. . . remember the old saying "first, figure out what's wrong . . . next, figure out someone else to blame"?
OK, I'm kidding, the author doesn't actually blame George, a'la climate change, gas prices, etc. I just wanted to get your attention on the attached artical which, I believe, is the best explanation I've yet seen on the mess we're in today. It's well written and the study quoted is based on research, not opinion.
In the credit where credit's due department, this is from the Housing Wire's website. Their link follows the artical.
Learn and be amazed.
Regards, rc
____________________
Subprime Lending Not to Blame For Credit Mess, Says StudyPosted By PAUL JACKSON On July 30, 2008 (8:59 am) In Featured-front, Origination/Lending
It’s almost taken as common knowledge at this point that out-of-control subprime mortgage lending — the funding of home loans to borrowers with less-than-perfect credit — was the chief culprit behind the unsustainable boom in U.S. home prices that eventually derailed the real estate and mortg age markets.
But new research, published Wednesday by UC Irvine’s Paul Merage School of Business Center for Real Estate, suggests that subprime loan products themselves may not have been the primary cause of U.S. home prices’ rise and fall.
Instead, the study argues that the considerable 2003 pullback of government-sponsored financial service corporations Fannie Mae (FNM: 12.20 +5.17%) and Freddie Mac (FRE: 8.85 +5.11%) from the mortgage credit market and their subsequent replacement by aggressive, private mortgage securities issuers in late 2003 had a significant impact on home prices and was more responsible than subprime lending for the drastic price runup that peaked in early 2006.
“We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors influencing the market, but we were really blown away when Fannie’s and Freddie’s continuing presence in the market was shown to be so important,” said Kerry Vandell, UCI finance professor and Center for Real Estate director.
Vandell, along with Major Coleman IV, a finance doctoral student, and Michael LaCour-Little, a Cal State Fullerton finance professor, used 1998-2006 housing and mortgage data from a variety of sources — including First American LoanPerformance, the S&P/Case-Shiller Home Price Indices and the Federal Housing Finance Board — to analyze 20 U.S. metropolitan areas as part of their study.
The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.
But in 2003, political, regulatory and economic factors–including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios–forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital.
The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products, the study’s authors said. It also birthed a borrowing climate that sought to provide previously marginal borrowers with additional access to credit — a movement that was heartily endorsed by the Bush Adminstration, who actively pushed its vision of “the Ownership Society” at that time, as well.
This fundamental credit market shift led to a record increase in total mortgage volume, and pushed up home prices with momentum characteristic of a bubble.
The researchers also determined that interest rates did not significantly affect house prices. The finding defies conventional wisdom that ties interest rates directly to the monthly cost of housing and assumes an effect on purchase prices.
“These findings help us understand that the government can have a major role in affecting the mortgage and housing markets,” Vandell said. “It’s important policymakers consider this influence when they attempt to shape the markets in the future.”
And, in other words, Fannie Mae and Freddie Mac may yet matter more to our mortgage markets than some in the industry might otherwise want to admit.
Disclosure: The author was long FRE, and held no other relevant positions, when this story was published; other indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Article taken from Housing Wire - http://www.housingwire.comURL to article: http://www.housingwire.com/2008/07/30/subprime-lending-not-to-blame-for-credit-mess-says-study/
So – why on earth are jumbo rates so high? . . . and what about that conforming jumbo loan deal that was supposed to provide some relief?
First things first. Fannie and Freddie are limited by charter and regulation from providing jumbo loans. Their maximum loan amount ($417,000 here in E.P. county and much of the rest of the country) is set by median sales price formulas. Fannie, Freddie, and Ginnie (GNMA specializes in fha and va loans) historically provide liquidity to the mortgage market by buying loans from lenders, then securitizing the loan pools and selling those securities to investors.
About 5 to 7 years ago (sorry, didn’t look it up) Wall Street got into the game by doing the same thing – purchasing and securitizing mortgages – only they didn’t play in the GSE’s backyard, they invented and bought loans we had never even heard of . . . alt-a, sisa, nina, pay-option arms, etc. The securities Wall Street sold were insured by third party companies and rated by ratings agencies. This, in effect, became the private-sector mortgage backed securities market we’ve heard too much about this year.
