Real Estate Finance & Mortgage Planning, John Glynn, CMPS

We've Moved!

2011-02-01T23:56:00.000-08:00

pssst! wake up!

Hey there, sorry it's been so quiet for so long. I've been working on a new website, and things got a little hectic there this past year.

I'm finally up and running, and wanted to let you know that no more posts would be coming through at this site.

The new site is BayAreaRealEstateFinance.com

I've still got a lot of work to do on the site, but I expect to be rolling new content through there going forward.

So head on over, and sign up for RSS or email updates. Let me know what you think, I'd love the feedback.

Thanks!!

I'm Workin' on it!

2010-05-14T14:40:00.000-07:00

Hi - thanks for stopping by!

I'm working on a new site, and have been kind of quiet over here lately - sorry! If you're interested in hearing about the new site when I launch it, send me an email and let me know...

Thanks!

How To 'Greece' A Credit Crisis

2010-02-17T09:36:00.001-08:00

I love the parable offered by David Kotok at Cumberland Advisors in a recent market commentary, a link to which you will find below.

“My Big, Fat, Never on Sundays Story.”

It is the month of February, on the shores of the Adriatic Sea. It is gray and raining. The little Greek town looks totally deserted.

It has been many months of tough times; everybody is in debt and everybody lives on credit. The government has run out of money and the unions are constantly striking but getting nothing because there is nothing left to be gotten.

Suddenly, a rich German tourist comes to the village. He enters the town’s only hotel, lays a 100 euro note on the reception counter, and goes upstairs to inspect the rooms in order to pick one.

The hotel proprietor takes the 100 euro note and runs to pay his debt to the butcher.

The butcher takes the 100 euro note and runs to pay his debt to the pig grower.

The pig grower takes the 100 euro note and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 euro note and runs to pay his debt to the town's prostitute, who, in these hard times, provided her services on credit.

She runs to the hotel to pay for the rooms she rented on credit when she brought her clients there. She hands the proprietor the 100 euro note.

He lays the note back on the reception counter so that the rich tourist will not suspect anything.

A minute later, the wealthy German comes down the stairs, announces he did not like any of the rooms, puts the 100 in his pocket, gets into his Mercedes, and drives away.

There were six financial transactions. No one earned anything. Nothing was added to GDP. However, the whole town’s debt-GDP ratio changed dramatically. The village folks are now out of debt and look to the future with a lot of optimism.

Oh, if it were only so easy?

You can see more context to this in the commentary piece, and also other fantastic coverage of the sovereign debt issues, and whatever else may be going on in the market at the given moment at the Cumberland Advisors website.

Quote - Got Me Thinking...

2010-02-10T19:43:00.000-08:00

I came across this quote in a recent investment newsletter (you can read it here). It's worth pausing on to consider the relevance in today's environment. Not making a political statement; I'm more optimistic than this.... just waxing philosophical... let me know what you think.

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy..."

- Alexnder Fraser Tytler, Scottish lawyer and writer, 1770

White Collar Thuggery - "Give me your Breitling! And the Rolex!"

2010-02-10T14:16:00.000-08:00

Financial ruin isn't pretty. No question, the burst bubbles of the credit and real estate industries have put more than a few people out on the street. The ugly, sputtering, desperate last spasms of a business persona failing to cling on is exemplified by this story from the Boston Globe. I love the juxtaposition of the behavior - shake downs, threats, extortion - with the high class imagery of designer watches and fancy restaurants.

Another Piece of Evidence to Support the 'Evil Banks' Argument

2010-02-01T00:13:00.000-08:00

Wow. This is pretty ugly. Caught on tape, here is a conversation between a real estate agent trying to facilitate a short-sale, where there are two lenders on the property.

Bank one is going to accept partial payoff, meaning they will not recover 100% of the loan out on the property. But they do get 100% of the proceeds of the sale.

Bank two doesn't get a dime. Therefore, they have zero incentive to approve the sale, and in fact, they have an incentive not to - it helps them avoid digesting the loss on their current balance sheet.

So how do these deals get done? Well one way, as in this recording, is for the 2nd lender to bribe the real estate agent and demand that they pay them privately. Which is a violation of federal real estate settlement practice laws.

In a good showing for real estate agents, this one is clearly aware of and concerned about the conflict and the related ethical issues. Listen to how the bank administrator tries to bully them into complying.

Not pretty. Watch for more of this to bubble up to the surface and hit the news. There's a lot of murmuring about this practice going on right now.

Why Your Lender Will Not Approve Your Loan Modification

2010-01-31T20:27:00.000-08:00

Loan Modification has been all over the news for the last two years, as the Credit Crisis /Housing Bubble / Mortgage Meltdown debacle has played out and left many a homeowner trapped with a burdensome loan on an un-lendable property or in an un-lendable circumstance.

I've been right there with you trying to see past the smoke and mirrors to find out if modifications actually work. And when most inquiries end up being answered by snake oil salesmen, it's pretty easy to get discouraged. The media has made a sport out of exposing some of the worst con artists out there preying on vulnerable, desperate homeowners.

But when the White House came out with a "Home Affordable Modification Program" (HAMP) last year, there was some promise in the idea of a sanctioned and systematic approach to the process. And then the numbers just didn't show up. Sure, there have been some modifications, but not nearly as many as there are distressed homeowners. Banks are not just handing these out.

So why not? Because tt's a waste of money. A lost cause. The Boston Federal Reserve puts it to numbers in a recent paper. You don't have to even read past their title to get into the arguments, but there are some interesting data in the paper for the statistically-inclined.

Securutization makes it logistically difficult for lenders to identify the end-invesors and modify terms
Redefaults occur in roughly 1/3 of modified cases, thereby rendering the effort wasteful
Self-cure occurs in roughly 1/3 of untouched delinquent cases. Another 'why bother?' argument...

I find the self-cure idea particularly interesting, as it doesn't paint the picture of a vortex of distress in the housing sector like you hear from other sources. It may be a little early to tell still, but i's going to be something to keep an eye on.

Looking Ahead at Mortgage Rates

2009-12-31T12:27:00.000-08:00

The NY Federal Reserve is, and has been, the biggest buyer of Mortgage-Backed Securities for all of 2009. This helps push mortgage rates lower, and that's why they allotted for a 1.25TN budget over a 15 month period. It is set to expire at the end of Q1 2010.

This week, their purchasing volume is down significantly. ~9BN this week. For the past few months, they had been closer to 16BN per week, and a few months earlier they were consistent at 25BN per week.

It makes sense that as they near the end of their budget, they will slow the volume. Otherwise, their departure from the market would create a demand vacuum.

Many speculate that mortgage rates will quickly return to the levels that predated the Fed buying campaign. But I don't think it will be that severe - that environment had a number of different dimensions that do not apply today. That said, it's helpful to note what has happened to rates this week (up) as the Fed's buying changed (down).

Strategic Default and the Fading Stigma of Foreclosure

2009-12-30T15:44:00.000-08:00

It's important to pay attention to the sociological dimensions of the financial crisis (aka Great Recession) as it continues to evolve.

I think this article on SocketSite touches on a very interesting point. Social dynamics are at play as well as financial ones on the path to a mortgage loan default and foreclosure. But as the 'bug' spreads, and more and more of us know people who have faced foreclosure, it becomes less of a Scarlet Letter. And that implies that the social reasons to avoid foreclosure get weaker as it becomes more prevalent around us. It's a snowballing effect.

So before we are able to truly bottom, we need to combat this force as well as the purely economic ones.

Note - the study referenced here suggests that 1 in 3 California mortgage defaults in 2008 were strategic, which represents a 16x increase from the rate only 4 years earlier.

Price Discrimination and Landlording

2009-12-18T13:48:00.000-08:00

You've got to wonder about the owner who rented out this home. There are a lot of 'accidental landlords' out there, and maybe this is an upside-down, about to be foreclosed upon investment. But no matter what, I hope this homeowner charged a premium for rent based on tenant selection.

Unemployment Over Time - Nice Visual

2009-12-08T15:30:00.000-08:00

Here's a great visual representation of the unemployment trend over the past few years, laid out by county for the entire US. Takes about 15 seconds to get the point across.

Are You Getting Tired of Being Outbid?

2009-11-25T11:00:00.000-08:00

The Currently Frustrating First Time Buyer Landscape It has been an amazing transformation in the housing market - multiple offers scenarios are back in a major way, primarily on lower-end price ranges. Just a few months ago, it seemed there were 20 listings for every willing home buyer.

Not any more.

Today, first time buyers are FRUSTRATED when they make an offer and lost in the piles of offers, which in some cases are 30, 40 even 70 other offers! And within those offers, many of the would-be buyers are investment groups, buying with cash. It's big money squeezing out the smaller money. Just like that. First time buyers are getting boxed out.

This is frustrating when you think of the psychology of the today's first time buyer. They're overcoming quite a lot of fear and uncertainty after watching the devastation that has hit the housing marketplace in the past few years. Is now the time? Think of the nerves this requires! And on top of that, there's a sense that these buyers deserve a shot, since they weren't a contributing factor in this whole messy episode in the first place. Right or wrong, I can understand that feeling.

Frustrating.

Get Ready For a New Resource

Fannie Mae's "First Look" program is about to come online. Fannie Mae has a large inventory of foreclosure homes, just what the investor groups are after. But that's also what a lot of first time buyers see as good price opportunities. Here's how First Look is going to help:

* reducing deposit requirements to as little as $500
* renegotiate offers after appraisals
* up to 45 days to complete transaction, up from usual 30 days

Fannie Mae's intent is to provide easier access to this inventory for owner occupants. This is not restricted to first time buyers, but it will absolutely affect that sector of the market if the program comes around as intended.

If you have any questions about this, feel free to email me.

Rewind: Retirement Overconfidence, April 2006

2009-11-13T08:33:00.000-08:00

In April 2006, I was in Chicago preparing to give a best man toast at a wedding. I jotted down some notes on something I had with me for reading material. And this morning, cleaning out some stuff in my office, I came across the notes, turned them over to see what I had written on.

"Workers have Retirement 'Overconfidence'"

Wow. This was 3.5 years ago, and the study that the above article references indicated that 68% of workers surveyed reported that they were confident about their retirement savings. It also suggested that 53% of them had less than 25k saved for retirement.

That sounds like a horrible mis-match, but to me, that's only ~21% that are delusional for certain (assuming the 32% NOT confident are all in the group that has less than 25k saved so far.)

But 77% had less than 100k saved for retirement. When we retire at ~67, and live to 78 (78 is the US life expectancy as of 2007), that 100k isn't going to provide much of a Winnebago budget if it has to last for 11 years.

SIDE NOTE- And at least one prominent US doctor believes the first person to live to age 150 is currently a man in his mid-50s. Read that again. Do you still want to plan to retire in your 60s?

So where are they now? I'd love to see what the current survey says. How many are confident about their retirement planning now that we've passed into this era of economic crisis. How much has it affected confidence? (How much has it affected savings?). And how will it shape our expectations, planning, and savings habits going forward?

Tax Credit Expansion and Extension - Best FAQ Resources

2009-11-09T10:07:00.000-08:00

Take your pick:

Straight from the horse's mouth: IRS
User-friendly page from the National Association of Home Builders

The NAHB site was put up in a hurry. They want to sell you homes. Great motivation to put together a clear communication on the subject. Check it out.

Weekly Rate Survey on Mortgage-x

2009-11-09T10:00:00.000-08:00

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: Over the next 30 days rates will decline slightly; over the next 90 days rates will remain unchanged.

Comment by John C. Glynn: No signs of inflation anywhere, and wide profit margins from lending institutions; there's fat to be cut even if the inflation specter pops up. I see a lid on rates for a while."

See what others say.

Tax Credit Update - Move-Up and First Time Buyers (APPROVED)

2009-11-06T11:08:00.000-08:00

Obama has just signed the tax credit expansion/extension into law. It affects first time buyers, and now some move-up buyers as well.

Last week while this was still making its way through Congress, I asked readers to comment on how such a change might affect them. I received a good number of responses. Here are some highlights:

68% of responses were generally positive in response to the credit
37% indicated specifically that this credit would have positive implications for our general economic health
16% indicated that this specifically urges them along in plans that were loosely taking shape as-is
0% of responses contained comments that this would dramatically change their plans
26% of the responses had comments suggesting the size of the credit cause the credit to be ineffective
11% of the responses had comments suggesting that the credit was reaching too far up the socioeconomic ladder; either the Move-Up Buyer was being wrongfully rewarded, or that the income limits were too high
16% indicated specifically that this credit would have negative implications for our general economic health

And as a side note:

37% of responses had something sarcastic to say

Thanks to all who took the time to read, and especially to respond.

Some key points of interest with the new revision:

Income thresholds are raised
Move-Up buyers can claim a tax credit of up to $6500
Dates have been extended into mid-year 2010

If you're buying a home next spring, here are some key qualifying dates to remember.

April 30, 2010 : You must be under contract for your new home
June 30, 2010 : You must be closed on your new home

And if you are now trying to figure out how this credit might now apply to your specific situation, the IRS has a basic info page, and also a scenario page that has just about every possible angle.

Keep me posted - I'm really interested to see if this has an impact on our markets. If you're interested in reading my view, I explored it right here.

Why A Tax Credit For Move-Up Buyers Is Important

2009-10-29T23:50:00.000-07:00

Today I posted a question on Facebook - asking for input from existing homeowners on the appeal of a tax credit that would not be restricted to first-time buyers. There is currently a proposal on the table that:

Extends the deadline for the first-time $8000 buyer credit
Increases the income caps on accessibility of the credit
Adds a $6500 credit for move-up buyers

While I've seen many first-time buyers get excited about the $8000 credit, and especially in recent weeks as the deadline approaches, my gut sense was that the $6500 move-up credit would make far less impact in encouraging people to move than an $8000 credit encourages a renter to ditch their landlord.

