the 2^nd Quarter of 2009.  Initially the total contraction is now 5.1% not the previously estimated 4.1%, which means the recession was 25% worse than thought.  As a result current GDP is still below the pre-recession GDP (which is a slight correction to my blog post on the jobs target).

Revisions were also made to the 1^st Quarter 2011 GDP numbers, initially reported at 1.9% growth for the quarter the Commerce Department revised that growth number down to 0.4%.  That is a very significant reduction from so-so but hardly good growth to pretty much no growth verging on slipping into recession.  Along with this revision Commerce announced that the 2^nd Quarter GDP growth was 1.3%.  If the revision that will occur in October is equivalent to the revision made for 1^st Quarter GDP then we entered a recession again in the 2^nd Quarter of this year.

This goes a long way to reconciling the lousy employment numbers with an economy that has supposed to have grown every quarter since early 2009.  Even with the revisions however we cannot escape that GDP has grown and employment has not. 

Jobs are provided by companies that forecast their business sales, operations and costs and determine it is appropriate and fiscally prudent to add employees.  Unfortunately the environment in recent years has been such that there is too much uncertainty on the operations and costs estimates which prevents the decision to  hire new workers.  Regulations from health care and financial reform have added unknown costs and operating mandates to most industries, combined with debt negotiations where one side is demanding tax increases, has created a wait and see position for most companies.  Wait and see stalls job growth.

UPDATE 12:00 Pacific!! The House of Representatives has evidently added a Balanced Budget Amendment trigger to its latest bill to raise the debt ceiling.  Immediately getting the news my smartphone pinged with a text message that Mortgage Backed Securities jumped dramatically on the news—lower rates.  A flight to quality expecting the measure to pass the House and get rejected in the Senate, or a surge in investments in bonds thinking a deal is even closer? We’ll know on Monday.

Rates for Friday July 29, 2011: As mentioned above rates showed huge improvement today, taking Mortgage Backed Securities to highest price in several months.  Not all rates have adjusted to the price change yet, Monday’s open will determine if we go lower still.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               4.25%               Down 0.125%

30 year high-balance conforming           4.375%             Down 0.125%

30 year FHA                                         4.040%             Down 0.112%

30 year FHA jumbo                              4.139%             Down 0.071%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Quite house with the kids away at camp, while we miss them we are glad they are off enjoying being kids 24-7 with other kids from around the country.  Best of all they have no screens to stare at while they are away!

Take advantage of this big move in rates, call me to help you with your mortgage needs or questions!

Have a great weekend; call me if I can be of assistance.

Dennis