Problem was – that private sector was also where jumbo loans had historically gone to be securitized. When wall street’s house of cards came crashing down this year, it brought jumbo loans with it. Jumbo loans are still available, but confidence in privately-issued mbs (mortgage backed securities) has been so shattered that it now takes much larger rate premiums to attract capital to non-agency mbs issues – which includes jumbo loans. (non-agency means not FNMA, FHLMC, or GNMA).
And how about the “conforming” jumbo loans that Congress temporarily authorized Fannie and Freddie to buy earlier this year?
. . . sorry, only for designated “high-cost” markets, like Boulder County and some of our resort communities – definitely not El Paso county. They haven’t been very successful anyway, but that’s for another time.
So what to do when you’ve got a million dollar house, 20% down, good credit, etc.? Try to convince your buyers that it’s smart to pay-up on a mortgage because “the Street” screwed up the markets? Probably won’t get far with that model. The good news is that the huge spread between rates on conforming and jumbo loans isn’t really very large until you hit the 30 year fixed. Here’s what I mean:
Conventional Jumbo
3/1 arm – 6.25% 3/1 arm – 6.50%
5/1 arm – 6.625% 5/1 arm – 7.00%
7/1 arm – 6.75% 7/1 arm – 7.50%
10/1 arm – 7.125% 10/1 arm – 8.25%
30 yr. fixed – 6.75% 30 yr. fixed – 8.75%
So the longer the rate is contracted for, the larger grows the spread between the conventional conforming rate and the jumbo rate. The optimist in me thinks that I’d probably go for the 5/1 jumbo arm – after all, the rate spread is only .375% and surely the markets will have stabilized and become more liquid by the time my loan resets – so then I’ll refinance into a “saner” 30 yr. fixed loan. The problem with that thinking, of course, is that it makes the famous economist’s assumption of “all things being equal” . . . things like our interest rate environment will be just like it is today, like we’re not living in an energy-driven inflationary spiral, etc. Therein lies the risk, and that’s exactly why you see the spread widening as the promised rate period lengthens.
Hope that makes some sense. If not, or you have comments or additional questions, don't be shy about using the comments feature below.
By Andrea Pescatori and Beth Mowry
The target for the federal funds rate has been slashed three full percentage points since September, from 5.25 to 2.25 percent. Yet, despite this steep drop, the average interest rate on 30-year fixed-rate mortgages has fallen only about half a percentage point—from about 6.4 to about 5.9 percent—over the same time span. Why has the central bank’s aggressive action had such a small impact on these mortgage rates, and what does this mean?
The Fed does not set mortgage rates, but it does set a nominal target for the federal funds rate, the rate at which depository institutions lend their reserve balances to one another, usually overnight (a very short maturity). The fed funds rate in turn directly affects the price of other fixed-income assets of similar maturities and quality (measured in terms of default risk and liquidity); this is the case for short-term Treasury securities, for example. However, as the maturity of an asset gets longer, the link between its price and the funds rate becomes more tenuous. This is because the price of a long-term bond incorporates not just recent changes in the short-term rates of all relevant assets but their expected future short-term rates as well. For example, the spread between the interest rate on a 10-year Treasury note and the federal funds rate has risen recently because the future path of the federal funds rate is expected to go up.
Once we control for maturity, the spread between securities should tell us something about the role that liquidity and risk are playing in pricing the assets. A good benchmark for the 30-year fixed-rate mortgage is the 10-year Treasury note, because 30-year mortgages usually get paid off in 10 years. The spread between the average prime conforming mortgage rate and the 10-year Treasury note has been heading north since the summer of 2007, reflecting turbulence in the mortgage-backed security market, a secondary market for mortgages. With the housing meltdown, pricing mortgage-backed securities, especially the more sophisticated ones, has become even harder, as risk has increased, and liquidity in the mortgage-backed security market has dried up (just think about the billions of dollars in write-downs). An illiquid mortgage-backed security market, in turn, makes the repackaging of mortgages more difficult. Because mortgages are more difficult to repackage, mortgages themselves become less liquid for mortgage originators, who then seek higher compensation for the loss of liquidity. In fact, although the average 10-year Treasury yield has fallen 93 basis points to 3.59 percent since September (when the Fed started cutting the fed funds rate), the average yield for 30-year fixed-rate mortgages has fallen only 50 basis points to 5.88 percent. As a result, the spread between the average 30-year mortgage and the 10-year Treasury note has widened about 60 percent over the past year. The spread stood at 148 basis points in April 2007 and now stands at 233 basis points, having reached its peak of 262 basis points in March at the time of the Bear Stearns bailout. The risk of a financial meltdown clearly affected the prime conforming mortgage rate and even caused its level to increase. More recent data, though, show the spread retreating from its peak, suggesting that the risk of a financial crisis has decreased (as other indexes also indicate).
