Since when is down up?

When it comes to managing expectations. The National Association of Realtors had been forecasting that home sales in January would be down by .5% compared to December. They were only down .4%.

So down is up…..

Week in Review….

I have a confession to make. I was out of the office for a couple of days and things got out of control. Rather than remaining focused on the economic weakness that’s currently in the market, rather than dealing with the “readjustment of risk” that is going on in the credit markets, rather than dealing with the issues that the bursting of the housing bubble are causing in the economy, the markets suddenly switched focus. Suddenly, the only thing that seemed to matter was inflation. Suddenly, the only things that mattered were oil prices and inflation. Suddenly the economic weakness and the potential of a recession didn’t matter any more. And suddenly, interest rates went up. I don’t know how I let that happen!

So what does that mean going forward? There’s essentially a battle going on in the emotions in the market.

On the one hand, there’s the risk (or reality) of a recession. There are many facets to the economic weakness that is currently facing our country and typically, during a period of economic weakness, interest rates go down.

On the other hand, there’s the risk that, as money becomes cheaper, it will spark economic growth and the increased economic growth will lead to inflation. When inflation goes up, interest rates go up as well. There are a couple of areas (mainly oil) that are showing signs of inflation right now. There are people in the markets who feel that the Fed is being too aggressive in their slashing of interest rates and that once (important word there) the economy recovers, we’re going to see rates spike upward because inflation is going to come back and bite us.

I’m going to be bold and put together what I feel is going to happen for the foreseeable future:
1. Until the economy recovers (UNTIL is the operative word) we’re going to see the stock market and interest rates fluctuate based on the economic mood of the moment and based on whether the “recession” fears are winning or the “inflation” fears are winning.
2. The “bouncing” back and forth is going to continue for quite some time, at least until the effects of the housing bubble bursting and the credit market adjustments work their ways out of the market and the economy starts picking up. When will that be? At the earliest, I’d say we’re looking at at least 3 to 6 months if not more.
3. Once things do recover, we are going to see a “backlash” to the Fed’s cheap money. It’s sort of like a medicine that you take to cure a very challenging disease that is going to leave you with a residual headache for a while. The “headache” that comes back after the fact is a period of higher inflation that is going to happen (or at least it appears) after the cheap money.

With that being said, I have to tell you that we are currently in a period of more extreme volatility in mortgage rates than I have ever seen before (and I’ve been doing this for a LONG time.) It used to be very rare for rates to change more than 1 time in a day, now it’s becoming almost routine.

Keep in mind that this is a national report….

about housing prices and their possible drop as the housing bubble deflates. Read it here…..

But I have to tell you the story about a past customer who had considered moving out of state 2 to 3 years ago. At that point, local Realtors told him that his house could sell for between $280,000 and $300,000.

Now they are, unfortunately, heading for divorce court. They talked to a couple of local Realtors and were told that they could expect their house to appraise out between $180,000 and $200,000 and that it was realistically dropping at the rate of $2,000 per month.

Ouch!

Inflation vs. recession…..

Well, the battle rages on on Wall Street. Today the recession seems to be winning. The Philly Fed Index (say that 5 times fast!) came in surprisingly lower than expected. That raises more concerns that a recession is coming, if not already here.

In light of that, the yield on the 10 year bond dropped by .12% and mortgage rates fell as well.

Inflation

That “inflation” bug won’t go away. The Consumer Price Index came in the same for January as it did December, but the markets had expected it to ease up some. So, it’s a case of the same is actually up and the bond market doesn’t like the perception of inflation becoming an issue.

Read more about it here…….

So why have rates bounced up a bit lately?

A couple of things…..

The stock market has been doing fairly good lately. This always pulls money from the bond market and into the stock market as investors chase returns.

Oil – we hit $100 a barrel today. I haven’t checked, but I’ll bet we’ll see that in gas prices in the next day or two. That raises the concern for inflation. Inflation pushes interest rates higher.

Political uncertainty – Fidel Castro stepped down, Chavez is fighting with Exxon, we still don’t know whether Barrack or Hillary is going to be the Democratic candidate. The bond market doesn’t like uncertainty.

Problems with the Bond Insurance companies. They are way too complicated to spell out the details, but let’s just say that another part of the collateralized debt market is coming under problems, potentially big problems.