Most of the responses I got were pointing at political aspects of this (which I don't care to get into here), but it did elicit a few private messages from people who said they would consider it. None of these people was previously insistent upon staying still, so it's hard to tell if the allure of a $6500 credit would make anybody budge who wasn't already oriented that way...

But then I recalled a very interesting article that I read a few weeks back from the Pragmatic Capitalist. In this post, they take data to the theory of market lock-up, and explore the level of equity most homeowners need to be in a position to sell and buy. They look at how many homeowners are 'trapped' and unable to become a move-up buyer even if they wanted to. It's not an optimistic outlook, so remove all sharp objects from the area before reading.

The move-up buyer credit goes straight at the problem raised by the Pragmatic Capitalist. Maybe $6500 isn't enough to grease every jammed-up gear in the system, but it's got to help some scenarios. I'd argue it could be the last nudge needed to spark a few transactions currently stuck. As with everything economic, it affects the margins.

Add to this conversation the Plankton Theory as it applies to Housing (discussed frequently by Bill Gross and Paul McCulley of PIMCO)- which stresses the importance of first time buyers (the plankton) to continuously bring new money to the market so that the bigger fish (move-up buyers) and whales (McMansions) can have something to feed upon.

If we have low inventory at the first-time buyer level (we do, as evidenced by reports of 20-40 offers per listing), and a move-up buyer creates lower-end inventory, than the enticements need to be hitting this move-up market. The first-time buyer needs inventory, not a tax credit.

So if it works, it encourages market activity in the middle and upper price brackets, essentially adding fluidity to the market. I like it.

Best Real Estate Commercial Ever

2009-10-26T23:00:00.000-07:00

There are so many things to love about this ad.

Another Angle on the Housing Crisis

2009-10-21T10:28:00.000-07:00

Russ Roberts made an interesting remark in a podcast I recently listened to, in which he was talking with Robert Shiller of Yale University and the well-known Case-Shiller Home-Price Index.

He stated that one of the often overlooked benefits received by the droves of consumers who over-bought houses and helped carry the economy into crisis, was the fact that they got to (and in many cases still do) enjoy being able to live in a bigger, nicer home than they otherwise would have.

It's worth thinking about. In the end, it may not work out so well for everyone. But what about all the time spent enjoying the lifestyle?

Where'd That Buyer's Market Go?

2009-10-15T10:18:00.000-07:00

Didn't it just seem like there was a massive swing from a seller's market to a buyer's market? Leading up through about 2005 or 2006, it seemed buyers were constantly facing multiple-offer situations, and frequently watching homes sell above the asking price. Not all markets, but it was common in the Bay Area. Sometimes the seller priced deliberately low to try and incite a bidding frenzy.

Then, the bubble burst. Foreclosures and short sales hit the scene. And we had 20 listings for every buyer. Low-ball bids, high inventory were commonplace. It was a complete inversion of the seller's market, as the buyer now had all the levers.

And in recent months, we've heard some pretty wild stories about some segments of the market. What is interesting to me is the lower end homes, first-time buyer price range. This market is back to full on mania! Much of the inventory is controlled by banks, the prices are low/affordable. And investors with cash have come out of the woodwork to pick up these places. First time home buyers are racing to buy before the $8000 tax credit expires.

We are hearing of cases with 20 offers. 30 offers. 40 offers... listings stating that "all non-cash offers will be dismissed". Buyers are taking a shotgun approach, putting offers out on several homes, hoping one 'sticks'. Crazy stories about Realtors stealing keys so other agents cannot show listed homes, and the other agents breaking in to the home to show to their clients... !!! Madness.

It's amazing to me that we would see the market go from one extreme to the other so quickly. No time spent in the middle, no 'equilibrium'. But we'll straighten this out eventually. And it will last for a while before the next tilt happens.

35 Billion in Housing Aid - Coming to State Housing Finance Agencies

2009-09-30T09:05:00.000-07:00

There's some interesting news about an expected 35 Billion lifeline about to be extended to the various state run Housing Finance Agencies, including CalHFA. These agencies offer below-market financing for housing to first-time buyer families and individuals, with some restrictions on income and property value.

I have a substantial amount of experience with the CalHFA program, and when this program is healthy, it is effective.

Late in 2008, CalHFA suspended it's lending programs due to a lack of funds. This 35 Billion infusion - which is ~2 times as much as the expected total expenditure for the 8k first time buyer tax credit - will likely help open that program back to a level where it can be effective. It's worth keeping an eye on.

Are Home Sales Up? Depends On Your Price Point

2009-09-28T15:12:00.001-07:00

Real estate is all about micro markets. In the San Francisco Bay Area, homeowners might be celebrating the recent trend to higher sales volume in recent months. But that data comes from national sources. How much of the Bay Area falls into the brackets below, where we are seeing increases in volume? Thanks to Steve Harney for the info:

Below $100000 - sales up 38.8%

100k-250k - sales up 8.7%
250k - 500k - sales down 6.2%
500k - 750k - sales down 8.9%
750k - 1MM - sales down 10.6%
1MM - 2MM - sales down 23.3%
2MM+ - sales down 32.4

Not to be a wet blanket though... This data does not show the volume of sales in these brackets, and the bulk of housing likely falls into those lower price brackets. Activity at the lower end means future liquidity at the higher end. It's the "plankton theory" of housing: If a homeowner want's to buy a higher priced home, they need to sell their lower priced home to somebody. There's a food chain. First-time buyers, aka the "plankton" have to get into the market to support the ripple up the chain for move-up buyers. So I would expect that this activity will work its way up through higher price brackets in coming months.

Ayn Rand - Liberty vs Socialism

2009-09-04T12:50:00.000-07:00

This is worth a spin...

Slideshow of 100 Abandoned Homes in Detroit

2009-08-18T17:29:00.001-07:00

This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in 'The Great Recession'.

Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

We'll come back, and the beginning of that long process is underway. I'd love to see these same 100 photos updated in a few years.

Weekly Mortgage Interest Rate Survey on Mortgage-x

2009-08-17T22:41:00.000-07:00

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

Comment by John C. Glynn: A second-guessing of the 'recovery' will put pressure downward on rates, but be careful about the implications of an unwinding Federal Reserve with their asset purchase programs designed to lower rates - they are coming to an end.

Find out what others are saying by clicking here. (hint, looks like I am running with the pack this week...).

Unemployed to US Economy: "Go on without me..."

2009-08-10T09:31:00.000-07:00

I am concerned about the recent optimism in the financial markets. Sorry. Not cool to be a pessimist. But I am not - just trying to be a realistic optimist here.

We lost 245k jobs in the month of July. This made markets happy because it was less than expected (325k), and fewer than the prior month. Around January of this year, we were losing ~750k per month. So yeah, improving, but not exactly good.

Is this cause for optimism? How can we distinguish between optimism and an evaporation of pessimism? Are they the same thing?

(Source: Bureau of Labor Statistics)

What bothers me are the following details, below the headlines of the news release:

the only growth in new jobs is among the 55 and up crowd - baby boomers who, under other circumstances, would no longer be in the job market.
nearly 5MM people have been out of work for more than HALF OF A YEAR

The second point leads me to wonder, when does fatigue set in? The unemployment rate went down this period (9.4%) but this is expected to be anomalous in retrospect; unemployment is expected to break 10% within the year. Since the survey methodology only considers "unemployed" people to be those A) without work and B) actively looking for work, how many people have given up? How many are tired of sending resumes out multiple times a week, getting no replies, and simply focusing on other things until there are signs that jobs are available?

I love this analogy from Planet Money: The foot is on the pedal, and it's floored (Federal Funds rate @ 0% and other stimulus). The car (our economy) is rolling backward. But the speed at which we are rolling is slowing. And that's enough to get us where we're going? hmm...

I am not yet convinced. What say you?

Stevie Ray Vaughan Called; He Wants His Social Security Back

2009-08-09T23:48:00.000-07:00

According to The Tax Foundation for 2007 (most recent data):

the top 1% of tax filers paid 40.4% of all Federal taxes (up from 39.9%)
the top 1% of tax filers made 22.8% of total reported adjusted gross income
$410,100 income required to be considered top 1%
top 5% paid 60.6% of all Federal taxes on 37.4% of adjusted gross income
$160,000 income required to be considered top 5%
top 10% paid 71.2% on 48% of all income
$113,000 to be in the top 10%
bottom 50% of all filers paid 2.9% of the total income tax bill

July Jobs Report to Mortgage Rates: "You can call me Susan if it makes you happy"

2009-08-07T11:44:00.000-07:00

Today we saw release of the anxiously awaited July employment report, which turned out to have a few surprises, and a general portrayal of an economy that is continuing to struggle, but at a slower pace than before. The number of jobs (net nonfarm payrolls) lost over the month eased to 247,000, as against June’s loss of 443,000. Obviously, this is an improvement, and it is generally being read as indicative of a gradually healing jobs market.

It is important to recall, though, that this recession has seen the loss of 6.7 million jobs—and “less-worse” won’t make that number decline. And while the unemployment rate fell to 9.4% from 9.5%, there is a lot of indication that a primary reason reason was that people took themselves out of the jobs market, as they stopped actively look for a job. This is no improvement, and the unemployment rate is still expected to break 10%. When we see a greater number of people entering and re-entering the jobs market, it will signal an improvement to confidence in people’s ability to find a job. Improvements in the jobs market tend to follow improvements in other areas of the economy. It will be some time before we can say we’re in a recovery, not just moving toward one.

So how did mortgage rates respond to this news? Not so good. If you are on the fence about refinancing, or waiting for a better deal, it might feel like somebody's got a grip on your necktie right now, no clear sign of them letting go at the moment...

...For approved audiences, this clip is "Rated R". The butt-kicking in the bond market today reminded me of this...

Mortgage Meltdown: More Blame Game and Depressing Politician Behavior

2009-07-28T12:57:00.000-07:00

In case you still want to watch the debate over 'who caused this Great Recession', check this clip out. You can't stick a bullseye on Barney Frank's back, let alone get a straight (or honest) answer out of him. But can you blame the guy? He's a vote-getter first and foremost! Ok, I'm in a particularly cynical mood today, politicians depress me rather than inspire me 9 times out of 10. Now you know.

Last we heard, it was the Clinton administration pushing Fannie Mae and Freddie Mac to lower lending standards to accommodate more low-income buyers. Who even cares at this point? I wish they'd stop the finger pointing and learn how to regulate before the crisis hits, not squeeze the life out of the market with righteous after-the-fact belt-tightening that is more about showboating to their constituencies (self-service) than about creating a healthy economic environment with stable legal guidance (public service).

For some more bad light on politicians, see this story about Senators Chris Dodd and Kent Conrad and their 'sweetheart' deals from Countrywide on their own personal mortgages, via a program called "Friends of Angelo" (Mizillo). How feasible is it that the Chairman of the Senate Banking Committee (Dodd) and the Chairman of the Senate Budget Committee remain unclouded in their judgment when receiving preferential treatment from a bank? In other words, "the last two people that should have dirty loans were at the front of the line".

Well apparently they now admit that they were aware of the preferential treatment, though they denied it a year ago when the story first broke. I can't find a credible link though that supports this supposed acknowledgement.

Weekly Mortgage Rate Survey on Mortgage-x

2009-07-13T09:35:00.000-07:00

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: (V) (V) Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

"Comment by John C. Glynn: Discord among analysts - and thus volatility - continues. There's enough reason to expect rates to remain low, but the sensitivity seems to be to the upside for rates, so bad timing can potentially hurt."

Find out what others are saying by clicking here. (hint, all over the map - still - which reinforces my belief about uncertainty above...).

090706 Less Worse Syndrome and other Brain Dumps

2009-07-06T14:45:00.000-07:00

Are we in the midst of recovery? Has the Great Recession hit bottom? The market chatter has definitely shifted. Key changes include:

"green shoots" instead of "next shoe to drop"
"inflation" instead of "deflation"
"recovery" instead of "bottoming"

So.....?

During the last Fed meeting, there were actually conversations that included speculation that the Fed would either raise rates, or begin looking in that direction. They said nothing of the sort. And even though the oddsmakers had the chances of rates changing at that meeting at less than 4%, there was still anticipation along these lines. Since that meeting, SF Fed President (evidently in the running to be the next Fed Chairperson) reiterated her belief that the Federal Funds rate would be at or near the current level of 0.000-0.250% into 2010 or longer. huh.

Paul McCulley says, discussing the eventual hiking of Fed Funds rate:

"And when is all this going to happen? Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly. In the matter of cutting off, and then kikking, the fat tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue. The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011." -6/15/09

It's going to be tough to pull out of this with rising unemployment. At 70% of GDP, Consumer Spending is a critical factor in new environment. Consider this from Bridgewater, which I recevied from John Mauldin:

"... as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions."

Less Worse syndrome is dominating the markets right now. For example, in May, the total number of jobs lost came in around 345k, but since April had losses of ~509k, the markets saw this as a positive sign. Job losses are not positive. The month to month changes may indicate a change in the trend, but not just on one report. The June losses were at 465k. So that's 509, then 345, then 465. During the mnth of June, before the June data was released, the markets were optimistic based on an appearance of "less worse". They appear to be reconsidering...

...

The California new home purchase tax credit - 10,000 to anybody buying new construction residential real estate in CA has expired. The program hit it's limit at 100,000 applicants.