Compared to the 1990s, the spread between mortgage rates and treasuries is elevated, which suggests that financial markets are still working through their prior excesses. To find levels higher than the current ones, we have to go back to the 1980s, in particular to the early part of the decade, when the spread reached its historic high. This was a time of great economic turmoil, with a high rate of inflation, two back-to-back recessions, and banking deregulation.
Given the excesses that occurred in the housing and mortgage markets, it is not surprising that market participants are being more cautious. Some potential home buyers are holding back, and lenders have implemented tougher lending standards and are charging more for loans. From January 1972 to April 2008 the median weekly spread is about 160 basis points between the 30-year fixed-rate mortgage and the 10-year Treasury note. If this more normal spread prevailed, fixed-rate mortgages would be around 5 percent today, instead of the current 5.88 percent. Until market participants regain confidence, rate spreads are likely to continue to deviate from their historical norm. Had the Fed not lowered the funds rate, mortgage rates would likely be even higher. Assuming there are no more large shocks, it is likely that the spread will ease back to more normal levels, providing a boost to home buyers, who, after all, care about their mortgage rate, not the fed funds rate.
Graphs are available at: http://www.clevelandfed.org/research/trends/2008/0508/01ecoact.cfm
ch-ch-ch-ch-changes
All these items, along with others I'm probably not remembering right now, are changing or have already changed the way we do business. I've written here lately about the importance of establishing expectations of the mortgage process with our customers.
If you'd like an in-person agent staff training on these or other issues for your office, please contact me. I'd be more than happy to share what we know, what we expect, and how to guide your clients through the new maze that obtaining a mortgage has become.
Yes, the industry has now moved to disqualify many prospects who could have been buyers a year ago . . . and potentially, then victims of foreclosure and financial ruin. While that's a good thing, now - more than ever - you and the agents you work with have to be well-informed about today's financial landscape.
Usually the training sessions I conduct are designed to be informative, informal, and fun. . . . there's no test at the end . . . and no hard sell. Of course, I won't be coy and suggest that we don't hope to make a new friend or two, but that isn't the primary objective. We - all of us in the real estate business - have a responsibility to our clients to provide the most comfortable and professional result we can. Our customers demand and deserve no less.
. . . so let us share what we know about this new world we're working in. Give me a call. Look forward to hearing from you.
- best to you and yours - rc
Just got this - if you're an appraiser or use one from time-to-time, this is required reading. The agreement is out for comment now and is scheduled to be implemented on Jan 1, 2009 . _________________________________________________
Home Valuation
Code of Conduct
I. No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:
1) withholding or threatening to withhold timely payment for an appraisal report;
2) withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser
3) expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;
4) conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;
5) requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;
6) providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;
7) providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;
8) allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice
1
(USPAP) or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior;
9) ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process; or
10) any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.
Nothing in this section shall be construed as prohibiting the lender (or any third party acting on behalf of the lender) from requesting that an appraiser (i) provide additional information or explanation about the basis for a valuation, or (ii) correct objective factual errors in an appraisal report.
II. The lender shall ensure that the borrower is provided, free of charge, a copy of any appraisal report concerning the borrower’s subject property immediately upon completion, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the appraisal.
III. The lender or any third-party specifically authorized by the lender (including, but not limited to, appraisal management companies and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third-party (including mortgage brokers and real estate agents).
IV. All members of the lender’s loan production staff, as well as any person (i) who is compensated on a commission basis upon the successful completion of a loan or (ii) who reports, ultimately, to any officer of the lender other than either the Chief Compliance Officer, General Counsel, or any officer who is not independent of the loan production staff and process, shall be forbidden from: (1) selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender; (2) any communications with an appraiser, including ordering or managing an appraisal assignment; and (3) working together in the same organizational unit, or being directly supervised by the same manager, as any person who is involved in the selection, retention, recommendation of, or communication with any appraiser. If absolute lines of independence cannot be achieved as a result of the originator’s small size and limited staff, the lender must be able to clearly demonstrate that it has prudent
safeguards to isolate its collateral evaluation process from influence or interference from its loan production process.
