Tightening Guideliens In Mortgage Lending

The Economist has a great visual tool this week showing the trend in guideline tightening by mortgage lenders. It looks back almost 20 years, and you can see where guidelines tighten into tougher housing markets - and where they tend to get more loose (below the zero mark) during booming markets. This is quite a spike, with nearly 50% of lenders reporting that they are tightening guidelines right now.

This is why many of the borrowers who have loans entering an adjustable rate period are going to be caught between a rock and a higher payment, as many will be unable to qualify for the same loan they had, let alone a better one.

To some extent, the tightening guidelines are an over-reaction by lenders, who are trying to fix a problem after the damage has been done. Some adjustment is clearly needed, as the liberal guides can be blamed for contributing to the run-up in housing mania. But we are seeing it difficult in some cases to fit some very sensible deals together, as lenders are hyper-sensitive and picking apart every aspect of the file. Some cases, not all.

Like the housing market itself, the lender guidelines will balance out again. Markets have crossed from the manic side of balance to the panic side, and we will stay here until the participants themselves are convinced that a bottom has been reached.

Fragments Of Recent Market Commentary Related To Subprime Contagion

At this point, there has been a deluge of financial press about the implications of a "Mortgage Meltdown", how the Subprime problems started a Credit Crisis, (or Liquidity Crunch, Credibility Crunch, etc), and about speculation into the US Economy's chances to enter a recession. I don't think you can turn over a rock anywhere and find anybody who hasn't 'heard the news'.

In the Mortgage world, this has made everything a little more challenging. Fewer loan programs exist, fewer borrowers qualify, and fewer deals work. Its an over-reaction to the 'easy money' days we saw on the run-up in the housing market. But it will normalize. Just watch...

In the meantime, here are some snippets from articles I've recently read. Each is telling, descriptive, or interesting in the context of this changing economy and shifting housing market (my own interjections are beneath each quote where applicable):

• In an era of spread compressuion and search for yield, the rising tide of amle liquidity covered up a profusion of jagged and dangerous rocks. As the tide now goes out, the rocks now get uncovered. The subprime crisis is a classic example of what can be unmasked at low tide. -Stephen Roach, "A Subprime Outlook For The Global Economy"
  
• As a side note (John here again) This sentiment has already been famously expressed by Warren Buffett as follows: " It's only when the tide goes out that you learn who's been swimming naked", but it was spoken in relation to an entirely different issue - evidence of history repeating itself yet again...
  
• Starting in 1991, the US financial sector began contributing more and more to total US corporate profits as our universities began matriculating relatively more financial engineers (modern day alchemists?) compared to mechanical engineers. -Paul Kasriel, Northern Trust
  
• CDOs, CLOs, SIVs, anybody?
• The central banks have a difficult balance to strike. If policy is too tight, they will be held responsible for creating recessions. If it is too loose, their grip on inflation could slip, as markets and the public cease to believe that prices will remain stable. The great paradox is that the central banks' mastery of inflation has made the task of keeping financial markets safe all the harder. When people are confident that inflation is low and will remain so, they may be more prepared to take on debt.That leads to an expansion of credit and the pursuit of more exotic rewards by lenders. It feeds price rises in assets such as housing and securities. It encourages excessive risk taking. If so, how can you contain inflation without sparking occasional but dangerous bouts of insanity in asset markets? That is a riddle likely to test central bankers for a long time to come. -The Economist, "Only Human"
  
• See Hyman Minsky, and "stability breeds instability"
• The Fed is anxious to calm the credit markets, so that the economy's funds are allocated in line with risk and reward. But even if it succeeds, risky assets are likely to hold much less appeal than they did. The central banker's task is to unscramble price signals distorted by panic, not to protect the markets from a signal that they do not like. -The Economist "Paper Losses"
• Borrowers found that such creditors, in their hunger for higher yields at a time of low interest rates, were quite willing to drop safeguards altogether, leading to a surge of "covenant-lite" loans. Because banks held on to fewer loans, they relaxed their guard. -The Economist, "Switching off the lites"
  