Do I think this is a long term change in direction? Not right now I don’t. Right now, I believe that the problems that are out there are much more likely to push rates down than they are to push rates higher over the next 3 to 6 months, that is. Longer term, I believe that the inflation risks are greater because of the drop in interest rates, but not for at least the next 3 to 6 months, potentially longer.

Stay tuned, it’s going to continue to be a wild ride!

Tom

Because communication is important….

Because it’s never been more important to be able to get straight answers from your mortgage lender, I’ve added a new way to get in touch with me. Now, if you’ve got a quick question, hop online and see if I’m available on AIM. I’ve got a screen name devoted strictly to making me more accessible for mortgage questions, and it’s an easy one to remember, TomVanderwell.

Try it some time, maybe just to stop by and say Hi!

Tom

I talked to a lady this last week who is a classic example of what’s been happening…..

Without getting into any details that would be confidential information, she and her husband bought their current home in a suburb near where I live. They bought a “moderately priced” home for the area (actually under $200,000) and went to the same mortgage broker they had used for their first home. Well, on this home, they did an 80/20 (2 mortgages, 80% on the first, 20% on the second).

The mortgage broker sold the second to the bank I work for, and sold the first to World Savings (now owned by Wachovia). The second was a relatively normal equity line of credit (more thoughts on that in a few minutes). The first was an option ARM.

Jump three years down the road, and what has happened?
1. The rate on the option ARM has jumped from 3% to 8.5%.
2. Because of the increase in rates, they have had to make the “minimum payment” at times and the balance on their mortgage has gone up.
3. They want to refinance to get out of that loan, but they can’t because property values have fallen and they are upside on the loan.

So I ask you, who do you think benefited from them getting into that loan program?
Let’s consider some possibilities:
1. They did because it’s a cheaper option than a 30 year fixed rate? Nope that doesn’t really work. It might have been cheaper for 3 to 6 months, but it’s not any more. They have lost over $5000 in equity because they took out this loan. Plus 3 years ago, 30 year fixed rates were in the mid to upper 5%’s, so, paying 8.5% now is definitely costing them more money. So, they are definitely not the ones who benefitted from them getting into that loan program.

2. Their Realtor? It better not have been him because that would be illegal. Realtors aren’t supposed to get kickbacks from mortgage brokers.

3. Their mortgage broker? Ding Ding Ding! We have a winner. I’ll bet you that the broker made 2 to 3 times as much writing them the option arm than he would have if they went with a boring conventional 30 year fixed.

So, there we have it. We have a customer who is in trouble on their mortgage because the rate has gone way up and the only logical benefactor for them getting that type of loan is the mortgage broker.

Until we get a better handle on making sure that mortgage people (I was going to say professionals but that doesn’t apply to all people in the business) start putting the needs of their clients in front of their desire to make more, we are going to see continued problems like this.

As to this customer, I told her that the only way I could see for them to get out the loan they have is to go back to Wachovia and beg for them to modify the loan into a fixed rate. No one else will be able to refinance them because they owe more than what the house is worth.

Oh, that brings up another question – my bank has a second on their house that is partially unsecured now because it’s over 100% of the value of their house. What is the likelihood that we would have done that second mortgage if we had known they were getting an option arm for the first? Brings back the old “wholesale vs. retail” debate doesn’t it?

Happy Saturday!

Tom

I talked to a lady this last week who is a classic example of what’s been happening…..

Without getting into any details that would be confidential information, she and her husband bought their current home in a suburb near where I live. They bought a “moderately priced” home for the area (actually under $200,000) and went to the same mortgage broker they had used for their first home. Well, on this home, they did an 80/20 (2 mortgages, 80% on the first, 20% on the second).

The mortgage broker sold the second to the bank I work for, and sold the first to World Savings (now owned by Wachovia). The second was a relatively normal equity line of credit (more thoughts on that in a few minutes). The first was an option ARM.

Jump three years down the road, and what has happened?
1. The rate on the option ARM has jumped from 3% to 8.5%.
2. Because of the increase in rates, they have had to make the “minimum payment” at times and the balance on their mortgage has gone up.
3. They want to refinance to get out of that loan, but they can’t because property values have fallen and they are upside on the loan.