There is a 1 page bill in congress to put the hated HVCC (Home Valuation Code of Conduct) policy on hiatus for 18 months. If you are engaged in a financing transaction, you've either encountered this acronym, or are about to. It is causing all kinds of problems, and creating quite a stir. Should be interesting to see where this goes. I'm not too encouraged by the 1-pager, but there's been overwhelming support from the industry...

Did She Just Say "Pundint"?

2009-07-02T09:45:00.000-07:00

eh? I know Suze Orman is already a target for laughs, portrayed on Saturday Night Live by Kristin Wiig. So I'll try not to get petty here.

There are a few well known "pundits", or even actual financial services practicioners, who have taken opposition to some of Suze's advice. Particularly her hardcore blanketed advice to pay down all debt as a top priority. Critics say, sometimes it's just not that black and white.

In this video, Suze makes a key shift in favor of liquidity for safety purposes as a priority over eliminating credit card debt. It's interesting to note however, that this advice comes too late in the game for many to react. I think it really highlights the key issue some have with her advice - we need to be financially prepared for the unknowns in life before they hit us. It doesn't really help to start preparing for disaster after it strikes.

Her former advice to pay down credit card debt is basically a math lesson gift wrapped as financial planning advice. Too many of the variables in her equation are held constant, when true financial planning takes a subjective, individualized look at all variables in a particular scenario. Same goes for the new advice - that may be the right idea for some, but don't mistake what is going on here. Her extreme point of view, and universal conviction are what make her interesting enough to put on TV. That's not what makes individual advice pertinent or valuable.

For kicks, here's the SNL version.

Fed Watch: What Did Today's Policy Statement Really Say?

2009-06-24T15:13:00.000-07:00

"Strikes and gutters, ups and downs..."

I have not seen this much anticipation ahead of a Federal Open Market Committee meeting in I don't know how long. This component of the Federal Reserve meets for a 2 day session every 6 weeks, and makes a formal policy statement at around 11:15 (pacific) on the 2nd day. Generally, there are a lot of eyes on the markets in this moment, as the Fed's statement will contain an update to or reassertion of the Federal Funds rate, a key short term rate with implications for the economy and longer term rate outlook. But there are also a few carefully constructed sentences released to justify their rate-setting decision, and the markets try to read between the lines for hints at what the Fed might be thinking.

When investors buy bonds, the values increase, and rates get lower.

We entered this week's meeting in a state of uncertainty. During the spring months, the bond market had been flat for several months, rates for mortgages remaining relatively calm. Then, a few weeks ago, after a few economic reports indicated a potential recovery beginning to take place in the economy. This caused bond investors to pull some money out of the market in favor of other vehicles - like the stock market. The momentum gained traction until the levee broke, and a lot of the 'safe haven' money that goes into bonds during bad economic times started to flood its way out, causing rates on mortgages to rise - and rise quickly.

Just as quickly, the 'confidence rally' came to a halt, and the markets seemed to be reconsidering the idea that we were about to come out of the woods of The Great Recession. And that's where we were today - caught in the middle, unsure of whether we are going to head into recovery, and bump right into hyper-inflation, or another wave of economic pessimism, causing bonds to regain their appeal.

All eyes were on Ben Bernanke and the Fed's policy statement. The markets wanted to be reassured that inflation was not an imminent threat. They wanted confirmation that the Fed has an 'exit strategy' in place to unwind some if the excess reserves that have been pumped into the economy to fight deflation. Funds which if left unchecked, should lead to inflation again at some point. But there are as many critics of the inflation treat theory as there are proponents. And this causes the market to be uncertain. They wanted something to chew on today...

Here is a link to the policy statement. It was all old news. Nothing new. Just a subtle reference to the idea that they expect inflation to remain low, and that they are committed to their campaign to keep participating in market stabilization efforts.

The bond market made an initial sell-off, but knee-jerk reactions are typical. By the end of the session, the market for Mortgage Bonds (underlying instrument affecting mortgage rates) were dead flat on the day. I'll give credit to Bernanke for playing it cool, and effectively managing the expectations of the market. By not responding directly to the wishes of the market, he reasserts the impression that he is in control. It may not be what the market was asking for, but the market abides.

Weekly Mortgage Rate Survey on mortgage-x

2009-06-14T14:21:00.000-07:00

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline significantly; over the next 90 days rates will decline slightly.

"Recent bond market deterioration represents a shift in sentiment, and the high volatility is representative of a lack of conviction. No markets like uncertainty. The shift toward optimism that we are coming out of the Great Recession may be premature."

Find out what others are saying by clicking here. (hint, all over the map, which reinforces my believe about uncertainty above...).

Affordability Index Update - Remember Real Estate is all about Micro Markets

2009-06-12T10:55:00.000-07:00

Holy smokes!

Check out this article from the LA Times, talking about the real estate market in Lancaster, CA. House prices are down to levels not seen since the late 1980's! If we could get an affordability index for this town alone, I imagine it would look quite exaggerated compared to the one above. And if you're a homebuyer in Lancaster, that's a good thing!

Bummer for everyone who bought over the last 20 years, especially if they are looking to sell, but if you're out looking for a home, or an investment property, this is what we call a 'no brainer'.

Long Exhale... Brain Dump 06/09/2009

2009-06-09T21:35:00.000-07:00

I've been plugging away some long hours over the last few months, but I'm back to shake some dust of the blog here. No cohesion promised here, just a spewing of some of the more evocative and interesting ideas, quotes, etc that I've seen since the last post:

- Jon La Grou introduces an awesome home construction enhancement, cheap, smart, simple. Updating 150 year old technology, bravo. 5 min video

- John Mauldin on the current crisis: "..This again illustrates the problem of using past performance to protect future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today's world is useful, and may be harmful to your portfolio." >> Word.

- Pimco's Paul McCulley on the current crisis: "There's nothing like a bull market to make geniuses out of levered dunces."

- There's a battle Royale taking place right now in the debate on the future of interest rates. We saw the low trend break down over the last two weeks, and what followed was one of the biggest downlegs in the bond market I've ever seen. Cheerleaders of the recovery think that long term interest rates need to be higher to attract investment capital. The Federal Reserve can't continue to make the market with mortgages at 4.5% if all of the 'safe haven' dollars are now getting cozy with alternative vehicles to the US Treasury markets. But are we even out of the woods yet? With credit contracting, and unemployment rising (10% here we come!) how are we supposed to spend our way back to positive GDP growth? It doesn't add up... I said it before, and I'll say it again, we've got a lot of bites left in this sandwich...

- US Housing affordability index (which began tracking data in 1971) was at an ALL TIME HIGH before rates popped. This has been bringing in bargain hunters to gobble up the excess housing inventory. But the momentum was just getting going. With rates up, it knocks the index back a ways. But financing a home today is still cheap by historical standards. 30 year average of the 30 year fixed mortgage rate is closer to 7.500%

- In much of the recent economic press, there is discourse along the lines of "the worst is behind us". The stock market has had one or two down weeks over the last three months. In other circles, we hear "commercial real estate is the next shoe to drop". Given that it would be less likely that the government would bailout strip mall developers, will the markets be able to shake off an era of see-through buildings and continue dancing like there's nothing to worry about?

The Case for Not Waiting

2009-04-13T15:29:00.000-07:00

One of the more frustrating aspects of today's marketplace is all the wasted energy. Consumers are stuck on the fence, waiting for lower rates to refinance, waiting for lower prices to become a buyer in this buyer's market. Sometimes waiting pays off, and it certainly has if you hesitated to buy a home in 2006, and are now reconsidering. But you could be heating your house with the windows open...

Trying to squeeze blood from a turnip, waiting for 4.500% when you can get 4.625% today can lead to disappointing results. Rates are at or within spitting distance of all time historical low levels. With all the moving pieces of the puzzle, waiting often means a lot of false starts and missed opportunities.

Example 1 (purchase). Defining the cost of waiting. Maybe you've got a pretty good read on the supply/demand dynamics of your market, you know about the seller's circumstances, competition, etc. Visibility is ok, and you know this house is overpriced. So you try and pull down the price tag, but the seller isn't going for it. Do you have a good read on the global markets? Well, do ya? Some sort of inside track? What if that house you want does eventually come down 25k, but at that exact point in time, the markets are digesting a panic over inflation expectations, and rates have shot from 4.750% to 5.250%? What's a better deal? The answer is: Lower rate, higher price. I'll show my math if you don't believe me, shoot me an email to request it.

Example 2-4 (refinance). Job loss, Equity loss, Rate spike. If you owe $400k 6.250%, waiting for 4.500% when you could have 4.625% today, how much do you lose paying at 6.250% for 3, 6, 12 months of waiting? Again, it's helpful to do the math. 12 months at 6.250% costs $6500 more in interest than 4.625% over one year. The extra .125% in rate, if you can get to 4.500%, is worth $500 over a year.

Sure, over 30 years, that's a significant savings. But it is not worth the cost of missing the boat altogether, as we hear about consumers doing every day.

Unemployment is rising (currently 8.5%). Equity is falling (price declines of 30-50% off peak in some markets). And there is a debate going on in the markets about inflation coming from excess stimulus cash in the financial system, and whether it will cause rates to spike without warning.

Would you rather have a $6500 sure thing, or a shot at $7000 with a potential risk of zero? These are forces beyond your control, so eliminate them or avoid them if you can. Otherwise, if you're sitting on that fence, and you fall asleep, you might end up with a nasty burn...

This American Life & Planet Money Bring You: BAD BANK

2009-03-16T11:38:00.000-07:00

NPR's This American Life has done a few great features on the Subprime Crisis, the Banking Crisis, and the Economic Crisis (they evolve with the news!). Recently, along with the Planet Money team (which I believe became a spinoff team of This American Life after the 1st in the series), they released "Bad Bank". It's another great overview of the challenges before us, some details about how we got here, some good soundbites from congress, etc. They are among the best I have seen at breaking down this complex situation into digestable news. Give it a spin.

Earlier releases:
Giant Pool of Money
Another Frightening Show About the Economy

Stewart vs. Cramer: File under: UNCOMFORTABLE

2009-03-13T09:58:00.001-07:00

This is great to watch, and hurts at the same time.

ARRA 2009 - Important Details, Effective Date

2009-03-12T15:11:00.000-07:00

ARRA Brings New Opportunity To Refinance or Modify

There has been an overwhelming amount of noise and confusion since the American Recovery and Reinvestment Act of 2009 (ARRA) was announced a few weeks ago. As a follow up to my message from 2/24, below is an summary of the recently released details, some resources to help you figure out if this will benefit you, and some instructions on what steps you should take next. If you think this information is useful, please pass it along. Feel free to forward this email to anyone you know that may be impacted.

The Making Home Affordable government program is divided into two parts:

· Modification Program

· Refinance Program

Despite all the fanfare surrounding this program, it remains 100% VOLUNTARY, and mortgage servicers (the companies that actually collect borrowers’ mortgage payments) are not obligated by law to follow these rules and guidelines...yet. Oddly enough, even if a financial institution has already received assistance with government funding, they are NOT obligated to participate. However, if a financial institution receives new or more government funding in the future, they WILL be obligated to participate.

In other words, the rules are still a bit unclear and nobody really knows who will participate and how it will all work from a practical perspective. Most of what you read and hear about in the media will most likely be speculation at this point. In a nutshell, the program has three elements:

· The government is offering financial incentives to mortgage servicers who modify loans for borrowers.

· The government is offering financial reimbursement to investors if they allow servicers to modify loans and then take a hit on the borrower’s re-default if the property declines in value after the loan modification

· The government is offering financial incentives to borrowers who modify their loans and make their new payments on time

Vacation homes and investment properties don’t qualify for the program. Only borrowers who have experienced some type of financial hardship can qualify. Click on this link if you want to see if you qualify for at least the minimum requirements.

Remember, even if you do qualify under these minimum requirements, your servicer (the company where you send your payments) might not be participating in the program just yet.

Part 2 - Refinance Program

Here’s how it works:

· You need to be current on your mortgage payments (no late payments in the last 12 months)

· Your mortgage balance cannot exceed 105% of the current value of your home

· Your mortgage needs to be owned or guaranteed by Fannie Mae or Freddie Mac

o This may include Alt-A or even sub-prime mortgages

Based on current market conditions, this might make sense for you if:

· You have an adjustable rate, interest only, or balloon mortgage that you want to convert into a fixed rate; or,

· You have a fixed rate mortgage where the interest rate is greater than 5.500%.

Important Dates

· This program becomes effective on APRIL 4. Prior to that date, you can, and should begin the process of gathering required documentation. Please contact me to get this process started.

To find out if your mortgage is owned/guaranteed by Fannie Mae, click here.

To find out if your mortgage is owned/guaranteed by Freddie Mac, click here.

Other Recent Developments

There have been many other recent developments in the markets, as well as new government legislation. Here are just a few recent items that may impact you or someone you know:

· Home improvement tax credit

· First-time home buyer tax credit (Federal)

· New construction home purchase tax credit ( California primary residences)

· Reverse mortgages for home purchase transactions (age 62 or older)

· Suspension of required minimum distributions for certain retirement accounts (age 70 ½ or older)

Let me know if you’d like to discuss any of these items in further detail by sending a quick email.

The Simpsons on 'The Meltdown'

2009-03-12T10:33:00.001-07:00

What are you, some kind of talking dog? Put down your gins, and confess your sins! watch now.

Is The Stimulus Coming to a Town Near You?

2009-03-12T10:15:00.000-07:00

Stimulus Watch.

This is a pretty cool resource. It gives an overview of the projects, budgets, and number of jobs created by various stimulus plan initiatives.

I clicked around for a few local towns, places I've traveled recently, and places I've lived.

