Dennis' Mortgage Blog

Question of the week:  If I have a loan payment with Washington Mutual what should I do?  Answer:  Continue to make your regular loan payment.  As you probably have heard the FDIC pushed WAMU into a deal with JP Morgan Chase last night, making WAMU the biggest bank failure in U.S. history.  Now all accounts that were with WAMU are accounts of Chase; checking, savings, CDs, auto loans and mortgages.  Until you are instructed differently by Chase continue to bank as normal with WAMU, including your loan payments.  As well be very aware of any mail you get from JP Morgan Chase, you may see an envelope from them and think that it is junk mail or another credit card solicitation—it probably concerns your account so open it!

If you have a question you would like answered send to me!

Another historic week for the United States and our economy; personally while I am a history buff I would not mind a non-historic week sometime soon.  As I write this Congress and officials from the Treasury, Federal Reserve and other Federal departments are working on a plan that is either a bail out or a recovery depending on your perspective.  As you know Treasury Secretary Paulson announced earlier this week a somewhat vague plan to put $700 Billion into the economy to purchase delinquent mortgages and housing debt to remove from the balance sheets of the financial sector assets that have become liabilities.  The theory being that freed from these bad investments the credit markets will loosen up and funds will once again flow between banks, brokerages and investors. 

I personally have mixed emotions about the proposal.  Until we know what the final plan will be, what oversight and controls are put in place by Congress and the Administration it is hard to judge the merits and detriments of the plan—not that lack of any specifics or final plan has stopped many from pre-judging the concept.  Conceptually I feel an extremely bold measure is required from the Federal government, unless anyone is willing for the teetering financial markets and housing sectors to collapse entirely.  Ideologically I am against significant government involvement in the markets.  Concept wins this issue.

The obvious upside is if this plan, or some semblance of it, is enacted it can definitely have a positive impact on the markets—specifically the housing and real estate markets as funds are needed to keep rates affordable and to make loans.  By removing the delinquent debts it will put confidence back into lending.

Another upside is that the government is getting something for the funds being spent:  real estate.  With the Plan (I will refrain from using “bail out” or “recovery”) the U.S. government will be the single largest owner of single family residences in the world.  While prices may be dropping, each of those properties does have value and when sold the funds will go into the Treasury.  Further, with the ownership of Fannie Mae and Freddie Mac the Treasury will be collecting the profits that accrued to Fannie and Freddie stockholders, and executives, will not accrue to the Treasury.  I am not saying that the full $700,000,000 will be repaid, I am saying that I do not think the full amount is lost to the government.  Who knows, if the resale of property is handled right we might see a net profit from the deal (my inherent optimism shining through).

My concerns are as follows. First, with the prospect of being able to unload their foreclosures and severe delinquencies banks and lenders may take their REOs (Real Estate Owned, i.e. homes they now own because they have been foreclosed) off the market and possibly out of escrow.  They may do this to see if they get a better offer from the government as part of the Plan.  As well homeowners who are currently in escrow having negotiated a short-pay may have those deals taken off the table for the same reason; same may happen for homeowners who are negotiating forbearances to lower their rates or fix their terms.  With a rather large check looming from Washington D.C. many lenders will probably determine their best course is to turn their REO over to the Feds, even those in escrow.

Another concern I have is what is the Federal government going to do with all the housing stock it is about to own?  If you peruse the HUD website for property it owns through FHA foreclosures you can see that HUD does not do a good job of upkeep on its property.  Further, currently each bank is working with local real estate professionals to market and sell their REOs.  Some banks are not putting all their REOs on the market at one time to avoid flooding the market and driving prices down further.  How will the Feds handle the REOs they will acquire because of the Plan?  If all, or a significant number, of the real estate acquired through the Plan is put on the market in a very short time the Feds can literally wipe out some housing markets by saturation of supply.  With careful and prudent maintenance of the supply, and cooperation with local real estate professionals and housing authorities properties can be released to the market and perhaps to the housing authorities in a responsible fashion that may actually benefit local markets.  Given that some Federal bureaucracy is involved however I am not very optimistic about a positive outcome in this regard.

