The Mortgage Man

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Archive for September, 2008

Tuesday September 30, 2008

Mortgage Bonds continue to find their way in this uncertain market.

As the clouds lift after the largest single day point loss in Dow Jones history, the bond market is not showing a lot of movement.  The mortgage bonds have been trading in a sideways channel for over a week now with little movement in either direction.  This is significant since a sell off of yesterdays proportions would normally signal a strong buy into mortgage bonds.  But, because much of the uncertainty in the market revolves around mortgage backed securities, traders were putting their money in treasuries instead.  This uncertainty continues today as mortgage bonds are carefully creeping sideways looking for direction.

Keep an eye on any triggers that may signal movement in the market, but to be safe, it would probably be prudent to lock your loan in process if it has not been already.  The affect that news has had on the markets lately has been swift and dramatic.  If you wait for news to come out (and it turns out to be bad), you may not have time to recover and get your rate locked before prices freeze and await a market adjustment.


House Votes Down Bailout Bill

Much of the financial market expected the bailout bill to be passed, but the tides have changed.

After non-stop press coverage for almost 2 weeks, and a never ending jockeying for position in front of the camera by the talking heads in Washington, the wall street bailout bill has crashed and burned on the floor of the house of representatives.  With nearly a 2 to 1 vote against the bill by Republicans, and 94 Democrats voting against it, clearly the constituents negativity towards this has driven the House to vote down the bill.

Since most people on Main Street don’t understand the magnitude of the credit markets right now, perhaps they will get a better understanding after checking their portfolios at the end of trading today.  After expecting a bailout to be passed, the dow plunged down over 700 points after the vote went the wrong way.  Analysts are saying that without a bailout package from Washington, the Dow could drop as much as 2500 points before settling on a bottom, which will most certainly affect Main Street.  Even worse than the uncertainty in the stock market would be the affect that a freeze in credit would have on small businesses.

I think after seeing the aftermath, there will be another vote, and there will be some sort of bailout proposal passed.  The question remains, how long will that take?  And, have many casualties will be left on the battlefield before then?

What Does Wall Street Bailout Mean To Main Street?

With so many opinions about what is happening with the economy, what does this mean to you?

Wow, what a week.  There is no shortage of fireworks on Capitol Hill as the Senate Banking Committee continues to throw Fed Chairman Ben Bernanke and Secretary of Treasury Hank Paulson on the grenade.  The one constant that continues to be thrown around by members of the committee is that this unprecidented measure will “cost” tax payers $700 billion.  I am afraid that this term is being lost on the committee as it is also being lost by tax payers and citizens due largely to a misunderstanding of what this “bailout” actaully involves.

Let me qualify this by saying that I am a very large opponent of gevernment intervention at any level.  There is nothing that the government gets involved with that makes anything cheaper, more effective or more efficient.  That being said, we have reached a monumental point in the financial markets where intervention is necessary to avoid a total collapse of the financial markets that is nearly immeasurable by most people alive today.  Unless you are in your 80’s, it is unlikely you can truly appreciate what affect the depression had on this country (myself included).  The argument being made is that tax payers are being asked to foot the bill for mistakes made by people and organizations that they had nothing to do with, and to a limited extent that is true.

What is really going on is a total lack of faith in the system due to the unwillingness of financial institutions not only to lend money to consumers, but also to each other to keep the system fluid and capitalized.  When using the term bailout, you must see the bigger picture of what is actually going on.  The Fed and Treasury Department are proposing to the Senate Banking Committee that the government purchase certain mortgage backed securities from financial institutions that need help to liquidate these securities to continue in business.  If you own a pizza parlor, you can only remain in business if you sell pizzas for more than the cost to make them, use the proceeds to buy supplies, and repeat the process.  The same is true in the financial industry.  Banks can only lend money after taking certain securities, liqudating them in the open market, recovering the cash, and lending it again for a profit.  This is a highly simplified version of what is happening, but it has very complicated and wide reaching implications in all of our lives.

Some of these securities are owned by your pension fund, or your local municipality, or even your investment banker (as we have already seen with Bear Sterns and Lehman Brothers).  While it is pertrayed in the media and misunderstood by elected officials that this is a $700 billion line item expense to the tax payers, that in fact is not true.  It is actually the government purchasing assets with the intention of holding them and selling later.  The proposal is also suggesting that the securities be purchased in a reverse auction fashion where the banks most desperate will sell first at the lowest coupon rate, and as the value rises, the market will dictate what is reasonable to sell for each individual company.