Oakland CA
San Ramon CA
Pasadena CA
San Francisco CA
Jackson MS
Nashville (zip!) TN & Memphis (zilch!) TN
Maui HI
Grants Pass (nada!) OR
Tucson AZ

Frontline on The Mortgage Meltdown

2009-03-09T23:38:00.000-07:00

There was certainly some sensationalism, but I liked the way they presented this. In fact, I like the dramatic production effects, such as sirens in the background as if somebody had called 911 as the market chaos reached one apex after another. Kind of amusing, but makes a dry topic easier to watch... Beneath the surface, and particularly interesting is the look at the political and competitive elements of Henry Paulson's actions at the height of the marketplace drama. You can watch it here.

California's $10,000 Tax Credit for New Home Buyers

2009-03-02T13:55:00.000-08:00

No income limitations? Not limited to first time buyers?

A quiet little news item that for some reason isn't grabbing as much headline attention as I would expect... has me a little curious about the validity. A quick search points to several mentions, but all trace back to blogs on new home builder sites, and PR releases from builders like THIS ONE. I guess that makes sense, but I'd expect to see more attention drawn to this, or something pointing to an official CA.GOV page.

If this is legitimate, it is in some ways BETTER than the federal tax credit of $8000 to first time buyers with qualified income. And if you are a first time buyer in California, you could be eligible for both!

2009 Homeowner Affordability and Stability - early details

2009-02-27T16:13:00.000-08:00

New Initiatives To Help Homeowners

President Obama recently unveiled his plan to help stabilize the housing market and keep millions of borrowers in their homes.

The Homeowner Affordability and Stability Plan includes two initiatives to help struggling homeowners. One is a refinancing program for homeowners with less than 20% equity in their homes, or who owe more than their home is worth. The second program attempts to lower monthly payments for homeowners at risk of losing their home. In adition, the plan includes a third initiative to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

More details are to be released March 4.

What We Know Right Now:

Refinancing Initiative
Under current rules, those families who own less than 20% equity in their homes have a difficult time refinancing and taking advantage of the historically low interest rates. This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth.

Stability Initiative
This initiative is designed to provide help to families as well as entire neighborhoods by helping reduce foreclosures and stabilize home prices. It is intended to help homeowners who are struggling to afford their mortgage payments, but cannot sell their homes because prices have fallen significantly.

The goal of this initiative is simple: "reduce the amount homeowners pay per month to sustainable levels." To accomplish this, lenders are encouraged to lower homeowners' payments to 31 percent of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with Treasury sharing the costs.

More Info

A question and answer document is available HERE courtesy of the National Institute of Financial Education. I'll provide updates as I receive them, and if you want to learn more after March 4th, please send me a note.

Join the Savings Craze! The Paradox of the Paradox of Thrift

2009-02-24T13:56:00.001-08:00

Experiencing a recession is great way to force a reassessment of your financial behavior. The Great Depression is famous for shaping a generation of frugal citizens/consumers. Do you feel like you have not been saving enough money? America Saves Week dot Org has a 12 step program for you. Join the craze!

But wait, popular economic theory of the day warns of 'the Paradox of Thrift'. What may be good for the individual is not good for the collective. Waxing economical takes place here, here, and here. Is there a moral dilemma here? Is this why we've been trained to act as consumers, rather than citizens?

Paul Kasriel has another angle. Debunking the Paradox with some tough love for WSJ contributer Daniel Henninger.

Why I Love Rick Santelli

2009-02-20T10:22:00.001-08:00

This is a pretty powerful moment, representing the sentiment behind the counter-argument for Economic Stimulus. This is being called Santelli's 'Chicago Tea Party'. You can see Santelli expand the viewpoint here on the Today Show.

Today's View of Capitalism is a Joke

2009-02-20T09:58:00.000-08:00

In traditional capitalism, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

In American capitalism you have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

In French capitalism you have two cows. You go on strike because you want three cows.

In Italian capitalism you have two cows, but you don’t know where they are. You break for lunch.

In Real capitalism you don’t have any cows. The bank will not lend you money to buy cows, because you don’t have any cows to put up as collateral.

In Enron Capitalism you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

In Californian Capitalism you have two cows. They are happy.

In Arkansas capitalism you have two cows. That one on the left is kinda cute.

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

2009-02-06T10:54:00.001-08:00

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year - no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

buyers must occupy the home for two years as their principle residence
includes a two year recapture provision (if they leave the home in two years they lost the credit)
purchases of homes by investors are ineligible

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

2009-02-06T10:50:00.000-08:00

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.

Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

What If You Could Set Your Own Tax Assessment Value?

2009-02-05T12:48:00.000-08:00

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor's opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don't want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with "fixing" the economy. Specifically, he is looking at the "bad bank" concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the "bad assets".

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

Let the owner of the real estate place the value on his property.
The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It's a very thought-provoking piece. 2 pages of your time...

Yeah, rates are lower, but...

2009-01-27T14:29:00.001-08:00

It's just not that easy to get your hands on the banks' money these days... Great visual representation, and I can tell you, it fairly depicts the view from the front lines here...

We can still get the deals done, but nothing is as simple as it once was!

Barney Frank on High Balance Conforming Loans

2009-01-21T12:34:00.000-08:00

I caught a video piece of Barney Frank fielding questions the other day, in which it was painfully obvious to this mortgage planner that the legislation cannot force free markets to do as legislators intend or wish. I wish I had a link to the video, but I don't, nor do I have the time to search for it. I am sure it is out there.

In 2008, the elected representatives on Capitol Hill decided to allow for Fannie Mae and Freddie Mac to purchase loans at a temporarily increased ceiling - ranging by county according to the median home values in these counties. The non-conforming loan breakpoint was 417k, we've talked about it here. Anything above 417 could not be touched by Fannie/Freddie.

The 2008 temporary limits were put into effect, and some areas were able to treat loans all the way up to 729,750 as conforming, per law. But the banks did not like the temporary nature, investors didn't look at it the same way either, and rates and terms for anything between 417 and 729k left much to be desired, and many to be refinanced at some other time, or never.

For 2009, lawmakers made the "temporary" permanent, but revised the limits, bringing the max ceiling down to 625,500 in the highest cost areas. Investors and banks were a little better to adopt these. And in many ways, borrowers with 417-625k see many of the same underwriting rules. But some of the differences are significant.

Pricing these loans is not the same, bringing much disappointment to the borrowing and lending community. Lawmakers stipulated that banks could only package a small percentage (10%) of "high balance" loans with the traditional, sub-417k loans into their bond issues for the secondary market.

There was so much pent up demand from borrowers with high balance loans to refinance, that the banks all got inundated with demand for money under these terms. It put them way off balance, and they dont have 9x the traditional conforming investments to match every dollar worth of high balance loans. So what do they do? Raise rates. So now when you have a high balance loan, your rate is SIGNIFICANTLY higher than the traditional balance conforming loans.

This will ebb and flow as the banks process and liquidate their inventory. But watching Barney Frank scratch his head, saying something to the tune of "I don't understand why anybody would be treated any differently if they were borrowing the higher balance, we changed the rules to make it the same" - which is not a quote, but is precisely what he was saying - you can see why so many of the governments attempts to help the market have not worked, or only partially helped, or helped one area and introduced a new problem...

One more complication in today's market. Next to impossible to predict a given bank's pipeline composition, and therefore next to impossible to know when they will spike their rates overnight, as we are seeing them do erratically.

There's no inflation in our economy - unless you wholesale money

2009-01-15T16:35:00.000-08:00

What happened to inflation? 5$ gas, 6$ milk, 7$ Pabst Blue Ribbon!!! ???

Today's PPI (Producer Price Index) came in at a negative for the 5th straight month. It measures commodity prices, and other materials that producers of goods and services need to buy in order to produce their good or service. Tomorrow's CPI (Consumer Price Index - which measures the cost of goods that consumers buy) is expected to indicate the same signal - no inflation to speak of.

Meanwhile, much is being said about the efforts by the government to push down mortgage rates. But the underlying fundamentals that determine interest rates are not correlating with the rates being offered to consumers,. Or they are correlating less than is usual, presenting challenges to consumers and brokers trying to execute on their behalf.

Yes, rates are quite a bit lower. But the challenges of our "new landscape" are also new in nature, and no matter where you turn, it just gets more and more interesting. After 6 quarters of downsizing, banks were slammed in recent weeks with record applications for new loans. There was an immediate logjam. Demand is exceeding capacity. Banks do not need to lower costs to attract business. Margins are fat, 'because they can'.

Icing on the cake: Banks offer lower rates to deals on shorter term locks. But it takes twice as long for them to underwrite files today, so what's the point? You have to lock long-term, which means higher rates. Or, you float. And if you float, you get jumped in line at underwriting by all the locked-in deals. These same banks offer 7 day locks at their absolutely lowest rates... but you can never get within 7 days of closing UNLESS YOU LOCK!

If you do lock, and the period does not wind up being adequate, for ANY reason whatsoever, you can pay to extend it. But banks are doubling and tripling their extension fees as their queue grows longer and longer. Oh, and they are charging some brokers additional fees for not delivering on a loan once it is locked - even if they are too busy to underwrite it!

So lets review:
-banks have been taking it on the chin for ~6 quarters, so...

-rates are down, but not as much as they should be given the government intervention, and economic datapoints
-extension fees are skyrocketing
-processing times are skyrocketing
-lock periods are skyrocketing
-penalty for cancelling is skyrocketing

As far as I know, mortgage rate lock extension fees are not included in the PPI or CPI. Yet another area of the economy overlooked by the economic reporting data. Outrageous! Somebody call David Horowitz!

Great perspective to a timely question

2009-01-13T17:10:00.000-08:00

Ric Edelman fields a question from one of his radio show listeners:

Q: Do you and your wife make extra principal payments to your
interest-only loan? Or do you not want to own your home someday?

Many in the investment business suggest investing it in the stock market
- you don't keep up with inflation by putting the money into your home
or keeping the money in cash. Well, over the past decade or so, with all
of the ups and downs of the stock market, I bet the folks who kept their
money in cash or paid down their mortgages fared better than those in
the stock market. I know, I know, the market goes up and down, and over
the "long term" the stock market is supposed to outperform the other
things, but I question this advice sometimes and just wonder if you are
going to own your home someday? If not, why?

Ric: No, we don't make extra payments. We personally handle our money
the same way we advise our clients and consumers.

Why would we want to add extra money to our payment? If you believe that
real estate values rise over long periods, the home's equity will grow
all by itself, and it will do so at such a rate that any extra payments
we'd make would be pointless.

Here's an example: Say you own a $500,000 house with a $400,000
mortgage. You thus have only $100,000 in equity. If you send in an extra
$100 per month for five years, you'll have an extra $6,000 in equity.
But if the house grows just 1% per year, it will produce $25,505 in new
equity, or four times more than your effort from making extra payments!
And if the house grows 2% per year, your new equity will be more than
$50,000!

This is one reason - there are nine others in my DVD on the topic - why
making extra payments is a waste of time and effort.

Of course, I began by asking if you believe that real estate values will
rise over long periods. If you don't believe that, then you shouldn't be
a real estate owner in the first place. You should rent instead.

Also, I note that you referred to those who recommend placing into the
stock market all the money that you'd otherwise use to make extra
payments. I do not agree with that advice. Instead, you should invest
the money in a highly diversified manner. That's because, as you've
noted, it's possible to see stock prices falter for extended periods. By
owning a wide variety of assets, and not just stocks, you reduce the
risk of such underperformance.

But even if you invest solely in stocks, you're highly likely to do
fine. Remember that we're comparing the interest rate on your mortgage
to the performance of the stock market. Since your mortgage will last
for 30 years, we need to evaluate stock prices over that same period.
And in every 30-year period since 1926, according to Ibbotson
Associates, stocks have handily outperformed mortgage rates.

I realize that you're questioning the strategy because of the stock
market's recent performance, but it's precisely at such times that we
need to remind ourselves of the long-term nature of the markets.
Otherwise, you'll be tempted to do the wrong thing at the wrong time for
the wrong reason.

Find out more about Home Ownership here:
http://www.ricedelman.com/cs/education/home_ownership

FHFA September Foreclosure Prevention

2008-12-16T07:31:00.000-08:00

Here's a news release from the Federal Housing Finance Agency, for those keeping an eye on foreclosure and note modification trends:

FHFA September Foreclosure Prevention Report Released

Washington, DC – James B. Lockhart, Director of the Federal Housing Finance Agency today released the September monthly Foreclosure Prevention Report, which provides comprehensive monthly data on the loss mitigation efforts of Fannie Mae and Freddie Mac as well as information on delinquencies, foreclosures initiated and foreclosures completed.

Since year-end 2007, while loans 60+ days delinquent have increased, loans for which foreclosure was started actually decreased. Loss mitigation actions have increased for all workout types. Short sale and deed-in-lieu volumes increased significantly in September 2008. In comparison to 2007, the Enterprises’ loss mitigation performance ratio shows considerable sustained improvement with the year-to-date ratio at 54.6 percent versus 43.5 percent for 2007.

The report shows that as of September 30, 2008 of the Enterprises’ 30.7 million residential mortgages:

Loans 60+ days delinquent (including those in bankruptcy and foreclosure) as a percent of all loans increased from 1.46 percent as of March 31 to 1.73 percent as of June 30 to 2.21 percent as of September 30.

Loans for which foreclosure was started as a percent of loans 60+ days delinquent declined from 8.29 for the first quarter and 7.81 percent for the second quarter to 7.12 percent for the third quarter.

Loans for which foreclosure was completed as a percent of loans 60+ days delinquent increased from 2.41 percent for the first quarter to 2.55 percent for the second quarter and stabilized at 2.55 percent for the third quarter.