Perhaps my main concern was best expressed by one of my co-workers earlier today who said, “The Plan looks to be undermining our legal system by saying contracts do not mean anything anymore.”  If part of the Plan is to prevent the foreclosure of homes and “cramming down” whereby lenders are forced to lower the amounts owed, the Federal government is telling the world that contracts in the United States of America are not necessarily enforceable.  Taking away all the hyperbole and rhetoric of the past year about borrowers being taken advantage of by lenders, and people signing contracts that they did not understand, and predatory lenders created this mess; take all that away and what I know is that every borrower had to sit down and sign loan documents that spelled out the terms of the loan they were getting.  A contract was made between the borrower and the lender.  If the government is severely altering mortgage notes to benefit delinquent homeowners it is telling responsible homeowners who are making their payments, and have been for decades in many instances, that they would be better off financially if they had not adhered to their mortgage contracts.

This statement will be difficult for many, but after twenty plus years in the industry I know it to be true:  not everyone deserves to be a home owner; not everyone should be a homeowner.  That is the crux of our problem.  Too many people who had no business buying a home bought a home.  And now there are politicians saying, “we must keep these Americans in their homes.”  Well a significant portion of those people never should have been in that home.  Many of them have nothing invested in the home, purchasing with no money down and making interest only payments.  A number of people who lost or are losing their homes to foreclosure never should have owned them in the first place; they had no money in down payment, and no money in the bank; they did not have sufficient income to qualify for the loan; they had bad credit histories or too much credit; yet they purchase a home with the hope of the market going up so they could sell it for profit at some point down the road.  Guess what?  If the Plan allows these homeowners to keep their homes at a cost to the government—i.e. you the taxpayer.  I know these comments are harsh but they come from spending several years talking to people who wanted to buy a home and telling them they could not afford to, only to hear that they ended up buying a home. 

That is perhaps my biggest problem with the Plan.  Are we spending taxpayer money on saving homes for people who never were qualified or financially capable of purchasing and owning a home.

We will see what is put together over the weekend.  After all is said and done I am optimistic about our economy and the future.  We are actively funding mortgages to put people into homes, albeit a bit more challenging that it was several weeks and months ago with the pipelines we are facing, and that is good news.  When a family decides it is time to purchase a home, they are ready to purchase a home and our job is to help them buy the home they can afford.  Through all of this a very bright light is that the mortgages being funded today are solid mortgages, well qualified homeowners with an initial down payment into their home are getting loans that they will make payments on for a long time—just as most Americans always have done.

Here are the rates as we finish off the week:

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.875%            é 0.125%

30 year conforming-jumbo at 1 point 5.875%            é 0.125%

30 year FHA at 1 point 5.75%                                    é 0.125%

30 year jumbo at         NO PRICE CALL FOR INFORMATION              

Have a great weekend.  We will be eschewing the debate tonight to maintain our Movie and Pizza Night with the girls—I hope the pick is Mary Poppins, after a week like this I can use a “Spoonful of Sugar”!

Dennis

Wow.

My kids will be studying about this current period in college in several years, massive government intervention in private industry to protect the nation’s wealth and retirement—why and how will be debated for a long time and it may take until about 2020 before history fully and somewhat accurately judges the results of the moves this week by the Treasury and Federal Reserve.  For those of you stuck on the Food Channel, ESPN or still finishing the last Harry Potter here in a nutshell is a recap of the past week plus (for ease of writing and reading whenever I say “the Feds” I mean the Treasury Department and/or the Federal Reserve or a combination of Federal Government entities):  1^st the Feds move in and take of Fannie and Freddie over last weekend shoring up the confidence and investments in those entities.  Chairmen out, Feds in with about an 80% stake in the company  2^nd Lehmann Brothers begins to teeter and everyone waits for Feds to step in as they did with Bear Stearns six months ago, Feds sit on their hands and Lehmann files bankruptcy as Barclays comes in to buy what they can 3^rd Merrill Lynch begins to teeter and it is evident that the Feds having passed on Lehmann Bros will do the same with Merrill, Bank of America still working through its buyout of Countrywide Mortgage comes in with a deal and it is apparent that Merrill Lynch will be part of the new BofA 4^th AIG, the mega-huge insurance company faces serious liquidity issues and the Feds move in with a huge cash infusion/guaranty and another chairman is ousted and the Feds make about a $200 billion loan to the company at 11% interest 5^th  the Feds announce they will buy failed and delinquent mortgages and cover mortgage backed securities (investments in home loans) while also guaranteeing money market funds and eliminating the ability of investors/speculators to short sell stocks in investment companies and banks.   Meanwhile the stock mark lost 800 points on Tuesday and Wednesday and gained 800 points on Thursday and Friday and mortgage rates went down and up and are week to week flat.

Catch my breath….

