Tuesday, October 28, 2008

Monday, October 20, 2008

2009 Conforming Loan Limits

The Federal Housing Finance Agency (FHFA) expects to announce 2009 conforming loan limits for Fannie Mae and Freddie Mac by November 7.

The limits define the maximum loan size of mortgages that can be purchased by the Enterprises. You may recall that under the Housing and Economic Recovery Act of 2008, FHFA was directed to set conforming loan limits each year for the nation as a whole as well as for high-cost areas. The rules governing how the loan limits are established differ from the rules set forth in the Economic Stimulus Act of 2008 (ESA), which applies to loans originated in 2008.

For example, under ESA, loan limits for high-cost areas were set at 125% of local house price medians and the maximum high-cost limit was 175% of the national conforming limit ($729,750 in the continental U.S.)

Under HERA, the high-cost area loan limits are 115% of local price medians up to a maximum of 150% of the national limit. In 2009, if the national limit remains at $417,000 for one-unit properties, the maximum limit in high-cost areas would be $625,500 for the continental U.S.

To determine high-cost area limits under HERA for 2009, FHFA will use median home values estimated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). The FHA median prices will be calculated in the coming weeks by FHA for the purpose of determining its 2009 loan limits. The latest release from FHFA can be found here.

Why do Mortgage Rates Seem So High in This Market?

A few factors are contributing:

· In order to fund the rescue and the new government guarantees, our Treasury must sell more new Treasury securities to raise money. And the Treasury has to offer higher interest rates to sell them.

· Mortgage related bonds always trade at a slightly higher yield due to the prepayment and delinquency risk.

· The cost of financing mortgages has increased for Freddie and Fannie due to the plan for the FDIC to back the newly issued, unsecured debt of some banks. By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields - and to pay for that they'll have to charge borrowers higher interest.

· And in case anybody forgot, we had ‘the panic of 08’ the week before last. A massive liquidation of assets occurred, as people and institutions converted stocks, bonds, and everything else into cash. Mortgage bonds plummeted in value like everything else, causing the rates to spike. We saw the average 30 year fixed go from 5.9% to 7.05% in one week. Nobody is rushing back into this market… mortgages are tied to housing, and housing is at the epicenter of this entire financial crisis.

We are in seldom-explored territory, if not uncharted waters altogether. The risk of waiting for the market to come your way exceeds the risk of inking a deal at a rate that 'just has to come back down. If you have a deal on the table, close it. If you want to see what I mean in numbers, email me.

Monday, October 13, 2008

Why There Are Critics Of The Bailout/Rescue Plan

It's because of complicated concepts like this one, brought to light by David Kotok of Cumberland Advisors, in his September 24 piece titled "Helicopter Hank". He writes:

"... With the government holding a large portfolio of mortgages, the Fed's ability to fight inflation will be conflicted, because each increase in interest rates will impose capital losses on those holdings, making it mroe difficult to sell them back to the marketplace and delaying getting them off the Fed's and government's balance sheets..."

A little hair on this dog, so it goes. Raise rates to fight inflation, see the value of the bond holdings and mortgage securities go down. Makes sense. This does not mean the plan by and large won't work, but this is one of potentially several conflicts within the plan that are open to debate.

Thursday, October 09, 2008

Feedback Loops - I Raise My Hand And Ask, "Is There Homework?"


Scientists must be folding their arms and shaking their heads at the financial industry. The financial media and economic discourse of the day has adopted the term "Negative Feedback Loop", a term that originated in scientific labs, to describe the downward spiraling momentum of our economy (housing values go down, more people are encouraged to sell, foreclose, etc, and that causes values to go down further, and round and round we go...).

The market action systematically feeds its result back into the force that caused it to do what it just did. A feedback loop. Have you ever stood between two mirrors, and looked at your reflection, and then the infinite reflections of your reflection behind it? Its like that.

Problem is, we've got the name wrong. This may sound like I'm picking on a technicality here, but I think it points to a bigger problem.

A "Negative Feedback Loop" sounds like the right way to describe what we are seeing in the economy. But a true Negative Feedback Loop is one where the output of the system works against the system, causing it to lose momentum, and return to equilibrium. What we have here is a Positive Feedback Loop, or one where the output reinforces the input. The result is an increasingly negative impact on our economy, so its easy to understand the confusion. We had another Positive Feedback Loop that fed the mania side of the cycle as well.

A snowball rolling downhill, growing in weight, causing it to keep rolling, is a Positive Feedback Loop.

Why do I split hairs here? The widespread adoption of an erroneously illustrated concept just begs the question of who is doing the thinking out there, and who is doing all the talking. The mainstream media just takes it in on one side, spits it out the other, no regard for accuracy or perspective. All of the talking heads, the so-called experts, the pundits, the authorities, they're all confused like the rest of us about the big picture.

And it's a tough issue to figure out, so confusion is understandable. But our electable leaders and policy makers would serve us all well to admit what they don't know. Seems to me they feel a need to convince us that they do know, and the next thing you know, they're acting on their contrived and false sense of confidence. And let's face it, since 8 out of 10 Congressmen have no formal education in economics, most of these folks are expert at one thing, and one thing only: getting votes.

The bomb has gone off in the markets, and there's a lot of dust flying around. Those of us who slow down and focus while everyone else runs around screaming, are going to be the first to see what the new landscape looks like.

Tuesday, October 07, 2008

2008 Q3 Financial Dictionary

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no “fun”.
BROKER -- What my financial advisor has made me.
BULL MARKET -- A random market movement causing an investor who mistakes himself for a financial genius.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
INSTITUTIONAL INVESTOR -- Former investor who's now locked up in a nuthouse.
MARKET CORRECTION -- The day after you buy stocks.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
PROFIT -- An archaic word no longer in use.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
VALUE INVESTING -- The art of buying low and selling lower.

Friday, October 03, 2008

Revised Emergency Economic Stabilization Act

The bailout bill. The recovery bill. All the controversy, all the market whipsaws, the panic, the debates, the politics. It passed today. Signed by the president. Want to know the details? Here's 451 pages of weekend reading for you.

Wednesday, October 01, 2008

Worth A Watch - Bird And Fortune

Bird and Fortune - Subprime Crisis