V. Any employee of the lender (or if the lender retains an appraisal management company, any employee of that company) tasked with selecting appraisers for an approved panel or substantive appraisal review must be (1) appropriately trained and qualified in the area of real estate and appraisals, and (2) in the case of an employee of the lender, wholly independent of the loan production staff and process.
VI. In underwriting a loan, the lender shall not utilize any appraisal report prepared by an appraiser employed by:
(1) the lender;
(2) an affiliate of the lender;
(3) an entity that is owned, in whole or in part, by the lender;
(4) an entity that owns, in whole or in part, the lender
(5) a real estate "settlement services" provider, as that term is defined in the Real Estate Settlement Procedures Act, 12 U.S.C.§ 2601 et seq.;
(6) an entity that is owned, in whole or in part, by a "settlement services" provider.
The lender also shall not use any appraisal report obtained by or through an appraisal management company that is owned by the lender or an affiliate of the lender, provided that the foregoing prohibitions do not apply where the lender has an ownership interest in the appraisal management company of 20% or less and where (i) the lender has no involvement in the day-to-day business operations of the appraisal management company, (ii) the appraisal management company is operated independently, and (iii) the lender plays no role in the selection of individual appraisers or any panel of approved appraisers used by the appraisal management company.
Notwithstanding these prohibitions, the lender may use in-house staff appraisers to (i) order appraisals, (ii) conduct appraisal reviews or other quality control, whether pre-funding or post-funding, (iii) develop, deploy, or use internal automated valuation models, or (iv) prepare appraisals in connection with transactions other than mortgage origination transactions (e.g. loan workouts).
VII. The lender will establish a telephone hotline and an email address to receive any complaints from appraisers, individuals, or any other entities concerning the improper influencing or attempted improper influencing of appraisers or the
appraisal process, which hotline and email address shall be attended only by a member of the office of the General Counsel, Chief Compliance Officer or other independent officer. In addition: (1) each appraiser now or hereafter on any list of approved appraisers, or, upon retention by the lender, will be notified, in a separate document, of the hotline and email address and their purpose; and (2) each borrower, as part of a cover letter accompanying the provided appraisal, will be notified of the hotline and email address and their purpose. Within 72 hours of receiving any complaint, the lender will begin a preliminary investigation of the complaint and upon completing the inquiry (or, after a period not to exceed 60 days, whichever shall come first) shall notify the Independent Valuation Protection Institute and any relevant regulatory bodies of any indication of improper conduct. The name and any identifying information of the person or entity that has filed such a complaint shall be kept in strictest confidence by the office of the General Counsel, Chief Compliance Officer or other independent officer, except as required by law. The lender shall not retaliate, in any manner or method, against the person or entity which makes such a complaint.
VIII. The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, of a randomly-selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations which are used by the lender, including the results of automated valuation models, broker’s price opinions or "desktop" evaluations. The lender shall report the results of such quality control testing to the Independent Valuation Protection Institute and any relevant regulatory bodies.
IX. Any lender who has a reasonable basis to believe an appraiser is violating applicable laws, or is otherwise engaging in unethical conduct, shall promptly refer the matter to the Independent Valuation Protection Institute and to the applicable State appraiser certifying and licensing agency.
X. The lender shall certify, warrant and represent that the appraisal report was obtained in a manner consistent with this Code of Conduct.
XI. Nothing in this Code shall be construed to establish new requirements or obligations that (1) require a lender to obtain a property valuation, or to use any particular method for property valuation (such as an appraisal or automated valuation model) in connection with any mortgage loan or mortgage financing transaction, or (2) affect the acceptable scope of work for an appraiser in connection with a particular assignment.
What's vitally important right now is that we all understand . . . and communicate to all our clients . . . how tremendously difficult it is to get a new mortgage loan from application to the closing table. The money's still out there and available at historically good rates. There are certainly great deals to be had in real estate, both new and existing homes. So what's the problem - right?
