So Much For The Soft Landing Theory?

Holy smokes! The market is changing quickly, as the 'other side' of the cycle has arrived with a thud. Rates and products in the mortgage market are changing rapidly, and many homeowners are going to get caught up in the crossfire. Last week at American Home Mortgage, 800 Million dollars of would-be loan funds piled up in just 3 days as the company announced that it would not fund deals that had already signed. Forget those in underwriting, application, etc. 800 Million dollars - that's a lot of homes! Think of the domino effect of broken purchase contracts, failed credit payments, etc. This kind of spiral is what causes the market to buckle, and why a quick change in liquidity is referred to as a "crunch" or "crisis". Read more about it here, or here, or here.

As for today specifically, Mortgage Bonds are trading higher on unexpected news from Europe connected to US sub-prime mortgage investing problems, as well as Stocks trading lower off the same news. French Bank BNP Paribas, second largest bank in Europe, announced it has temporarily halted withdrawals in three of its mutual funds that have exposure to US subprime credit. As you can imagine, investors like you and I, who are told that their own funds are not available for withdrawal, would be quite worried. In the day's only economic news, Initial Jobless Claims edged higher by 7,000 claims to 316,000, the highest weekly total since June 30 - a positive factor for the Bond market.

I often talk about the book "Manias, Panics and Crashes". About a year ago I started reading this book again, and everyone looked at me like I was a doomsayer. But there is so much historical information in this book that can be applied to the current situation. It gives a detailed look at the anatomy of an asset cycle, and when and where systemic breakdown can occur. Rather than stick your head in the sand, take a look at it and consult with a professional about your finances, so that you can be sure you are prepared to weather this storm in housing and the mortgage market. Are you liquid enough to get through this?? It promises to get at least a little uglier before the dust settles. But this correction will be healthy for the long run.