• Sounds like a game of Hot Potato
  
• Providing greater short-term liquidity might ease the taking back of assets on to banks' balance sheets and hence bring down interbank rates. But it would also undermine the efficient pricing of risk by providing insurance, after the event, for risky behavior. -The Economist, "CSI: Credit Crunch"

More Signs Of A Topping Market - From Luxury Alternative Investments, And Some Market Chatter

It has been well publicized that asset markets have cycled higher in value in recent quarters, largely attributable to strong economic growth worldwide, and cheap and easy access to cash, credit and liquidity. Low rates from the US Federal reserve, as well as other countries like Japan (where the Fed Funds equivalent was at 0.000% for 8 years... 0%!! .... 8 years!!!) encouraged investors and consumers to borrow and invest and save, and economies boomed and everything got more expensive. We have seen it in the stock markets, bond markets, housing, commodities, precious metals, corporate buy-outs, you name it.

But there is another set of asset markets that tend to receive a little less publicity, and whose cycles often signal the peaking of exuberant money. In July 06, John Mauldin writes:

"Art, Wine & Horses

One of the recurrent themes of our research has been that it has "never been so expensive to be rich" and that this situation will only likely deteriorate. But even with that in mind, we have to admit that we have been floored by the recent activity at the high end of the market. Take wine, art & horses as examples. As most of our readers will know, modern art, fine wines, & horses, are assets that tend to peak just before the start of a pronounced downturn of the economic cycle. And interestingly, over the past couple of months, these assets have really been shooting up, breaking several records on the way:

* The US$16 million horse. A few months ago, a two-year-old colt who has yet to run a race drew a world record sale price of US$16 million at an auction in Florida, after a furious bidding war between Englishman Michael Tabor and Sheikh Mohammed bin Rashid al Maktoum of Dubai (could he be thinking that horses will run better than Dubai stocks?). The sale broke the previous record of US$13.1 million paid in the mid-1980s for Seattle Dancer. Considering that very few horses ever reach winnings of US$1 million and that the all-time leading earner, Cigar, took home close to US$ 10 million, this is a truly mind-boggling price to pay for a horse that has yet to race a single race (incidentally, Seattle Dancer, the previous record holder, went on to win a paltry US$150,000, racing only five times in his short career).

* The unbottled 2005 Bordeaux. In the world of wine investments, Bordeaux is king, with up to US$3.7 billion worth of wines changing hands every year. Over the past twelve months, much to Charles' chagrin (who likes to say that he is now too old to drink cheap wines), the price of top vintages have surged more than +45%. Much of this latest rally can be attributed to the - yet to be bottled - 2005 vintage. The 2005 vintage from some of the top chateaux are reportedly selling for around US$9,000 per case; as a comparison, in 2003, the same wines went for about US$3,800 per case... While investing in wine can be a very risky business, there is one undeniable advantage: if all else fails, it is a liquid asset...

* The US$135 million portrait. A few weeks ago, Robert Lauder bought a portrait by Gustav Klimt for a staggering US$135 million, the highest sum ever paid for a painting, eclipsing a Picasso sold for US$104 million in 2004. While we (by no means) would pass for art connoisseurs, prices do seem to have reached stratospheric heights. In his latest Gloom Boom Doom report, our good friend Marc Faber, describes his visit to the June Basel Art Fair, where one pure black canvas had a price tag of US$1.5 million... "

Sotheby's International, pedaler of all such things luxury is one good barometer of these markets. Look at a Sotheby's share price 2 year chart. Look like the peak has been reached? The company got kicked by shareholders today after a staggeringly poor auction result. Implication? Money is dried up. Sellers think the peak has been reached.

Paul McCulley of Pimco recently described liquidity as follows:

"... liquidity is not a pool of money but rather a state of mind. ... liquidity is about borrowers and lenders collective appetite for risk, a function of: The willingness of investors to underwrite risk and uncertainty with borrowed money and the willingness of savers to lend money to investors who want to underwrite risk and uncertainty with borrowed money..."