The problem is that the companies that still exist are here because they were more conservative than their now-failed competitors. They have carried that conservative style forward into today's market. Underwriting is now "forensic". Back in the day, an underwriter confirmed the borrower's qualifications and approved the loan. Today, an underwriter is charged with identifying any risk they can see or imagine - then requiring documentation to prove beyond a doubt that the imagined risk does not exist. In other words; guilty until proven innocent.
It's extremely distasteful to the loan officer to have taken what they believed to be a good, complete, well-documented file; then find out a few days before closing that there are additional "proofs" required of their borrowers. We all know what that stress feels like. Closing dates might need to be extended; borrowers are upset, feeling that they're being accused of something; agents are upset; the loan officer's probably more upset than anyone because he/she knows that last-minute conditions are a negative reflection on their expertise. All that equals high stress for all parties involved.
What to do?
The foundation of high customer satisfaction is expectations met or exceeded. It's our job to establish those expectations. If you give your client the 'heads-up' that the mortgage industry is playing all-defense, virtually no offense - they won't be frustrated and upset when what you told them to expect actually occurs. Let your clients know that more tedious review of their loan qualifications is the norm today. Let them know that pre-closing quality control audits of their file might create last-minute requests (man, I hate even writing this). It might not make the situation exactly enjoyable, but at least they'll nod their heads and think "this is just what they told me to expect - I'm glad I'm working with an expert".
Why Bailout May Be The Only Saving Grace
ECONOMIC NOTES
Monday
February 11, 2008
The biggest news of last week: the off-the-table January ISM survey (the ineptly re-named purchasing managers’ association), one of the very best real-time indicators, the 54-to-41 plunge the worst monthly result ever. A general intake of breath followed, not yet released. January retail sales were the worst in five years; credit cards declined in use and increased in distress; and Wal-Mart reported, sadly, that shoppers are using holiday gift cards to buy necessities -- diapers, pasta sauce, and detergent.
The only questions remaining: how deep and how long the recession?
This one is different in pattern from others (save perhaps ’91-’92 affair, a micro-mini crunch). By summer ’07 consumers were stressed by energy and housing, but the economy was still rolling along when the August Crunch began to tip it over. Standard recessions are consumer-first, then financial and credit trouble; this is vice-versa. Caught by atypical surprise, policy makers have floundered and flinched.
The problem: the August revelation of some $4 trillion in troubled assets. They had accumulated for years under the pretense of performance, but deteriorated steadily since ‘05. Each banker knew his own trouble, and in flash chain reaction each stopped dealing with his peers for fear that they were in as bad shape as he. Crunch.
That crunch was symptom, not cause. Since August we have been in an episode of “House”: while the Fed medicated the interbank symptom, the actual disease worsened, the crunch broadened, the economy deteriorated, and new symptoms forced the Fed into an undignified rate cut. Four times the Fed has cycled this way, patient sinking.
Enter Congress. Treasury Secretary Paulson set up Mr. Bernanke as messenger boy to plead for spending stimulus. New medication, wrong disease. There’s a lot we could do with $160 billion (one-fifth would have re-capitalized the bond and mortgage insurers, preventing perhaps hundreds of billions in write-downs ahead). This package will do nothing for the underlying problem, and was unnecessary: the Federal deficit has suddenly exploded from $150 billion to $400 billion, stimulus aplenty.
Bad ideas are pouring from pols and regulators, trying to get foreclosure toothpaste back into the tube instead of working on the real problem ($4 trillion...). There is no solution to foreclosures; most of these households were bad credits to begin with.
Brand new from energetic but dim Sheila Bair at FDIC: forgive loan balances (Whose? Ours? Please?). Increase the speed of workouts (From zero and pretending, to what?). Senator Dodd: intercept foreclosures by Treasury purchase of bad loans (Why just those?). Mrs. Clinton: freeze rates (ARMs began in 1980, rates fell for 25 years, and the first time rates go up, cancel the contracts?). Freeze foreclosures for 90 days (What to do on day 91?). James Lockhart, regulator of Fannie and Freddie, working overtime to disrupt their mission (Mr. Power-Freak, we created them for this moment!).
Fellas... look: What are you going to do with the $4 trillion in bad paper? The “plan” seems to be to leave most of it in the banking system, financed by central bank credit. Hapless investors hold an unknown fraction, paralyzed as new buyers of securitized credit. The Fed-reduced cost of money will widen banks’ investment spreads, increase earnings and over time generate new capital. Over time. Meanwhile -- years -- the financial system cannot provide new credit because of the rotting mess in its belly.
