Dennis' Mortgage Blog

Question of the week:  What the heck?

Answer:  I presumed the simple email message was regarding yesterday’s 1700 point ride of the Dow Jones Industrial Average which plummeted 1000 points in twenty minutes mid-day and then recovered to finish down 345 points (3.3%).  Replying with the ubiquitous “ ?? “  it was confirmed, yes what the heck happened and why?

U.S. stock markets were on weak footing on Thursday prior to the plunge as traders watched riots in Athens as the Greek Parliament voted to restructure its debt and budgets in order to receive a 110 billion Euro ($145 billion) bailout.  The austerity measures passed would cut the Greek budget $30 billion over the next three years, raise the national Value Added Tax, cut pensions and government wages.  Something in order of one in three Greek jobs are in government, they were not happy to see the cuts. 

While Greece was responsible for some decline early in U.S. stocks, it was not The Cause for The Drop.  Evidently there were one or more erroneous, or accidental, stock trades yesterday that then triggered automatic, or computer generated, stock trades.  Late yesterday it was believed that several stocks were sold in huge blocks at one time triggering the auto-trades.  This morning it is being reported that it may have been an error on a trade of Proctor and Gamble, selling one Billion shares instead of one million. 

While a clerical error or mistake that sets off the largest interday drop in Dow history is of concern, it is less of a concern than if the was purposeful manipulation of stock trades, simultaneous transactions by several traders intent on crashing the markets and plunging them into chaos.  We will see what investigators turn up.

Regarding the auto-trades and selling, almost all traders and large investors have stop-loss orders on the stocks in their portfolios.  If there is a big drop the investor protects the amount of money they can lose.  If you buy Dennis Inc at $100 you may want to keep a stop loss on it at $90, limiting your losses at 10%.  Once the stop-loss orders start to impact the market it triggers more stop-losses. 

As for rates, long time readers of the Weekly Rate and Market Update know that in general when stocks lose bonds, and Mortgage Backed Securities (MBS) gain.  Those gains mean lower interest rates.  Yesterday the market alerts on my Blackberry from a mortgage rate subscription service were coming in almost every minute around lunch time as investors fled the equity markets and purchased MBS. 

Today? Dow has had a 335 point spread between the high and low and Mortgage Backed Securities are again benefiting. 

What the heck? 

Have a question for me?  Ask me!

A lot, an awful lot, of news this week.  I will go through domestic economic issues first and then take you on a quick trip abroad to recap events and impact on mortgage rates.

Jobs, jobs, jobs, jobs, JOBS, sounds like a Monty Python harmony.  Jobs, earnings and jobs are in the news this week.  The news built throughout the week.  Personal income was up in April and 3% year over year.  First time unemployment claims were down from the prior week to 444,000.  The payroll company ADP reported the private sector added 32,000 net jobs over their network and that layoff announcements were at a four year low.  Today the Department of Labor announced April employment numbers with 290,000 more jobs for the month, the largest number since March 2006.  Of this number 231,000 were in the private sector.  While the number of jobs increased so did unemployment overall now at 9.9%. 

What the heck?  How can we add jobs to the economy and unemployment rises?  More people entered the marketplace seeking employment in April.  In the past two years 8.5 million people have lost jobs, currently there are almost 6 million on continuing unemployment.  Just through demographics anywhere from 125,000 to 150,000 individuals enter the job market each month, add the weekly unemployment insurance claims and there are several hundred thousand new people seeking employment each month.  More people looking for work means higher unemployment index.  Until jobs are added faster than the number of people actively looking for work the unemployment index will not drop.

With the deadline for the tax credit last week purchase mortgage applications have surged across the country.  The April 30^th deadline was to enter a contract to purchase a home, the next deadline is June 30^th to close your transaction to receive the IRS home buyer tax credit.  Does anyone know anyone who has actually received their credit yet?  If so can you please put us in touch? I would like to see how the process went.  I have yet to hear from any clients receiving the credit and am interested in how it is working from someone involved and not the media.

For those still reading and interested in what is happening in Greece, I wrote a piece on Wednesday “Financial Dominoes” for my opinion blog. I rarely mention on the weekly update trying to keep separation between personal views on issues and commenting on issues that impact the industry, but in this case I think there is a very good tie-in between what is happening in Greece, Europe and the United States and what happened in the housing, mortgage and credit industries starting in 2007. 

The thumbnail of Greece to recap prior weeks’ comments is that Greece is in deep souvlaki as its debt far exceeds its Gross Domestic Product.  Greece can get a bailout of about $140-150 billion but to do so must reduce its deficit.  Its parliament passed austerity measures yesterday that called for raising taxes, lowering entitlements and cutting pensions and pay to government workers.  Since a significant portion of the Greek population works for the government or receives entitlements riots ensued.  Not sure that economic will be restored, and that the problems Greece is having will not be repeated soon in other European countries, most notably Ireland, Italy, Portugal and Spain, investors have been in a “flight to safety.”  Safety is not stocks or non-U.S. debt, so we benefit in that our national debt is being bought by someone other than China (which is selling U.S. debt, another story for another day) and mortgage rates stay low.

Rates for Friday May 7, 2010: As can be seen by the chart the jump in rates predicted by me and others after the Fed left the MBS market in March has not happened, thanks mainly to Greece.  Rates for the week have been dropping steadily.  How much more and longer?  It is a coin flip in the industry as to whether we are nearing cyclical bottom or if there is more room to drop.  If you are a risk seeker you wait, if you are risk averse you lock in the historic low rates.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.807%                            Down 0.068

30 year conforming-jumbo 5.00%                     Down 0.125%

30 year FHA    4.75%                                      FLAT

30 year FHA jumbo 4.875%                            Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, 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 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.

I’ve known many mother’s in my life, but have only lived with two and how fortunate I am to have been able to do so.  The first is my own mother who passed away 30 years ago on Sunday.  She was a special woman with a big heart, big smile and loved by many.  She comforted a precocious, emotional and inquisitive boy and his siblings, passed along a love for cooking and baseball and continues to provide many happy memories and smiles.

The second is my wife and the mother of my children, Leslie.  She is a special woman with a big heart, big smile and loved by many.  She comforts our children, and me, and indulges us our passions while passing hers onto to the girls.  With many happy memories and smiles already imprinted I look forward to the many, many more to be created.

Happy Mother’s Day Leslie, and all the moms out there nurturing and teaching our children with a smile and a hug.

Have a great week,

Dennis