Modifications completed declined from 15,636 for the first quarter to 15,372 for the second quarter to 13,450 for the third quarter. However, loans reinstated through Fannie Mae’s HomeSaver Advance (HSA) Program increased from 1,244 in the first quarter to 16,658 in the second quarter and 27,277 in the third quarter.

The loss mitigation ratio is calculated at the total mitigation activities (payment plans, HomeSaver Advances, loan modifications, short sales, deeds in lieu, assumptions, and charge-offs) divided by the total of loss mitigation activities plus foreclosures completed and third-party sales.

Interesting Commentary From JP Morgan Chase

2008-12-14T11:04:00.000-08:00

A colleague forwarded this to me, so I don't have the direct link.

"In recent months, Wall Street has seen an extreme liquidity drought with steady redemptions from hedge funds and long-term mutual funds. However, this doesn't mean that investors have no money to put to work. In fact, in November, M2 (the total value of money held in cash, checking accounts, savings accounts, CDs under $100,000 and retail money market accounts) exceeded $7.9 trillionfor the first time, up 7.4% over the past year. Interestingly, holdings in these short-term accounts now exceed the total capitalized value of the S&P 500. The problem is not the ability of investors to invest, but rather their willingness to do so."

Don't want to miss the bounce, do you? Good time to be checking in with your financial planner. Please email me if you need a referral.

How to get a Cheap Vacation to Antigua

2008-12-08T15:48:00.000-08:00

Elite Island Vacations has thrown out an interesting twist on the stock market uncertainty - a bet that your financial stock shares are likely well below their fair value. They are willing to take your shares at July 1 2008 value in exchange for travel services - with some restrictions I am sure.

Example: GOOG shares closed at $302 today. On July 1, they were worth $534. If you have shares of Google, and want to go to Antigua, you can pay with your shares, and get $534 of travel for every single share - that you would only be able to get $302 on the open market for.

Why do this? Elite Island Vacations clearly believes that the shares are worth more than their current trading value. That and the fact that they are very clever marketers. It's no different than offering a sale on their service, but this is bound to get a lot of attention. I'd certainly never heard of them before.

Is The Loan Modification Trend Working?

2008-12-08T10:06:00.000-08:00

New reports on CNBC today that the re-default rate on modified mortgage loans is greater than 50% after 6 months.

That's a pretty disappointing and discouraging statistic. A lot of money is being spent on the modification efforts, and with that kind of performance, lenders are going to be less likely to continue the effort.

This gives good fuel to the debate over whether market intervention can soften the blows of a natural market correction....

Is the 'Bailout' Working?

2008-11-26T15:43:00.000-08:00

Some evidence of the US Government's activity affecting our markets in positive ways:

Yesterday, a statement from FHFA Director James B. Lockhart:

“The Federal Reserve Board’s announcement that it will purchase debt of the Federal Home Loan Banks, Fannie Mae and Freddie Mac as well as the mortgage-backed securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie Mae is a very positive step. This $600 billion program should be a major boost to the mortgage and housing markets. By providing more liquidity to the market FHFA expects these actions to help reduce the large interest rate spreads between mortgages and Treasuries, resulting in lower mortgage rates over time, assisting homeowners and home purchasers.”

And then, a press release:

FHFA URGES SERVICERS TO TAKE PROMPT ACTION ON LOAN MODIFICATIONS

And then, the announcement of a new report: "Monthly Foreclosure Prevention Report" which promises to detail the efforts to slow down the flood of foreclosure activity.

STRONG moves are being made to stop foreclosures from happening in such large quantities, as the downward spiraling momentum they bring is causing rot within our nation's housing stock. Property inventory declined this month for the first time in months, quarters, over a year? Let's hope it is the beginning of a trend... There was a 39% decrease in foreclosures in California, month over month, largely due to the cancellations and the moratorium imposed by the government, which is being followed by most major lenders and loan servicers.

Decreasing inventory causes a shift in supply/demand equilibrium. Are we nearing a bottom? Is it time to be thinking about investing in real estate?

Some Painful Medicine from Peter Schiff

2008-11-22T13:08:00.000-08:00

Some interesting retrospective views in this collection of Peter Schiff interviews on various financial circuits. Why post this? There's nothing valuable or encouraging listening to somebody who can look back and say "I told you so", but we really need to be careful when we listen to people who are in agreement on things that obviously want to believe. Listen to that voice that stands against the pack, and just give it a thought or two. Its very interesting to hear people laughing at Schiff as he made his forecasts.

I am optimistic, but cautious. And also realistic. We will hit a bottom, and we will recover. We are still adjusting to this environment, and there are some violent corrections going on that are going to damage a lot of people. A long bumpy road is ahead, but we'll get there.

401(k) Seizure? Time for a Dose of Reality

2008-11-17T08:50:00.000-08:00

Another vein of panic running through the foundation of the economic and financial stability - whatever amount of it is left - is a concern over an impending seizure by the government of 401(k) balances to be used for some nationalized program used for bailout funds. The Wall Street Journal ran an editorial on Friday, allowing this widespread concern to proliferate.

You can disregard any fear over this - it ain't gonna happen.

According to George Miller (D-CA), who is chairman of house Committee on Education and Labor, this is nowhere near the intention or goal of Miller, or anybody else in congress.

Miller's hearings on 401(k) legislation have the following objectives:
1. Expose excess fees that Wall St middlemen take from workers accounts
2. Bring young and low wage workers into the system
3. Ensure that retirement accounts have diversified investment options with low fees
4. Ensure workers have access to reliable independent investment advice
5. Reduce vesting periods and portability of 401(k) accounts

Congressman Earl Pomeroy (D-FL), member of the House Ways and Means Committee, says he is against anything of the sort, and suggests that this concept was born out of political gaming, pushed by conservatives as a threat of what a Democratic leadership landscape might bring.

Speaker of the house, Nancy Pelosi, says "we would never even consider a proposal to seize retirement assets." in a statement issued to Ric Edelman, financial planner, when asked specifically about this topic.

One of the voices pushing this concept, Teresa Ghilarducci of New York's New School for Social Research, who is referenced in the Wall Street Journal piece, even claims in an interview with Edelman that her comments were taken way out of context. However sour on the concept of 401(k)s, she admits she was never suggesting that the government take the funds under control.

If you want more information about participating in 401(k) plans, please contact your plan administrator at work, or your financial planner. If you would like a referral to a financial planner, please contact me.

Sign of the Times...

2008-10-28T10:03:00.000-07:00

2009 Conforming Loan Limits

2008-10-20T12:56:00.001-07:00

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?

2008-10-20T12:01:00.001-07:00

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.

Why There Are Critics Of The Bailout/Rescue Plan

2008-10-13T14:18:00.000-07:00

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.

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

2008-10-09T11:10:00.000-07:00

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.

2008 Q3 Financial Dictionary

2008-10-07T12:39:00.000-07:00

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.

Revised Emergency Economic Stabilization Act

2008-10-03T16:16:00.000-07:00

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.

Worth A Watch - Bird And Fortune

2008-10-01T12:25:00.000-07:00

Bird and Fortune - Subprime Crisis

Does This Work?

2008-09-30T15:54:00.000-07:00

Came across this quote from Michael Lewitt of Hegemony Capital Management recently:

At some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes. This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results.

hmm. An interesting idea, and one that garners some attention in a climate like this one. I don't think it would hold water in a bull market, say what you will about moral sentiments, but a very interesting thought to say the least...

How To Get Your March Madness Fix In September

2008-09-30T14:34:00.000-07:00

There is no better time in the sporting calendar than the first weekend of March Madness. It can be a long wait year over year, especially if your bracket gets blown out early. So what is one to do in the downtime, especially when the Giants and A's can't make the playoffs, the Olympics are over, the Raiders and 49ers are struggling at best, and you don't give a rip about hockey?

Play September Madness, of course.

How Big Is This Bailout?

2008-09-30T14:07:00.000-07:00

Bailouts are nothing new, history has many examples. Some recent ones are explored below courtesy of ProPublica, and are put into perspective in terms of their size with a nice visual. If any of the links are broken, view them here.

With the flurry of recent government bailouts, we decided to try to put them in perspective. The circles below represent the size of U.S. government bailout, calculated in 2008 dollars. They are also in chronological order. Our chart focuses on U.S. government bailouts of U.S. corporations (and one city). We have not included instances where the U.S. government aided other nations.

Check out how the Treasury did in the end after initial government outlays.

	Industry/Corporation	Year	What Happened	Cost in 2008 U.S. Dollars
●	Penn Central Railroad	1970	In May 1970, Penn Central Railroad, then on the verge of bankruptcy, appealed to the Federal Reserve for aid on the grounds that it provided crucial national defense transportation services. The Nixon administration and the Federal Reserve supported providing financial assistance to Penn Central, but Congress refused to adopt the measure. Penn Central declared bankruptcy on June 21, 1970, which freed the corporation from its commercial paper obligations. To counteract the devastating ripple effects to the money market, the Federal Reserve Board told commercial banks it would provide the reserves needed to allow them to meet the credit needs of their customers. (What happened after the bailout?)	$3.2 billion
●	Lockheed	1971	In August 1971, Congress passed the Emergency Loan Guarantee Act, which could provide funds to any major business enterprise in crisis. Lockheed was the first recipient. Its failure would have meant significant job loss in California, a loss to the GNP and an impact on national defense. (What happened after the bailout?)	$1.4 billion
●	Franklin National Bank	1974	In the first five months of 1974 the bank lost $63.6 million. The Federal Reserve stepped in with a loan of $1.75 billion. (What happened after the bailout?)	$7.7 billion
●	New York City	1975	During the 1970s, New York City became over-extended and entered a period of financial crisis. In 1975 President Ford signed the New York City Seasonal Financing Act, which released $2.3 billion in loans to the city. (What happened after the bailout?)	$9.4 billion
●	Chrysler	1980	In 1979 Chrysler suffered a loss of $1.1 billion. That year the corporation requested aid from the government. In 1980 the Chrysler Loan Guarantee Act was passed, which provided $1.5 billion in loans to rescue Chrysler from insolvency. In addition, the government's aid was to be matched by U.S. and foreign banks. (What happened after the bailout?)	$3.9 billion
●	Continental Illinois National Bank and Trust Company	1984	Then the nation's eighth largest bank, Continental Illinois had suffered significant losses after purchasing $1 billion in energy loans from the failed Penn Square Bank of Oklahoma. The FDIC and Federal Reserve devised a plan to rescue the bank that included replacing the bank's top executives. (What happened after the bailout?)	$9.5 billion
●	Savings & Loan	1989	After the widespread failure of savings and loan institutions, President George H. W. Bush signed and Congress enacted the Financial Institutions Reform Recovery and Enforcement Act in 1989. (What happened after the bailout?)	$293.8 billion
●	Airline Industry	2001	The terrorist attacks of September 11 crippled an already financially troubled industry. To bail out the airlines, President Bush signed into law the Air Transportation Safety and Stabilization Act, which compensated airlines for the mandatory grounding of aircraft after the attacks. The act released $5 billion in compensation and an additional $10 billion in loan guarantees or other federal credit instruments. (What happened after the bailout?)	$18.6 billion
●	Bear Stearns	2008	JP Morgan Chase and the federal government bailed out Bear Stearns when the financial giant neared collapse. JP Morgan purchased Bear Stearns for $236 million; the Federal Reserve provided a $30 billion credit line to ensure the sale could move forward.	$30 billion
●	Fannie Mae / Freddie Mac	2008	The near collapse of two of the nation's largest housing finance entities was yet another symptom of the subprime mortgage and housing market crisis. In an effort to prevent further turmoil within the financial market, the U.S. government seized control of Fannie Mae and Freddie Mac and guaranteed up to $100 billion for each company to ensure they would not fall into bankruptcy.	$200 billion
●	American International Group (A.I.G.)	2008	When AIG was unable to secure a private-sector loan, the federal government intervened by seizing control of the insurance giant.	$85 billion
●	Auto Industry	2008	In late September 2008, Congress approved a more than $630 billion spending bill, which included a measure for $25 billion in loans to the auto industry. These low-interest loans are intended to aid the industry in its push to build more fuel-efficient, environmentally-friendly vehicles. The Detroit 3 -- General Motors, Ford and Chrysler -- will be the primary beneficiaries.	$25 billion
●	Troubled Asset Relief Program	2008	The Bush administration has proposed a rescue plan to ease the current crisis on Wall Street. If approved by Congress, the Treasury Department will be authorized to purchase up to $700 billion of distressed mortgage-backed securities and other assets and then resell the mortgages to investors.	$700 billion

Quick Details On Bailout Plan's Unsuccessful Vote

2008-09-29T12:55:00.000-07:00

BOTTOM LINE: House vote on TARP failed 205-228. We expect legislation to reemerge in the near future, but the extent of the modications that will be necessary is unclear. There still appears to be a good chance that Congress enacts some type of stabilization package before the election. Another vote is possible in the House later this week -- perhaps on Thursday -- but the situation is fluid.

KEY POINTS:

1. A simple majority was needed to pass the TARP plan. 140 Democrats voted in favor, and 66 Republicans supported the bill, leaving the bill 12 votes short. Internal vote counts prior to the vote expected roughly that number of Democrats to vote for the bill, but expected a greater number of Republican votes than materialized. Assuming that Democratic votes on the bill do not change, House Republicans are likely to be the key to unlocking additional support for the bill, so the focus over coming days is likely to be on what additional concessions they may request.

2. Congress will be in recess on Tuesday, and will return to legislative business on Wednesday. Another vote then is possible, but looks likely to occur at earliest on Thursday. It is not clear whether major concessions will be necessary, or whether minor changes to the bill would be enough to secure the incremental votes necessary for passage.