Why are mortgage rates stuck up high, at just the moment that housing is desperate for cheap, well-underwritten credit? Banks cannot buy new Fannies, Freddies, and Ginnies because they are short of capital. Rather worse, they face new losses, balance sheets crowded with bad assets. So, they are sellers of the only good stuff they have. Sellers of our stuff. Sellers.
We would very much like to be proven wrong, but the word is “bailout”: extract the rot from the system and put it into a nouveau RTC. Then markets can function.
Economic Notes is published weekly by the Economics Department of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2008, all rights reserved.
Another excellent question - glad I asked.
5 steps to the answer
Let's look at an example:
In this example, you're looking at a zero risk "return" on the money you invested in the transaction of almost 70% year-after-year. Now before all you finance majors call me to remind me that this is not a true ROI (Return on Investment) calculation . . . I know that. It doesn't consider that you're probably looking at a new 30 year term. It's not a true IRR (Internal Rate of Return) calculation because it doesn't consider the time value of money; it's not a NPV (Net Present Value) calculation for the same reason. . . . but it is a good way to think about whether or not to refinance your mortgage today.
You need to answer the simple questions "what does it cost and what do I get?" If the person you're talking with can't or won't provide these answers for you, go find someone else to talk with - they don't deserve your business because either they're ignorant or they're trying to kid you. This ain't brain surgery folks; unfortunately, mortgages can be complicated and we can lose track of the forest for the trees. If you focus on the "what does it cost and what do I get" pieces though, you'll stay on the right path.
. . . of course you could always call us and we'll happily walk you through it - we get paid to do stuff like that :o)
Enjoy "the dance" - rc
Here's another timely piece by the econ. department of Universal Lending up in Denver. Universal is a business partner of ours and this particular article contains important concepts driving mortgage interest rates today . . . particularly if you're a Realtor with clients who have decided to wait for lower interest rates before they buy - rc
"Contrary to the conviction of deeply confused civilians and reports by lazy news media, mortgage rates are unchanged, about 5.75% for the lowest-fee 30-year paper. If you don’t believe us, visit www.freddiemac.com and its weekly survey. It is unbiased by sales jive, although it suffers from “survey lag” (early-week data released on Thursdays always misses real-time reality), and assumes a fractional origination fee. Last week’s “5.48%” captured the one-day hysterical bottom when the industry could not log onto rate-lock websites. Last Thursday’s “5.68% plus .4% origination” is still about right, and all but identical to the prior week’s “5.69% plus .5%.”
Yet, the media refer constantly to “dramatically lower mortgage rates.” They are better, but... drama? Freddie’s average for the whole of 2007 was 6.34%. A half-percent drop is nice for buyers, and a help to a few refinancers, but no fire sale. “How can it be the same...!?!” says the client, after a cumulative 1.25% cut at the Fed in only eight days? Answers follow.
Brand new January economic data are not that bad. Says here not bad enough to justify the Fed’s panic, let alone to anticipate more cuts. Payroll growth slipped to flat in January (negative 17,000 is within the huge range of error and revision), unemployment down to 4.9% in a workforce statistical quirk -- soft, but hardly a recession. The purchasing managers reported their first gain in six months, likewise soft, but with persistent strength in foreign orders. 4th quarter GDP grew by a mere .6%; however, aside from a temporary drawdown of business inventories grew at 2%.
The Fed’s form is disturbing to long-term investors. Central banking is not figure skating, but Mr. Bernanke has departed his predecessor’s 17 years of gradualism for lurching on the rink. A Fed that will lurch down will lurch up.
Investors bought long Treasurys and mortgages at these levels 2002-2004 because Mr. Greenspan said after every meeting into 2006: Excessive monetary stimulus most likely will be “removed at a measured pace.” Translation: you’re safe for now, and we’ll give you time to get out before we kill you.
In those late Greenspan years, deflation was the problem. Today, inflation is rising all over the world. Australia, 16-year-high 3.8% core; Europe 14-year-high 3.2%; UK 2.6% core; China 6%-plus, and an economy completely out of control beginning to export inflation to us. Each time the Fed has lurched to a catch-up ease, all the way back to August, it has rescued stocks, commodities, oil, gold, and tanked the dollar.