So what does all this mean?  Who the hell knows?  Seriously it is a tangled mess of protecting the economy, protecting the investments of Americans, and ensuring our economy can move at all much less forward.  But you did not read this far for me to take a pass so here are my thoughts after reading many opinions I have culled through research or sent to me by some of the readers of this weekly update.  Of all the information I have gathered here is the best, most simple analogy I can offer you:

You are hit with a bunch of expenses at one time, car breaks down, house needs a new roof, kid needs braces, property taxes and insurance are due, your 10^th anniversary and your spouses 40^th birthday have come and gone and your company is re-structuring so there is not bonus this year.  So you hunker down and do your work and slowly pay down debt, fix your assets and get to the point where you rebuild savings.  After a while the debts are diminished, everything is working well, you get a bit of a raise at work and decide to take a weekend vacation with your spouse to relax and enjoy life a little bit.  A little while later you have more debt paid down, more money in savings, another raise and bonuses are restored at work.  You decide to take another weekend vacation and this time decide to go to Las Vegas, you have nice dinner and gamble a little at the $5 tables and come home losing about $100 but relaxed and refreshed.  Some more time goes by, everything is paid but the mortgage, your savings have become investments and your bonus check was very nice.  You decide to take a four day weekend, go back to Vegas and because everything is going so well decide you can risk $50 hands of blackjack because what the heck I am on vacation and I deserve it and can afford it—and if I when I will win a lot. 

That is where our credit and investment markets were last summer.  Investment houses like Bear Stearns, Lehmann Brothers, Merrill Lynch had weathered the recession that started sometime in 2000 and the subsequent post-9/11 economic and emotional traumas.  They had debts, houses that needed fixing and braces to buy; and they slowly put capital into the markets and the economy.  And slowly the capital investments grew and profits were made—much of which was reinvested again and again.  Over time the capital grew very fast and investments were spinning off significant amounts of cash in income and equity for all investors.  As their stockpiles of funds grew the risk managers decided they could put a greater amount of their funds into riskier investments and still protect their prime assets and investments.  So they got together with the mortgage industry and created sub-prime loan programs for homeowners.  Money was cheap, housing prices were soaring (in part because money was cheap and in part because record numbers of Americans were earning paychecks) and the initial waves of sub-prime loans were great investments—so more money was pumped into them. Then one of the dominoes began to teeter, a company out of Orange County by the name of New Century, a sub-prime lender was having problems getting funds from Wall Street to fund new mortgages.  And boom most of your chips were on the blackjack table and the dealer was showing an Ace.  Investors pulled back, money got really tight and the markets began to seize up.

What we have faced this past year has been less of a problem about profits than one of liquidity.  Much of the Wall Street investment vehicles are somewhat of a Ponzi scheme, the more people who invest the more money those invested make.  The investments already made, for the most part, have been paying very well and steady and profits have been made.  The problem is the lack of funds for new investment and investors has created cash problems for the investment houses and the credit markets seeing the cash crunch stopped lending and investing funds.  Everything grinds to a halt.

The moves by the Feds have been less about guaranteeing individual investments and investors and more about ensuring investors, and Americans, Chinese, Germans, Chileans, that investing in American businesses and the economy is okay.  Essentially the Feds are providing confidence to the markets, confidence that it is okay to free up some capital and invest, confidence that it is okay to invest in a portfolio of mortgages backed by single family homes in Aimes, Fargo, Tulsa or Long Beach.  Our biggest issue has been confidence that tomorrow will be okay, because investors need that confidence before they invest any assets in a tight market. 

And so the cycle will begin anew.  Through this we may see a few more investment houses go out of business, merge or be bought; we may see some bank mergers or closings; and we may see some decline in the value of our stock markets.  But as we go through this slowly those with equity and capital are looking for bargains and investments that will provide a solid return and they will make those investments.  And capital will enter the market and slowly more capital will follow.  And more.  And more.  And the cycle will continue until one sector over extends and begins to collapse and the markets will correct and we will start again.

The biggest questions I am asked are:  How much of the taxpayers money is at risk? And what will happen with interest rates? 

Regarding taxpayer funds at risk that might be impossible to ever calculate since the Feds can print and borrow money at will.  My feeling is that in regards to the Fannie and Freddie deal the government should end up making money on this maneuver.  A very small percentage of the mortgages under the Fannie/Freddie umbrella are delinquent or in danger of going to foreclosure.  The total numbers are high, but a big reason for that is the sheer number of mortgages outstanding.  Overall the Fannie/Freddie portfolios are very profitable and will continue to be so.  The mortgages currently being funded, and that have been funded for the past year, are very secure mortgages given the credit criteria.  Over time the funds extended by the Feds for Fannie and Freddie should be repaid with interest.