3. The House can bring the bill up quickly if a compromise is reached among House and Senate leaders and the White House on potential modifications. If the House is able to pass an amended plan later this week, the Senate should prove to be less challenging. However, the legislative process in the Senate takes at least two days for procedural reasons, so passage in both chambers by the end of the week could be a challenge.

Interesting That This "Crisis" Is Happening During An Election Year

2008-09-28T15:15:00.000-07:00

Just because of the way it shapes the discourse on the matter, the way it causes the public to value the players and the voices, the way it will shape the election, and how the election will shape the eventual path forward. I watched most of the McCain / Obama debate last week, and I have to say, when asked about their opinions on the bailout plans, I felt embarrassed that either tried to express any opinion whatsoever. Henry Paulson's request for $700bn came with a "trust me, I know what I am doing" style plea, there wasn't much to make an opinion of. Most of congress seemed perplexed by the details, so why should Obama or McCain represent to have a grasp of what it entailed, and then elaborate? Why can't they just say "I dunno, my economists will advise me on that when the details become more clear..."?

The republicans have voted down the bailout plan. The market is in a panic-style reaction. Stocks are way down, treasuries are way up, flight to safety. Even if some of them support the bailout effort, they all know that if they allow it to pass on a democrat-carried vote, McCain can soapbox all the way to the November election about how the democrats are bailing out Wall Street. You have to wonder what this would have looked like if it happend after the election...

Here are some more politically charged items floating around my desk today:

1- NY Times article dated 9 years ago tomorrow, talks about the Clinton Administration urging FannieMae to make more subprime loans. From the article:

"The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring."

2- Ron Paul preaching tough medicine in today's bailout plan vote.

3- On the fall of Lehman Brothers, Bill Bonner writes:

"... how a company that survived the Civil War, the railroad bankruptcies, the panics, WWI, the Great Depression, WWII, and the Cold War couldn't survive the biggest financial boom in Wall Street history?..."

In fairness, they survived the boom, just not the bust. But thought-provoking enough... well said.

Where Are California's Most Undervalued Real Estate Markets?

2008-09-26T17:26:00.000-07:00

According to the Sept 10 Kiplinger Letter, which they admit may surprise some, they are:

San Diego 17.2% undervalued!
San Francisco 15.9% undervalued!
Stockton 13.8% undervalued!
Vallejo 13.4% undervalued!
Modesto 12.9% undervalued!
Santa Ana/Anaheim 12.4% undervalued!
Santa Barbara 12.3% undervalued!
Sacramento 11.1% undervalued!

Despite the fact that some of these areas are known to have some of the worst subprime mortgage problems, Global Insight (a forecaster) suggests that they have relatively healthy economies, strong job growth to support demand, and home prices have already dropped significantly.

hmmm... signs of a bottom? or overly optimistic?

Buy And Bail vs Note Modification

2008-09-23T11:06:00.000-07:00

If you bought your home sometime in 2005 or 2006, you likely nailed it at the peak, depending on exactly where and exactly when you bought. And if your home has lost a significant amount of value, you have to wonder why you are still paying the bill for the mortgage, especially if the mortgage is bigger than the value of your home.

So what can you do?

+One option is to stick it out. Do nothing. Keep paying and stay put until the home value comes back... how ever long that ends up taking.

+Another is to attempt a short sale, where your lender agrees to let you sell your home for less than the balance owed on the note, and then be forgiven of any debt you cannot pay off with the proceeds from the sale.

+Less appealing is foreclosure. Let the bank take your home, walk away, etc. Bank's problem now. Your credit will be trashed, but you won't keep bleeding cash into a bad investment. Hope you can find a new home (even a place to rent) with that new 500 FICO score...

+Enter the Buy & Bail strategy. Buy a new home now, and once it closes, let the old one go into foreclosure. This sounds nice if you bought your home for $1MM, and now the one next door is selling for $600k. The problem is, your new lender wants to make sure you can afford the payments on both homes. So you try to off-set the costs of the home you will depart by bringing in a renter. If you can find one.

This might have worked, except that banks are concerned about fraud when you claim a renter who may just be a straw person, or suggest you are going to rent a home, and then walk away from the obligation to repay... aka "Bail". Your intentions clearly were not honest, and the new lender now has a brand new client with a 500 FICO score. That's not what they were signing up for.

So underwriting guidelines are responding to this practice, which has been seen before in top-heavy markets, by changing the way they value that rental income. Quite simply, if you don't have at least 30% equity in the home you will be departing, you don't have adequate 'incentive' to make good on that payment. Why would you keep paying the bill? So the new lender says: rental income is worthless in this scenario.

Here is some text from a recent FHA announcement:
This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage.

That will break down quite a few "buy and bail" strategies for consumers who thought they were making a crafty maneuver in this challenging market.

But is there a better alternative?

Have you considered requesting a note modification? There is a bloodbath going on out there. Banks are at the epicenter. They do not want you letting your house go into foreclosure. They can't take it, literally. Maybe you bought more house than you could afford, maybe the payments skyrocketed based on a loan feature you were not informed of, maybe you lost your source of income, had a divorce, etc... you're ready to throw in the towel.

Sensitive to the threat, and also under pressure from the government banks are working with consumers to renegotiate the terms of their loans. Results can include: forgiveness of debt, restructuring of payment, reduction of rate, extension of terms, etc. Any feature of your loan can be re-written. You can contact them yourself, but you'll have much better results with an attorney in your court. Learn more about this here.

Down Payment Assistance Programs - Updates At Legislative Level

2008-09-11T10:02:00.000-07:00

I am breaking a long inexplicable silence here to follow up to a recent post about rules surrounding seller-funded down payment assistance programs (DAP).

What's a DAP? (or a DPA? I'm not sure if there is an official acronym; both seem prevalent at this point). With the credit markets recoiling, the ability for homebuyers to enter the market with small down payments has been hampered. Big time. Lender's simply want the borrower to have skin in the game, so that if the value drops a little, they still have incentive to keep paying back the loan.

The DAP programs that were eliminated in the recent HR 3221 Housing Bill refer to those facilitated by a charitable organization to essentially 'launder' a down payment from the seller of the home. The down payment needs to be from the buyer's funds, not the seller's. If it came from the seller, its the same as buying the house for cheaper. Proponents of DAP argue that the borrower has equity in the house, regardless of the source. Opponents claim that the fair value of the house is really the purchase price less the seller-funded down payment, or in other words, there is no equity.

FHA was allowing these programs until they realized that default rates on borrowers with DAP assistance were 3x that of borrowers who funded their own down payment.

But without DAP in the market, fewer buyers can get into the market at entry level. And if there are no first-time buyers, who do the move-up buyers sell their homes to? They don't, and all of the sudden, nobody is buying anything, and inventories skyrocket, and prices fall... sound familiar? This is the "plankton theory of housing". We need first time buyers to keep everything moving...

There are also community organizations that provide down payment assistance, but do not receive funding from the seller of the home. There is no regulation on the table to curtail these programs, and with them, buyers can still obtain 100% financing in some circumstances.

Here is the latest on the seller-funded side of the practice:

At this point the ban on the use of seller-funded down-payment assistance with FHA-backed loans takes affect October 1st. But a compromise may be in the works. HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, may pass. HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680, who relied on seller-funded gifts, might be subject to higher insurance premium fees. Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA's insurance requiring taxpayer subsidies. Chairman Barney Frank said, "The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing…That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground.”

Indymac Failure Raises Important FDIC Questions

2008-07-24T14:21:00.000-07:00

For years, FDIC coverage has been a fairly irrelevant concern in the personal finance area. But with the recent collapse of Indymac Bank, and with so many financial institutions teetering in this environment, it's a good time to get familiar with the risk of having large deposits with banks, and with how FDIC insurance works.

A history of the FDIC can be viewed here, and their main site is here. For up to $100,000 per depositor, checking and savings deposits are insured against institutional failure by the federal government. There are some particular nuances to this however, when you have multiple deposits with different institutions, or deposits in different types of accounts or with different joint ownership, etc.

A new tool published on the FDIC site will help you tally up your savings to find out what your protection is exactly.

With increased down payment requirements for mortgage financing these days, we are seeing more and more consumers with greater than $100k in savings. Even if it is a temporary position as you prepare to make your down payment, you don't want to get caught over-exposed with the wrong custodian.

And if you are someone who sits on this much cash for longer than short-term, you may want to run your strategy by a financial planner, especially in light of our current inflation.

Interesting Perspective On Federal Economic Stimulus Package From Hoisington Investment Management (Watch Out For Deflation! ...yes, "DEFLATION")

2008-07-23T10:54:00.000-07:00

From a recent article presented by John Mauldin in his "Outside the Box" weekly, Van Hoisington and Dr. Lacy Hunt write:

"Fiscal Policy would seem to be undisputedly supportive for the economy with Treasury's $110 billion in rebate checks and a Federal budget deficit that is approaching a record $500 billion. But that is not the case. The Treasury does not $500 billion in its checking account to cover the deficit, nor even the lesser amount for the rebates. The Treasury has to raise these funds by selling debt securities to the private sector. Credit availability may be thought of as a pie. When the Federal sector, which is the economy's premier borrower, takes more of that pie, fewer dollars are left for the private sector. Thus, deficit financing crowds out funds that would have gone to private uses. With the exception of the Federal funds rate, in the first half of this year, virtually all money and bond yields rose, a clear sign that the deficit usurped funds for the private sector. This has had the impact of slowing, rather than stimulating economic growth."

This makes for an interesting debate. Is it all politics? Does the government really lack the economic understanding to do what's best for us at this point, even if misjudgements that got us here were made in the past? Or is this perspective simply inaccurate? What portion of those rebate checks work back into the economy, stabilize personal finances, or help somebody avoid a foreclosure, etc?

Down Payment Assistance Programs - Keeping An Eye On Legislation

2008-07-23T07:01:00.000-07:00

Lots of sparks flying right now, with popular down payment assistance programs (DAP) to first-time home buyers under scrutiny, and a mortgage industry fearful of losing another business niche. This recent story brought quiet a bit of chatter into the markets.

The FHA, who lost $4.6 billion last year, may be losing their ability to accept down payment assistance money. Nearly 79,000 people last year took advantage of them, where nonprofit groups provide buyers with money for down payments and home sellers then reimburse the organizations and pay an administrative fee. The FHA said seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the agency. The Senate version of the housing bill would have banned the programs but the House version would not. At this point a compromise bill has backed the Senate's version on this, which also is supported by the Bush administration.

Credit Score Tips (5 Common Mistakes To Avoid) From Edward Jamison

2008-07-11T08:47:00.000-07:00

With mortgage lenders raising their minimum FICO score requirements lately, it is as good a time as ever to get in touch with your credit profile. A high percentage of credit reports we look at contain errors and inaccuracies that our clients were unaware of - and if we are working on a purchase contract, or taking advantage of a briefly open window of opportunity to refinance, its often too late to do anything about it by the time we see the score.

Edward Jamison is an attorney who provides credit score repair advice. I am not endorsing his product, but he has a significant presence in the mortgage industry as a go-to for clients in need of credit clean-up. He'll tell you that much of what he does is stuff a consumer can do on their own, as long as they know how credit scoring works.

Credit scoring models are not 100% transparent, but there are many sources out there who claim to know how to tweak here and there. The problem I see is that much of the advice conflicts with one another, sometimes in significant ways. Jamison seems about as credible as any in providing advice, so I figured this brief article was worth a read at least. Look it over and see if you have made any of these mistakes. And if you need further help, contact me and we can go through your report together.

What's The Monthly Payment On A 2 Billion Dollar Home?

2008-06-30T18:22:00.000-07:00

A lot.

But you probably have other types of problems when you are worth $42bn than making your mortgage payment. Such as, figuring out which of your 6 levels of garage you want to park on for any given day, or deciding which in-your-house gym you'd like to lift weights in. Or finding your kids.

Due up this January, the world's most expensive home. There are video and photo tours in this article. Not really my style, but I could manage...

Inflation Panic 2008 - What Are We Headed For?

2008-06-24T16:33:00.000-07:00

I wonder if in a few years, when we look back at this great Credit Crunch episode, and the associated economic slowdown, if we will remember the extreme moodiness of the markets during the transition. It seems every other week the Dow is posting multi-day consecutive 3-digit gains or similar consecutive losses. The financial news media is loaded with guys who say "we are nearing bottom" or "we are at the bottom", yet none of these guys was here telling us we were headed for this in the first place, so how are they expecting to be viewed as credible? One article I read recently (from Marc Faber, introduced by John Mauldin) labeled this a "conspiracy of optimism". A pretty dismal prognosis for our economy is laid out in this piece. I have to admit, it was a bit jarring to read.

But the view is a slight bit different in this one, from Pimco's Paul McCulley. With all this debate going on about stagflation, wage-price spirals, the 1930s (depression) or the 1970's ("the lost decade", at least economically speaking), and general financial Armageddon, eyes are on the Federal Reserve this week for an updated policy statement. Expectations, via the Fed Funds Futures trading activity, are all over the place in predicting the Fed Funds rate over the coming year. There is a general lack of consensus, the market is confused.

It will be interesting to see if "Doctor" Bernanke appears on board with McCulley's concept of a Hippocratic Oath, and there should be a lot of attention on tomorrow's Fed news release.

Interesting times for sure. Where exactly is this economy headed, and what's it going to mean to you? How does it impact your investments? Your employment? Your family? Are you positioned to endure the downdrafts as well as participate in the bull runs?

Hidden Camera Inside A Mortgage Company Office?

2008-06-13T15:02:00.000-07:00

Is this the scene inside a local mortgage company office? Could be, although the lack of empty desks might be a clue that it is not. Nonetheless, it is a fair depiction of the office rage that I have heard too many times in the last year.