In the end, the actual cost to the tax payer will be much less than $700 billion, in fact, it will more likely be a fraction of that.  The result of this action would be to open up a logjam in the system allowing institutions to become more liquid, be able to lend more money to consumers, and increase consumer confidence in the economy as a whole.

As you sit in Smallville, USA and wonder why you would go along with such a deal, be aware of the fact that farmers who need short term financing to get their crops to market are affected.  Car companies that employ thousands of people to build and sell cars are affected.  And, small businesses that need money to expand and grow and create more jobs are affected.  This may have originated on Wall Street, but there is a very real impact on Main Street that could create real problems if it is not done.

Thursday September 18, 2008

Today’s bond market and its affect on mortgage rates.

At present, the bond market is moving in a sideways channel between resistance and support.  The cash infusion by The Fed has had some positive affects on the stock market today which is creating pressure on bonds.  There is no clear up or down swing predicted to happen today in mortgage rates and mortgage bonds, but due to unexpected volitility in the markets that could happen at any time, it would be prudent to go ahead and lock your rate if you have a mortgage loan in process.

Enjoy your day, and try to think about something other than the stock market.

Where Do You Keep Your Money Safe?

In these historical times in the financial markets, how do you know that your money is protected?

Everyday there is a new headline about some other “sky is falling” scenario.  It was only a week ago that history was made when the government stepped in and took over operations of Fannie Mae and Freddie Mac, but that is old news now.  This week it was the nations largest insurer AIG being given an $85 Billion loan from your tax dollars to help keep them out of bankruptcy.  But hidden in all of the negativity are shining pockets of positive news.

If you ever watch CNBC, you may know that Jim Cramer likes to say “there is always a bull market somewhere”, and he is right.  In the constant yin and yang of the financial markets, where there is a loser, there is also a winner somewhere, you just have to know what to look for and where to find it.  For instance, if you bought into gold earlier this week, you are no doubt celebrating as the gold market had the largest dollar gain in history this week.  Equally, as confidence fades in the stock market, investors must forge ahead and put their money somewhere, and guess what just started looking really good…..real estate.  Thats right, real estate.  The dirty word that people have been scouling at for months just became one of the best places to put your money.

Think about it, if you have $1 million in the stock market and you don’t know if you will wake up one day to find that your top holdings are out of business, your money may be better served in a tangible asset that you can see, touch, get a tax break, and live in (or rent out).  At a time when real estate is at historically low prices, you could be getting in at the very beginning of a new bull market.

I find it interesting what an affect the media has on the markets.  They seem to give you just enough information to instill a panic without regard to how people will react.  I know that the AIG issue is big news, but did you know that there are 1000’s of people without homes or jobs in Galveston, TX after Hurricane Ike virtually wiped the town off the map.  Chances are pretty good that you didn’t because no one in the news is saying a word about it.

So back to the topic at hand, is your money safe in the bank?  Yes, if it is less than $100,000 per depositor per institution.  Is it safe in stocks?  I guess it depends on the stock and your level of exposure.

Even if you take away my obvious bias towards real estate (because I am an active mortgage banker), do your own home work in your local market to see if I am right.  If you haven’t looked lately, you might be shocked at the deals available now.  I my area of the Florida Panhandle, there are gulf front condos that can be stolen for prices that compare to 4+ years ago.

Good luck to you, and tell me how things are in your local real estate market.

LIBOR Index In For A Bumpy Ride

If you currently have an adjustable rate mortgage tied to the LIBOR, you may be in for a shock at the next adjustment.

The LIBOR (or London InterBank Offering Rate) is the rate at which banks loan each other money.  The reason this type of loan became so popular a few years ago was that the index was typically lower than other prevailing indecies used for calculating rates such as Prime or Treasuries.  Unfortunately, because of so much uncertainty in the financial markets regarding the ability of one bank to come through on their paybale obligations, banks are pushing this LIBOR much higher to justify the risk associated with the uncertainty.