We have chewed on the Fed for its inaction and credit-wreck oblivion. However, this situation is NOT a monetary problem: it is a bankingsystem near-insolvency that may morph into a recession, each making the other worse. The crying need for six months has been transparency of credit loss and bad-asset firewall. Cuts in the overnight cost of money may intercept recession, but inflation means that these cuts cannot be maintained or removed at a measured pace.
A central bank chairman must be prepared for the ultimate sacrifice: no tough inflation problem was ever solved by slow growth. It takes a recession. It takes higher unemployment and crushing the commodity spiral. To get long-term rates down, Mr. Bernanke must get the good out of this slowdown: he must let it get ugly. Instead he has rescued inflation-pushing markets again and again.
Two non-Fed forces holding up mortgage rates: credit fear about Fannie and Freddie has the spread between mortgages and the all-defining 10-year Treasury (3.57% on the 1st) over two percent for the first time ever. Second, somebody by accident may arrive at an effective credit-wreck bailout: the giant bond insurers, Ambac and MBIA may be resolved in days. If no collapse, then credit fear will give way to inflation fear.
The Fed’s cuts have had a dramatic effect on ARM adjustments, and should revise estimates of housing doom to the better -- also reducing bond-market fear. This month, common one-year Libor-floating loans will adjust DOWN to 5.125%."
So BofA and CW have inked a deal. So what?
If you're a mortgage banker or mortgage broker who always looked to CW for product, you could well be wondering if they'll remain active in the wholesale and correspondent channels after the acquisition. Most of those acquainted with B of A think the wholesale channel will disappear quickly upon purchase . . . and they're not too convinced about correspondent. Those opinions are driven first by B of A's history, but more so by the notion that the real value in CW is the "book" of mortgage clients they provide loan servicing for. That book of serviced clients is of real value to a bank that wants to cross-sell banking services. Of course CW also maintains thousands of retail offices that may be attractive to B of A in regions where they have no current footprint. So whether or not the merged companies will continue to provide mortgage product to bankers and brokers in the fashion that CW excelled at is an open question. I'd be busy covering my bases with alternative investors right now if I were you.
If you're a CW employee today, you've gotta be nervous. As an employee, one can usually look to the value one brings to his/her employer when judging job security. In a case like this, however, not knowing the acquirer's proposed business plan is the scary part. While you may be providing obvious value to the current business plan/platform - the new "plan" may not include your market . . . or your position could be eliminated by consolidation . . . or the products you made a good living by selling may be eliminated . . . or . . . etc, etc. I'm not trying to ruin your day, just hate to see anyone surprised. Most companies that agree to a takeover rush to tell their employees not to worry, that everything will stay pretty much the same - after all, they want us because we're a successful business, right? Well . . . first, stop to remember that if the company disintegrates prior to the closing of the deal, the deal probably won't close, so it's in the speaker's self interest to try and preserve what "is". Second, never - never forget that the executives of a public company owe their loyalty to only one person - and it's not you - it's the shareholder. If shareholder value is increased by eliminating your position, then your position is eliminated . . . period . . . the end. Frankly, I'm surprised that B of A made the proposal in the first place. The mortgage business is frightfully cyclical on the origination side of the house and most public co. CEO's hate cyclicality because of what it does to earnings and stock prices. The other factor that B of A's buying into is the difficulty of hedging the asset value of the servicing portfolio, which also moves dramatically - and, of course, who can forget the concern over "what we don't know" about where and how big is the "toxic assets" number that aren't discovered and thus not reflected in CW's financials.
Oh, btw, according to WSJ>com today,
"Countrywide Financial Corp. shares dropped nearly 10% Friday amid growing investor fears that Bank of America Corp. could walk away from its agreement to acquire the struggling home-mortgage lender.
Countrywide shares were at $4.96 in 4 p.m. composite trading on the New York Stock Exchange Friday, a 12-year low, down from $5.48 Thursday and $6.33 on Jan. 11, the day plans were announced for a merger in which shareholders would get 0.1822 Bank of America share for each share in the mortgage company. Based on Bank of America's closing of $35.97, the offer values Countrywide at about $3.8 billion, or $6.55 a share."
Again, I'm not trying for drama here - I have lots of good friends and colleagues at CW and only want the best for them - which might just be with a different employer . . . as quick as you can.
Hope I'm wrong, but . . .
Hope your week is great! rc
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