I have heard a few statistics ranging from 40-50% workforce attrition in recent weeks. To be perfectly honest, while I know some great people are being knocked out, the industry was due for a cleansing. All markets need to correct when they grow out of control for a prolonged period.

How Foreclosures Increase The Risk Of West Nile Virus

2008-06-13T08:58:00.000-07:00

A couple of interesting news headlines today, especially when you put them together. First, a 48% surge in foreclosure filings nationwide for the month of May. The 'pig in the python' is just beginning. If you want to learn more about this, and more about the shape of things to come, email me.

And second, public health workers in Phoenix have devised a strategy to combat a spike in mosquito populations now that so many homeowners have abandoned their homes, and their pools, leaving the water to stagnate and become a habitat for the little pests. They are concerned that thriving mosquito populations raise the risk of outbreak of West Nile.

So this is another sign of how foreclosures can drag down community integrity. We have some choppy waters ahead still, but there is opportunity across the board. You must learn to position yourself, and ownership of a home requires much more careful planning today than in recent years. Work with a qualified professional to review your position and if you must abandon your home, for the sake of the neighborhood, drain the pool on your way out the door.

Ed McMahon In Foreclosure - Lessons Learned?

2008-06-09T10:38:00.000-07:00

Ed McMahon, notable sidekick to Johnny Carson for what, 25 years or so, host of Star Search for 12 years, and pitchman for Publishers Clearinghouse Sweepstakes for who knows how many years, is making headlines for hitting the skids. At 85 years old, he is late on roughly $650,000 in payments on his $4.8 million mortgage with Countrywide.

So what's the problem? For a guy who's been working forever, in the entertainment industry, where we are taught that employment is very lucrative, this seems pretty odd.

Apparently at 83 years old, Ed broke his neck, and has been unable to work. And the housing market coupled with the his injury is forcing him to fail making his payments. He put the home on the market 2 years ago, and has been unable to sell it.

Are we really supposed to believe that a guy who was forced to stop working at 83 due to injury, and worked in a lucrative business all his life is supposed to go broke 2 years later? Are we supposed to feel sorry for this? In the article, McMahon cites "the economy, health problems, and poor planning" as reasons this happened. I think we can strike the first two excuses from the list.

He isn't exactly shirking responsibility, but this is an "aw, shucks" way of avoiding the significance of POOR PLANNING. First of all, the guy should have socked away a boatload of cash in his line of work. Second, he should have planned for retirement, differently, and should not have been living in a house with 4.8MM in debt unless he had significant liquid assets on the other side of his balance sheet. I love that he was still working at age 83, but sadly this seems now to have been out of necessity rather than a passion for his work.

The market has been turbulent, this much is obvious. But when high profile, high income-earning people like this get caught up in the mess, you have to take a hard look at why. Is the economy so bad that even rich guys like Ed McMahon, Jose Canseco, and Evander Holyfield are getting wiped out? Or is it a fact that people with more money that most of us can fathom can get ruined with poor planning, while modest income-earning blue collar workers, and others can take a slow steady path to safety and wealth if they plan wisely? The answer is very clearly the latter.

Look at this headline for Holyfield's case. "Not Broke, Just Not Liquid". You must learn how to plan, and learn not to compartmentalize your financial decisions. For those who's mortgage is their biggest bank account, this is where it begins. Work with a Mortgage Planner to learn how to position yourself for the right balance of cost, safety, and return on your investment.

The Wise Words Of Paul McCulley

2008-05-30T11:13:00.000-07:00

Paul McCulley with Pimco is one of my favorite economists to listen to or read about. He has some great ways of describing the markets, and especially the current credit crisis, against the backdrop of classic economic theory. I have a few recent articles that are each insightful and interesting, and couldn't throw into the recycle bin before reading a few times. Here are some highlights, with links through to each:

-November 15 2007:

"Indeed, I’ve taken to calling the 2004-2006 vintages of limited or no document, no down payment, negative amortization (pay-option) subprime ARM loans as not loans at all, but rather free, at-the-money call and put options on property prices. Not exactly free, to be sure, as the putative borrower was obligated to pay something in cash interest, even if not the full amount, with the unpaid amount being added to the principal.

But as a practical matter, the options were essentially free. If home prices went up, the putative “borrower” would stay current, as the call went into the money, refinancing before the ARM reset, essentially re-striking the option exercise price higher. Simply stated, the borrower wouldn’t default, as logical people do not walk away from in-the-money call options.

And they didn’t, until about a year ago. As a consequence, default rates on pools of such subprime loans came in amazingly low, soothing rating agencies’ nerves and re-enforcing the shadow banking system’s appetite for securitized pools of them.

But if house prices didn’t rise, the call option would fall out of the money, and the put option – the right to default on the full principal value of the loan – would go into the money. Indeed, house prices didn’t have to fall, but simply not rise for this outcome to unfold, given negative amortization. In which case, the putative borrower would no longer have any incentive to stay current: Why throw good money after bad for an at-the-money call option that you got for free, which has gone out of the money?

And so it came to pass about a year ago, when early-payment defaults became a new phrase in our collective lexicon. The home price bubble popped, the at-the-money call options went out of the money, the at-the-money put options went into the money, and the holders of them remembered the wisdom of Paul Simon’s 1975 treatise on 50 ways to leave a bad situation:

You just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee
And get yourself free

And with Jack, Stan, Roy, Gus and Lee setting themselves free, the shadow banking system was revealed to be caught between the longing for love and the struggle for the legal tender, living life as Jackson Browne’s Pretender, ships bearing their dreams sailing out of sight, with the junkman pounding their fenders. To wit, a run on the asset backed commercial paper market!"

- March 2008 (interviewed by Katheryne M Welling)

"Only the rating agencies? I’d say the creators and issuers of all that funny paper bear some burden.
They were clearly at the scene of the fraternity party. But it was the rating agencies that were providing the kegs. You couldn’t have played the game without the rating agencies.

I’d say Wall Street and the banks provided the kegs and the rating agencies provided the false IDs.
Touché. Good analogy."

- May 2008

Read the whole thing via the link above. A great walk-through of the role and responsibility of the Federal Reserve, and some throwbacks to McCulley's often-quoted evident mentor, Hyman Minsky, who was a noted specialist in Financial Instability Hypothesis.

Buy Or Rent - What Can We Learn From The Rent Ratio?

2008-05-30T09:54:00.000-07:00

The New York Times has an interesting graphic illustrating the costs of renting versus owning a home in various US cities. The Rent Ratio is a useful metric for people contemplating the costs of renting versus owning a home. Bay Area residents will notice that the ownership premium is higher here than many other areas, especially non-coastal metro zones. Historical appreciation records are likely the reason why buyers are willing to pay a greater premium in these cities.

Understanding the true costs of renting relative to the true cost of owning, you need to look well beyond average rent prices and average mortgage payments for equivalent properties. A true rent vs. buy analysis will take into account:

inflation of rent costs
opportunity costs of down payment funds that could have been invested elsewhere
return on investment of dollars invested rather than spent on mortgage payments in excess of equivalent rent
tax implications of owning real estate
appreciation of housing as an asset

Also, are we looking at the cost of renting the home we want to buy? Or are we looking at the cost of renting the home we would likely rent, if we chose not to buy? They may not be the same, for when we are not required to sink 100k or 200k into a down payment, we may be inclined to spend an extra $200, $300 even $500 a month more in rent. If you want to see how a true rent vs. own analysis works, please email me.

Some other interesting observations: San Jose, CA has the highest ratio. New York City is surprisingly low, suggesting that it's not only expensive to own, but also to rent in that city.

OFHEO's Four Quarter Price Change By State For US Housing

2008-05-23T08:35:00.000-07:00

Interesting graphic. With all the news about house price declines, and expectations of declines in the current marketplace, there are some interesting take-aways from this chart, published last week by OFHEO. You can read the full report here. OFHEO says the decline in values is accelerating. I like the pictures, and this one is telling. Most markets appear flat, and Utah and Wyoming are showing above-average gains year-over-year. Worst performance is in California. Easy come, easy go? Housing prices, like all asset value cycles, are showing characteristics of "Mean Reversion".

Two Great Market Articles

2008-05-19T15:18:00.000-07:00

From the WSJ, "Bernanke's Bubble Laboratory". Within this, a great quote from famed economist John Maynard Keynes "the market can remain irrational for longer than you can remain solvent." This quote conjures up memory of a former roommate who was an analyst with a major Wall Street firm, and his frustration over the 1999-2000 apex of the NADAQ. He simply didn't believe it, and went short on an NASDAQ index security. He held out and held out, and finally was forced to cover about a month before the market turned and dumped. He knew better, but the market still rules...

From BBC News, "The US Sub-Prime Crisis in Graphics". Loaded with visual aids.

Another Reason To Pay As Little As Possible Into Your Home Equity

2008-05-16T15:29:00.000-07:00

Reason: Corrupt Insurance Companies.

File under: SAFETY.

Staying liquid is safer. Might it cost you a few more dollars? Sure, but its safer. What's that worth to you? Nothing brings that point home like images of houses in flames, homeowners in tears, and more houses in flames.

Watch all three installments of this video, an effort by PBS and Bloomberg.

I can't really weigh on where the bias is in this, but I am sure there is some. The media loves to portray big business (insurance companies) as evil, and looking to choose dollars over people all day long. But how well do you know about your homeowners policy? Do you know anybody who lost their home in the Oakland Hills Fire? How about the 2003/2004/2005/2006/2007 fires in San Diego/Los Angeles/Orange/San Bernadino/Santa Barbara/Ventura County?

What I can do, is point out to you that it is important to review and understand your policy. It's important to work with an insurance provider who is reputable and reliable. If you need a referral to one, please email me.

And I can also teach you some highly effective mortgage strategies that help you take control of your financial profile, build liquidity and safety, and rest easy at night.

Nobody expects disaster to happen to them. But if it does, and you have a fight on your hands with the insurance company, it can take YEARS to settle, or be indemnified. Regardless of the outcome, where are you going to live while the fight goes on - and how are you going to pay for it when the insurance company is denying your claim?

Here's another example: Senator Trent Lott has been down this road related to Hurricane Katrina devastation to a home he owned free and clear.

This American Life - Podcasting On The Giant Pool Of Money AKA Mortgage Meltdown

2008-05-14T09:19:00.000-07:00

If you are looking for an overview of the mortgage meltdown, a recent This American Life podcast provides an excellent comprehensive overview. They touch on just about every dynamic in 'the perfect storm' that led us to where we are today. Specifically, they hit on:

the "innocent consumer vs innocent banker" debate
excess global liquidity leading to poor evaluation of investment risk
abuse of low documentation financing*
CDOs and rating agencies
hot potato nature of the process between origination and securitization of mortgage loans
the unexpected end of house price appreciation, and how it exposed systematic problems
small banks vulnerability to leveraged wharehousing from larger banks
challenges related to loan modifications in the wake of securitized and derivitivized mortgages
why the "credit crisis" was not ever going to be confined to "Subprime"
why the credit crisis extend beyond mortgages into student loans, credit cards, etc.

Some criticisms from my point of view while listening...

Could use more of "The Nothing Song"
* from item 3 above, they fail to acknowledge the intent of low documentation financing and why these programs were really created in the first place.
did this "poor Marine" really think he could afford the home? Sounds like the broker was a creep, but would the Marine have been as willing to go along with all of this if he didn't expect the home to be skyrocketing in value?

This is well worth a listen. Its nearly an hour long, but if you are interested in understanding why it is currently much more difficult to borrow money to buy a home, why foreclosures are happening at a record pace, and how the natural motivation of greed causes financial markets to bubble up and pop every once in a while, then this is an hour you need to set aside.

If you want to measure this against the historical record of financial crisis, see "Manias, Panics and Crashes" by Charles Kindleberger.

If you want to look at this within the context of of chaos and complexity theories, and learn how we might predict when and where and how big the next financial crisis will be, see "Ubiquity: Why Catastrophes Happen" by Mark Buchanan.

Jumbo & Conforming Loan Limits - More Market Chatter 5/12/08

2008-05-12T16:06:00.000-07:00

Last week Fannie Mae made an announcement about a new "keys to recovery initiative". Below is an overview as forwarded by a colleague. We are expecting more to follow this week, but at the origination level, we are already seeing the effects of this in the Jumbo-Conforming sector pricing for the new high balance conforming sized transactions. If you have questions about this, email me.

KEYS TO RECOVERY INITIATIVES

Fannie Mae’s Keys to Recovery™ initiatives are geared toward providing liquidity, stability, and affordability to the housing and mortgage markets for the long term, and include steps to keep struggling borrowers in their homes, assist prospective homebuyers with home purchases, and stabilize communities impacted by the
mortgage market downturn. The initiatives include
1) a new refinancing option for Fannie Mae “underwater” borrowers that will allow for
refinancing up to 120% of a property’s current value;
2) a renewal and expansion of the company’s partnership
with the state Housing Finance Agencies (HFAs) to provide $10 billion in financing for qualified, first-time
homebuyers;
3) in partnership with Self-Help Credit Union, a new initiative that allows families in hard-hit
communities to reside in foreclosed properties on a rent-to-own basis; and
4) pricing for new jumbo-conforming
loans that will be flat to conforming for portfolio asset acquisition through the end of the year.

Refinancing “Underwater” Borrowers
With home prices declining in many areas of the country and lending standards tightening as a result of the
ongoing turmoil in the housing finance system, many borrowers find themselves with mortgages that exceed
the value of their homes and are locked out of refinancing into safer loans that would allow them to sustain
their mortgage payments.
In order to assist borrowers whose home equity is “underwater,” reduce foreclosures and support sustained
homeownership, Fannie Mae will purchase refinanced loans the company owns for up to 120% of the current
property value provided the borrower is current with their mortgage payments.