I would say the same thing about the AIG transaction.  Already its shareholders are trying to find a way to pay off the loan so they are not partners with the Feds; they know insurance companies are profitable—that is why they invested in them.  They will slowly sell off bits and pieces of the company and repay the Feds bailout money, also with interest.

The potential losses to taxpayer funds come more from the Feds taking on the delinquent mortgages.  While these are backed by hard assets, property, that can and will be sold for some return on the asset, overall many of them would be a loss for the government.  I would like to see them slowly manage the foreclosed properties; sub-leasing them to local governments as part of an affordable housing package that can slowly turn them into owner occupied homes without flooding local markets with re-sale housing stock.

Regarding interest rates my feeling after the recent moves by the Feds to inject and insure almost $1 Trillion (Tuh-tuh-tee as in Trillion) into the markets is that to do this they will have to borrow.  That kind of borrowing will be a strain on the markets and put pressure on rates to increase.  Of course as the rates do increase it will encourage more money to flow into investments to capture the higher rates and it will have a positive affect of loosening the markets some more.  Until the end of the year my prediction—subject to disclaimers and changing my mind—is that our current conforming rate of 5.75% will stay within a range of about 0.500% to 0.75%; meaning lows of about 5.375% to highs of about 6.25%.  We still have a pretty solid employment number with over 93% of America working and earning paychecks, we have oil and natural gas prices dropping, and we now have what should be confidence in our markets to encourage renewed investment and opportunity.  With the Feds borrowing money and creating higher short term rates the Federal Reserve can sit back and let the Fed Funds and Discount rates stay where they are and let the markets raise rates to fight inflation without them.

I was at a meeting Wednesday afternoon and half-jokingly people were saying, “well lost 10% today how about you?”  I said then, and say now, markets go up and down and in the end capitalism works.  Along the way there are bumps and individuals can and do get hurt, but for the overwhelming majority of society and members of the economy (which is all of us) it works.  So, I said, I will continue to invest in my 401(k) because now I am buying on the down and will continue buying when it goes up; and over time I will be glad I did.  The media makes nothing off of good news and everything off of bad news.  Remember 2003 when they predicted a burst in the housing bubble?  Well it took them five years to get that right—but even a broken clock is right twice a day.

Meanwhile back at the ranch…. Rates were up and down and up and down and up and down and that was just each day before lunch!  We are still seeing a good intake of purchase applications with healthy borrowers.  As we close out the year with the combination of prices and rates I am cautiously optimistic about our local market.  I hope you are as well. 

Here are the rates as we finish off the week:

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.75%              ó  FLAT

30 year conforming-jumbo at 1 point 5.875%            ó  FLAT

30 year FHA at 1 point 5.75%                                    ó  FLAT

30 year jumbo at         NO PRICE CALL FOR INFORMATION              

Have a great weekend!  (Happy birthday Puppy!)

Dennis

The announcement late Sunday that the Federal government was essentially taking over Fannie Mae and Freddie Mac, had a huge impact on rates Monday morning.  Every day, starting at 5:30 when the bond markets open, I get pricing alerts sent to my handheld on the mortgage backed securities market.  Usually the first couple of alerts are showing the trend up, down or flat that opens the market—usually small moves.  When there is some bad economic news, bad for bonds anyway, I have had my first alert at 5:30 show the market in the tank and know that when lenders put out rates around 8:30 to 9:00 a.m. they will be higher than the close the previous day.  This happens but somewhat infrequently.  On Monday morning my first several alerts, probably five before 6:00 a.m., indicated an opening of the mortgage markets that I cannot every recall seeing in my career—it was very evident from the alerts that the lenders were going to open pricing on Monday down 0.25% in rate from their close on Friday. An unheard of drop in rates in a single early session was occurring. 

Why?  By restructuring Fannie Mae and Freddie Mac the government was telling investors, and credit markets around the globe, that anyone willing to invest in American mortgages would be protected.  Essentially Treasury Secretary Paulson crafted a deal that took much of the risk out of conforming mortgages for investors, investors responded by buying in record sums mortgage backed securities.  High demand causes higher prices, in mortgage trading high prices mean low yields, low yields mean low interest rates. 