Because the LIBOR is on the rise, the next time you have an adjustment coming due (many LIBOR loans were done on a 6 month adjustment), you may be in for a real sticker shock.  Combine that with the strength in long term fixed rates, and you may be looking at the perfect scenario to refinance your loan into a long term fixed rate and stop worrying about the news on a daily basis.

There are a few snags in this plan to be aware of.  First, the value of your home is likely not what it was at the time of your last refinance, so unless your loan was done at a reasonably low loan to value ratio, you may not qualify for a refinance.  Get an estimate of the value of your home for free at  When using Zillow, be aware that the acuracy of the information is somewhere around + or – 10% (based on my own experience).  If you are unsure, I may be able to help you sort through it.  Also, Zillow is notoriously innaccurate on waterfront homes, or homes where a significant portion of the value is based on the location.  All of those disclosures out of the way, Zillow can be useful and fun to use.

The second snag in the plan is the verification of income.  During the same time that LIBOR loans were so popular, stated income loans were “all the rage”.  As long as you had good credit and the right asset profile, you could state your income on the application without the need to verify it in writing.  In the industry these are referred to as “liar loans” because historically, the number given as an income figure more acurately would be filed in the fiction section of the book store.  The days of stated income loans are officially dead.  While there are still a few loan programs out there that offer the option to not verify income in exchange for an increase in your rate, what is not widely advertised (and many inexperienced loan officers don’t even know) is that when your file goes to underwriting, they will pull an IRS form 4506 tax transcript.  This means that the underwriter is going to see the income that you file taxes on whether you provide them or not.

Even hard money lenders, notorious for turning a blind eye on income in exchange for asset based lending, are now turning heavily towards verifying “the ability to repay”.  Contact me to find out if a refinance on your LIBOR adjustable rate loan is the right thing for you and your family.

Why Is The Government Bailing Out Everyone?

In an unprecedented financial crisis it seems like the tax payer is the real loser.

Bear Sterns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG…..what does all of this mean to you?  Why are some companies being bailed out while others are allowed to fall on their face?  It is a complex question being answered by your tax dollars, and the answers change from one day to the next.  Just 2 days ago, the official opinion of the Treasury was that there would be no bailout of AIG (the nation’s largest insurer).  Less than 48 hours later they are writing a check for $85 billion.  So how is it in the best interest of the country to bailout these corporate executives that made bad decisions?

For starters, every situation is different, and the government is not bailing out every company that steps up to the bread line.  Those that are allowed to fail without creating widespread devastation in the economy is, in my opinion, good for the over all health of the economy.  The ability to assume risk and fall flat on your face is actually what makes a free market economy work.  IndyMac Bank for example was a huge financial institution.  Yet, they were allowed to fail because there are dozens of other companies performing similar functions in the market, and therefore it is not the responsibility of the governemt to step in and help.  In that example, since most depositors were covered by FDIC insurance, there was little affect to the end consumers and account holders anyway.

The Fannie Mae and Freddie Mac takeover was different.  With over $5 Trillion in combined assets, the collapse of Fannie and or Freddie could have widespread implications in the credit markets and significantly hinder mortgage lending.  But, in the case of Fannie and Freddie, the government took over operations.  Their business was significantly less risky than the subprime lenders that have had so much trouble.  But because of their shear size, they have been affected by the current housing market.

AIG is a much different situation than any other that we have faced.  The significance of AIG is that more than 100,000 employees work for the company, and a collapse would affect so many sectors of the economy that it could create a ripple effect that is almost immeasurable.  The $85 Billion being provided to them by the FED is actually a short term loan, and the collateral for the loan is the entire $1 Trillion dollar asset portfolio of the company.  From a simple bottom line lending standpoint, it appears to be a no brainer, and for me to say that is really something.  I’m not in favor of the government bailing out anyone, but, an $85 Billion loan backed by $1 Trillion in assets that also saves over 100,000 jobs just makes sense.

Ultimately, we are in unchartered territory and no one knows what the long term affects will be.  But there is a light at the end of the tunnel.  For those who are even remotely in the market to buy a home, the events transpiring are creating unprecedented buying opportunities.  At the same time, for those in an adjustable rate mortgage, the market is ripe for a refinance with fixed rates as low as 5.25% (see for current pricing).  In every market, there are winners and losers.  Those who have the fortitude to seek out these buying opportunities will be in a position to build wealth like nothing we have seen in generations.