So I ask you, who do you think benefited from them getting into that loan program?
Let’s consider some possibilities:
1. They did because it’s a cheaper option than a 30 year fixed rate? Nope that doesn’t really work. It might have been cheaper for 3 to 6 months, but it’s not any more. They have lost over $5000 in equity because they took out this loan. Plus 3 years ago, 30 year fixed rates were in the mid to upper 5%’s, so, paying 8.5% now is definitely costing them more money. So, they are definitely not the ones who benefitted from them getting into that loan program.

2. Their Realtor? It better not have been him because that would be illegal. Realtors aren’t supposed to get kickbacks from mortgage brokers.

3. Their mortgage broker? Ding Ding Ding! We have a winner. I’ll bet you that the broker made 2 to 3 times as much writing them the option arm than he would have if they went with a boring conventional 30 year fixed.

So, there we have it. We have a customer who is in trouble on their mortgage because the rate has gone way up and the only logical benefactor for them getting that type of loan is the mortgage broker.

Until we get a better handle on making sure that mortgage people (I was going to say professionals but that doesn’t apply to all people in the business) start putting the needs of their clients in front of their desire to make more, we are going to see continued problems like this.

As to this customer, I told her that the only way I could see for them to get out the loan they have is to go back to Wachovia and beg for them to modify the loan into a fixed rate. No one else will be able to refinance them because they owe more than what the house is worth.

Oh, that brings up another question – my bank has a second on their house that is partially unsecured now because it’s over 100% of the value of their house. What is the likelihood that we would have done that second mortgage if we had known they were getting an option arm for the first? Brings back the old “wholesale vs. retail” debate doesn’t it?

Happy Saturday!

Tom

I talked to a lady this last week who is a classic example of what’s been happening…..

Without getting into any details that would be confidential information, she and her husband bought their current home in a suburb near where I live. They bought a “moderately priced” home for the area (actually under $200,000) and went to the same mortgage broker they had used for their first home. Well, on this home, they did an 80/20 (2 mortgages, 80% on the first, 20% on the second).

The mortgage broker sold the second to the bank I work for, and sold the first to World Savings (now owned by Wachovia). The second was a relatively normal equity line of credit (more thoughts on that in a few minutes). The first was an option ARM.

Jump three years down the road, and what has happened?
1. The rate on the option ARM has jumped from 3% to 8.5%.
2. Because of the increase in rates, they have had to make the “minimum payment” at times and the balance on their mortgage has gone up.
3. They want to refinance to get out of that loan, but they can’t because property values have fallen and they are upside on the loan.

So I ask you, who do you think benefited from them getting into that loan program?
Let’s consider some possibilities:
1. They did because it’s a cheaper option than a 30 year fixed rate? Nope that doesn’t really work. It might have been cheaper for 3 to 6 months, but it’s not any more. They have lost over $5000 in equity because they took out this loan. Plus 3 years ago, 30 year fixed rates were in the mid to upper 5%’s, so, paying 8.5% now is definitely costing them more money. So, they are definitely not the ones who benefitted from them getting into that loan program.

2. Their Realtor? It better not have been him because that would be illegal. Realtors aren’t supposed to get kickbacks from mortgage brokers.

3. Their mortgage broker? Ding Ding Ding! We have a winner. I’ll bet you that the broker made 2 to 3 times as much writing them the option arm than he would have if they went with a boring conventional 30 year fixed.

So, there we have it. We have a customer who is in trouble on their mortgage because the rate has gone way up and the only logical benefactor for them getting that type of loan is the mortgage broker.

Until we get a better handle on making sure that mortgage people (I was going to say professionals but that doesn’t apply to all people in the business) start putting the needs of their clients in front of their desire to make more, we are going to see continued problems like this.

As to this customer, I told her that the only way I could see for them to get out the loan they have is to go back to Wachovia and beg for them to modify the loan into a fixed rate. No one else will be able to refinance them because they owe more than what the house is worth.

Oh, that brings up another question – my bank has a second on their house that is partially unsecured now because it’s over 100% of the value of their house. What is the likelihood that we would have done that second mortgage if we had known they were getting an option arm for the first? Brings back the old “wholesale vs. retail” debate doesn’t it?

Happy Saturday!

Tom

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