The euphoria continued into Tuesday and then the market drank some strong coffee, took a couple of aspirin and stopped the party.  Wednesday and Thursday the mortgage markets jumped up and down and the daily charts looked like EKG readouts.  Mortgage investors reacted to oil prices dropping close to $100 per barrel (good for rates) and then reacted again when OPEC announced cuts in production (bad for rates); economic data came out showing tame inflation numbers (good for rates) and back up again.  Throughout the week investors played cat and mouse and cashed in on profits and bought big on the dips with every piece of news.  And then Friday came and everyone turned on Fox News, or MSNBC, or CNBC or whatever news/market program they watch and saw a huge red blob moving into the Gulf of Mexico called “Ike”.  Bigger than Katrina and likely not to veer into land until fully crossing the Gulf, Ike has the potential to inflict incredible damage on the Gulf’s oil and gas delivery systems and platforms.  This possibility of a huge impact on America’s domestic petroleum and gas supply sent the market off and we saw a huge drop in prices today and rates were climbing through out the day. 

At the end of the week our pricing is still significantly better than last Friday, rates have remained near the Monday numbers.  Also the technical aspects of the market bode well for continued drops in the future and our trend since mid-August continuing down, the question is at what pace.  Based on the information available, I still advise locking when possible, floating rates is always risky when in a purchase escrow as you may run out of time.  For those I have spoken to, or am watching rates for regarding refinancing we will continue to exercise patience over the longer term for rates to hit your target numbers.

Here are the rates as we finish off the week:

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.75%              ê  .25%

30 year conforming-jumbo at 1 point 5.875%            ê  .375%

30 year FHA at 1 point 5.75%                                    ê  .25%

30 year jumbo at         NO PRICE CALL FOR INFORMATION              

With the exception of the usual activities of ballet, soccer games, church, honey-dos and errands I am around all weekend to assist if you have questions or inquiries for rates, payments, programs or pre-qualifications---don’t hesitate to contact me if you need me!

Have a great weekend!

Dennis

What crazy times we are having in the industry, most of it around turn times and tight underwriting.  With the slow down in mortgage applications starting last spring lenders began reducing work forces, this has led to fewer underwriters, funders and other staff.  The past three months have seen volumes increase in applications but lenders have not staffed up to account for the increased volume—and who can blame them?  Particularly lacking nationwide, but very much so in California, are FHA approved underwriters.  With the FHA limits pretty irrelevant for much of the state the past decade most lenders kept few on staff; now with FHA mortgages being about half the volume—at least in our company—we are noticing a lack of experienced FHA underwriters throughout the industry.  Another layer on the process is that it appears Fannie and Freddie are sending loans back to lenders for appraisal reviews; the result is that lenders are calling for appraisal reviews on more and more files.  I would estimate that most files with minimum down payment and about 50% of all other files are now having to go through a review process.

What does all this mean?  Between short sales and short staffs buyers and sellers can write 30 day escrows in their contracts, but be prepared to have your transaction go a little bit longer—especially if there are any quirks to the file—to adjust for appraisal reviews and pipelines that continue to bulge as the real estate markets continue to see increased activity with first time buyers.

This week allows us to say that there is a downward trend in rates occurring, not just a happenstance the last few weeks but this makes three weeks in a row we have ended up on a down beat from the previous week.  Not unusual for us that once again Friday was the big loser on the week so we had repricing today and could see the rates open higher on Monday.  The big reason for the rate decline is lower petroleum costs combined with higher employment create less inflationary pressure in the economy and increased likeliness that the much talked about but never yet occurring recession may still occur.  Yes, I said not yet occurring since we have not had the technical data of two quarters of a shrinking economy that are required to define a recession.  With the lower energy prices expected to feed through the economy to ease price pressures on all goods and services we see reduced inflationary pressure and therefore reducing the chances for higher rates in the short term.

While floating from last week was beneficial, the risk-reward given our unstable market makes me uneasy and I do not recommend anyone taking a floating stance.  One day of bad economic news sends rates up over 0.125% and climbing rapidly.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR JUMBO LOANS AND 10% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 6.00%              ê  .125%

30 year conforming-jumbo at 1 point 6.25%              ê  .25%

30 year FHA at 1 point 6.00%                                    ê  .125%

30 year jumbo at         NO PRICE CALL FOR INFORMATION              

We went back to school this week, always a bit bittersweet for everyone as summer ends; I hope all the kids enjoy their new teachers and classmates.  Thanks for 14 wonderful years Leslie, here’s to our next 14 and many more beyond that!

Thanks to everyone for their referrals, it is the best compliment I can receive on my service, experience and products.

Have a great weekend!

Dennis