HFA Investment
HFAs exist to provide affordable homeownership and rental housing opportunities within their states. The
majority of HFA single-family business is for first-time homebuyers who have received borrower counseling
and down payment and/or closing cost assistance from the government.
Fannie Mae has maintained a long-term agreement with the National Council of State Housing Agencies
(NCSHA) to purchase loans generated by the HFAs. The company is renewing and expanding its agreement
with NCHSA to purchase up to $10 billion in HFA loans by the end of 2009. In addition, the company will
provide preferred pricing on HFA business to lower borrower costs for first-time homebuyers.

Neighborhood Stabilization
In order to minimize the neighborhood impact of foreclosed properties, Fannie Mae will support an initiative
with Self-Help Credit Union in partnership with local non-profits to purchase Fannie Mae-owned, foreclosed
homes in hard-hit neighborhoods. The nonprofits would acquire and rehab the properties, and then sell them to qualified borrowers or enter into a customized lease-purchase agreement. The initiative will be geared toward borrowers who have the income to qualify for the home purchase, but need additional time to improve creditworthiness. Participants choosing the rent-to-own option would be granted up to five years to qualify for the mortgage and receive extensive credit counseling during the lease period.

Jumbo-Conforming Loans
Following passage of the Economic Stimulus Act of 2008, Fannie Mae is temporarily able to purchase loans
greater than the conventional-conforming loan limit of $417,000. In certain high cost-areas as designated by
HUD, the company is able to purchase jumbo-conforming loans up to $729,750 in the continental U.S. The
company is now accepting deliveries of 15-year and 30-year fixed-rate (FRM), and certain adjustable-rate
(ARM), jumbo-conforming mortgages.

In order to bolster liquidity in the jumbo-conforming market and help reduce rates for jumbo-conforming
mortgages in high-cost areas, the company will now:
• Price new jumbo-conforming loans flat to conforming for portfolio asset acquisition through the end
of the year. This means that although jumbos are not TBA-eligible, we will be pricing them as if
they were.
• Allow for cash-out, jumbo-conforming loan refinancings.
• Expand loan-to-value (LTV) criteria for jumbo-conforming purchase loans and limited cash-out
refinancings.
• Offer expanded jumbo-conforming FRM and ARM options.

HomeStay
The company’s Keys to Recovery™ efforts build on Fannie Mae’s HomeStay™ initiative announced last year.
The company is working with lenders, loan servicing companies and policymakers to respond to the housing
and mortgage market crisis with a goal to minimize the impact on families and communities by preventing
foreclosures, supporting counseling efforts, and providing market stability. Through HomeStay™, since the
beginning of 2007, the company has:
• Helped more than 200,000 at-risk homeowners refinance into safer loans or work out their loans,
including nearly $28 billion in refinancings for subprime borrowers.
• Provided more than $10 million in grants – and hundreds of employee volunteer hours – to support
foreclosure prevention counseling and workshops since the housing crisis deepened last year.
• Worked with loan servicers to emphasize work-outs for delinquent loans, instituted attorney incentive
fees for workouts, provided HomeSaver Advance™ loans that allow borrowers to catch up on their
delinquent mortgage payments, deployed staff to work on-site with our largest servicers, and made
dozens of operational changes and enhanced servicer authorities to allow for easier modifications and
work-outs.
• Supported HOPE NOW initiatives and public policies to give at-risk and delinquent borrowers a better
chance to afford their mortgages.

Jumbo & Conforming Loan Limits - More Market Chatter 5/8/08

2008-05-08T13:11:00.000-07:00

A big wet blanket got thrown on the whole idea of the new conforming loan limits when we realized that the banks were going to take advantage of the new limits to off-load some frozen pipeline to Fannie Mae and Freddie Mac, but not turn around and extend the offer to the consumer. As a result, we saw a new market form between Conforming and Jumbo sized loans - the new "Agency Jumbo", "Conforming-Jumbo", "High Limit Conforming", or whatever you want to call it - the names are all over the place. But banks priced these much closer to the currently-dysfunctional Jumbo market rates - with 30 year loans pricing at 7% and higher.
But not any more! Here is some fresh news from a colleague:

Fannie Mae threw some chum into the water for loan agents in high balance areas, saying that it will buy jumbo mortgages for the same prices as smaller loans. Some random notes:

Fannie is expecting the benefits of the price improvement to be passed along to the consumer. The intention and spirit of the price change is to improve the rate for the borrower, not to present an arbitrage opportunity. Fannie’s policy is that for loans already in pipeline lenders can float the borrower’s rate lower or sell already closed loans at the originated market level - they will not buy closed loans at flat to conforming. Other investors have yet to announce firm guidelines regarding those loans already locked in.

Credit pricing is unaffected, and all adjustments still apply, including the 25bp for fixed rate, 75bp for ARMs, and the 25bp adverse market delivery charge.

Fannie Mae approved seller/servicers should see approximately a 37bp yield improvement for the jumbo-conforming fixed rate and a 20bp yield improvement for the jumbo-conforming 5/1 adjustable rate whole loan postings.

Fannie Mae Trading Desk will buy jumbo-conforming adjustable rate securities at levels flat to where they are bidding conforming ARM securities.

Fannie also announced that they will handle refinancings of non-delinquent mortgages for as much as 120 percent of property values when it owns the existing loans.

Some investors made the change effective immediately and reduced the spread from 150 basis points down to 50 bps, of which 25 bps is a direct fee to Fannie Mae.

Manual u/w is still required, DU can be run but it must meet the product overlays.

Questions about what any of this means TO YOU? Email me here! This appears to be legitimate, real positive news. For the first time since the crisis began back in August, we are seeing 30 year rates near or even below 6% at the new conforming limits in high cost areas!

Interest Rate Spreads And Why The 10 Year Treasury Is Not The Best Indicator Of Mortgage Rates

2008-05-07T09:03:00.000-07:00

One of the topics that comes up on a daily basis with my clients is the relationship between mortgage rates and the headline-grabbing interest rate reference points like the 10 Year TreasuryNote, or the Federal Funds Rate.

A very common misconception is that mortgage rates are based on the 10 Year Treasury Note. I am not exactly sure what the logic there is, but I have heard people say that the average 30 year mortgage lasts only10 years. Seems like a pretty loosey-goosey way for a bank to call out a price for lending their money out on a 30 year term. Do mortgage rates correlate to the 10 Year Treasury at all? Over time, mortgage rates and the 10 Year Treasury do trend in the same direction, but on a day by day basis, they often go in different directions, or at least at a different pace. There are separate specific implications for each, and they react to a different set of data points in different ways - at times, the differences can be significant.

The other question I get rather frequently is how the Federal Reserve will impact rates with their recent string of cuts to the Fed Funds rate. People continuously expect that its best to wait until after the cut to take advantage of lower rates. Again, not the correlation you are looking for. The Fed has cut 7 times in the recent cycle, and on the first 6, mortgage rates spiked in response. On the last one, rates went down a little. Do mortgage rates react to the Federal Reserve actions? Absolutely, but its the greater economic context that matters at the time, and dictates the type of reaction.

So what's the best metric for determining mortgage rates? MBS, or mortgage-backed securities, aka mortgage bonds. Read a definition of these here. When mortgage bonds trade at higher prices, the associated interest rates drop. This tells lenders for new mortgage issues what the current value and rate of return is on long-term bond money, and helps them set their rates.

Each of the first 6 cuts this time around have brought on a perceived increase to the threat of inflation. Long term fixed-income securities, like bonds, Treasury Notes, etc, HATE inflation. If you were a bank, and committed to lend 100 dollars to somebody for 30 years, and then inflation doubled, your 100 dollars would be worth far less than you had expected it would be when you loaned it out. So you would loan your next 100 dollars at a higher interest rate to compensate. Accordingly, rates on mortgages jumped at each time.

Then on the most recent cut, the Federal Reserve hinted at the idea that this would end the cycle. It gave the bond market confidence that no further inflation pressure would be invited, and the bonds rallied on the news. Rates went lower.

The bottom line when it comes to trying to predict mortgage rates, is that you need to know where MBS are trading, and what the climate is for them amidst the constant inflow of economic data points. They react very strongly to things like the Unemployment data, GDP, CPI, PCE, PPI, Home Starts and Sales, and a bunch of other metrics. Depending on the mood, different indicators have different impacts. If inflation is a hot button, the inflation barometers like the CPI and PCE will have heavy influence. If we are looking for indicators of recession, MBS will be sensitive to GDP, Consumer Confidence, Retail Sales, etc.

The Cleveland Federal Reserve has an article out discussing the increasing spread between Treasury and mortgage rates. With the current credit crisis, money has rushed into bonds as usual. But mortgage bonds have been relatively less appealing, as the whole mortgage marketplace is at the epicenter of the crisis. Last time we had a recession, money flooded into all bonds, Treasury and especially MBS because the housing economy was strong, and MBS values were thus very secure. This is why we are seeing a lack of correlated movement between these two instruments.

If you are entrusting a mortgage professional with the management of your debt, you need to align with one who understands interest rates. They need to specifically understand the market for mortgage-backed securities, and the economics behind the current credit and liquidity crisis. If the person you are speaking with tells you that mortgage rates are based on the 10 Year Treasury, or especially if they call the 10 Year Treasury Note a Treasury Bond, there's a risk they are going to mishandle your business. And if they say they 'can't see into the crystal ball', its likely a sign that they don't have a clue what upcoming events might be influencing rates.

What Was Wrong WIth The Mortgage Business? Stuff Like This

2008-05-05T21:17:00.000-07:00

Here is a story about an internal memo from a major bank that was leaked out to the public, and to the media. It was a primer on how to trick the internal underwriting software into liberally approving loans that may not pass muster with a human underwriter. Such programs will provide a fast track to closing that essentially bypasses the human "manual" underwriting effort. The secret? Inflate the applicant's income to make it look so "over-qualified" that the underwriter doesn't even ask to see proof of income.

I know, I know. Just read the article. This represents an investment appetite well out of touch with risk assessment, and is symptomatic of an exuberant market. I'm not a huge fan of the 'media tint', especially with their ability to adequately report on the credit crisis, and this is no exception. There are misrepresentations, and the media loves to portray the entire industry as deliberately trying to hurt consumers. Keep in mind, banks don't benefit when they write loans that go into default. Even though they often transfer the liability through securitization into the secondary market, they still have rating agencies , shareholders, and reputations to answer to. Granted, there were flaws all up and down the system, but that's my point. The banks were not looking to make stupid investments so they could deliberately cause people to buy - and then lose their homes. They got carried away much like the borrower who signed their name to the application with bogus data got carried away. All based on the expectation that the home would keep rising in value. Economics.

Investor Emotion Cycle: Is Now Time To Buy?

2008-05-05T11:49:00.000-07:00

We are seeing a classic asset bubble cycle in the housing market (as well as the credit market, etc). Many investors feel that the best time to buy is when the general public is selling, and financial market history is full of retrospective examples that validate this philosophy. The chart below provides a walk-through of the cyclical nature of asset markets, often characterized by irrational (exuberance) on the way up, and irrational (panic) on the way down.
The curve may not always look this symmetrical, but the general idea is clear. And so where are we with housing in this cycle? I'd say we are somewhere between "Panic" and "Despondency". And there is no doubt that great deals are out there today, and will continue to show up on the market. Today's home seller is motivated by fear or necessity; they are not selling because they think its the best time - they just think today is better than tomorrow.

I think the real test is how long this lower part of the curve drifts on before we see "Hope" take over. We are seeing seasoned investors out poking around again, and looking for the 'right' deal. I get the sense that many do not believe we have seen the optimal entry point back in the market. Could be a slow rise back to optimism, but it will eventually get there...

Social And Economic Problems With The US Housing Market; Would You Rent Your Home To Jose Canseco?

2008-05-02T10:39:00.000-07:00

First things first. Jose Canseco, who I will always remember for bouncing a ball off his head and over the home run wall, and getting pulled over in my hometown a few times cruising in a convertible and a gun in his lap, is in foreclosure. Unless he owns another home to move into, he's looking for a place to rent. Are you looking for a renter to that investment home you speculated on and can't refinance because of the credit crisis?

A new report from the Center for Economic and Policy Research, and the National Low Income Housing Coalition presents some of the current trends in the relationship between home renting and ownership. They present a good outline of some of the challenges lawmakers are facing when trying to figure out how to regulate us out of the current mess we are in. Worth a read, at least of the executive summary. Definitely read it if you are thinking of renting your house to Jose Canseco.

What Happens When Savings Is Already Negative, And Then Credit Shrivels Up?

2008-05-01T12:38:00.000-07:00

You cut spending, or cash in assets. Or you steal.

I have to give credit to Paul Kasriel, who has been beating this drum for months - or years. He has done several walk-through essays, loaded with charts and visuals, which basically show the following:

We spend more than we earn. (negative savings rate - or very close to it, depending on when you look).

This is possible because we have been liquidating our home's equity via Lines of Credit (HELOC).

Now that home values are falling, we are losing the equity before we can spend it.

Furthermore, banks are less likely to allow access to equity, even if it is there.

Bottom line: we have to cut back, sell other assets, or steal to keep things going. So if we have not yet cut spending, we are still living off of increased borrowing, or we are liquidating other savings. None of these are good trends for the long-term. This is why our economy is due for a slowdown, recession, etc. We've been on an unsustainable path. Check out some of his recent write-ups. Including the most recent one, which is a re-issue of a 2005 essay.