So with all that has been going on along with this subprime virus, and its mutating its way through our credit markets right now, its no wonder everyone is getting a tight grip on their wallets. As new stories about financial loss break daily, the confrontation with reality becomes more real. The reason for the lag between the rising rates (the Fed started raising rates in 2004) and the realization of a liquidity crisis is because, as McCulley puts it, liquidity has more to do with psychology than it does with capital.

Likewise, it will take some time for the recent Fed cuts (and the coming ones as well) to work their way through the markets and translate to brighter attitudes and expectations. Banks - who have tightened up guidelines after-the-fact, will not un-pucker until after a bottom in housing is evident. Great quote from Pimco's Bill Gross, who describes the current situation as "closing the barn door after the subprime mortgage horse has escaped from the barn."

Pretty much. Going to be some bumps in the road, but I would not underestimate the mortgage industry to come up with some creative ways to work through some of the problems, and rescue the good deals from distress; not everybody facing pain in the housing market right now deserves to be there. We shall see...

Considering A Short-Sale?

If you are in a situation where you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A "short sale," in real-estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders who often would rather take a small loss than go through the lengthy and costly foreclosure process.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label. Proponents say, arguably, that they can be a “win-win-win” situation for seller, buyer and lender. Here's how: the seller gets out of the mortgage liability without facing bankruptcy, the buyer gets the home at a reduced price, and the lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too, since they don’t have to go through the lengthy foreclosure process and then having to put the property on the market and go through the whole marketing process.

I'm not sure this is a win-win-win, but maybe a win (buyer); lesser-of-two evils (lender); better-than-nothing (seller); business-as-usual (realtor).

How To Get Out Of An Option ARM

Thoughts go out to those affected by fires in Southern California.....

Why It Helps To See Things In Perspective

Check out this chart from Barry Ritholtz. There was a lot of recent media coverage about the anniversary of the 1987 stock market crash. Black Monday. It happened on October 19, and the Dow Jones was off by 22.6% There was also a lot of comparison to today's market environment. Coincidentally, the Dow had another big dip on October 19 2007, but a couple hundred points off of an index value of 14,000 is rather different than a couple hundred points from 2,000. On 10/19/07, the index lost 2.6%. Weird, but coincidental.


It was devastating at the time, but notice the "crash" in the red circle, and then in the context of the next 20 years in the market. Would you have bought the day after the crash?

Sub-prime Meltdown - Visual Tool

I think its fairly understood at this point that there has been a "meltdown" in the sub-prime lending world for home loans. The degree to which it would spill over into normal housing markets and prime home financing has been the subject of debate. I don't know why it wouldn't spill over, as the problem in the sub-prime lending was a spill-over of problems in the prime lending arena in the first place. Namely, money got too cheap and easy to get.

But take a look at this chart. Another great one from The Big Picture. It shows the delinquency rate for various recent 'vintages' of non-prime paper. 2006 and early 07 is being regarded as the worst 'vintage' because it was underwritten and funded at the peak of the lending mania.

14% of those loans are delinquent 20-24 months after origination, compared to a 3-7% delinquency rate on vintages recent previous years. 14 percent!!

It stands to reason that the Q307 paper and onward will be some of the best quality paper on the secondary market going forward, as these borrowers were scrutinized by the currently tough underwriting guidelines. I'll discuss this more in future posts...

Changes To Conforming Loan Limits?

If it were not for the current stress in the housing sector, the OFHEO would likely lower conforming loan limits for 2008 based on a decreasing value of median home prices. Many are speculating that they may raise the limit to help ease the situation... here is the latest word directly from the OFHEO...

FOR IMMEDIATE RELEASE October 16, 2007
	NO DECLINE IN 2008 CONFORMING LOAN LIMIT
	Additional Comments Sought on a Revised Loan Limit Guidance; New Mortgage Market Note on Historical Trends in Conforming Loan Limit
Washington, DC – The Office of Federal Housing Enterprise Oversight (OFHEO) announced today three actions regarding the calculation of the conforming loan limit, which establishes the maximum mortgage loan value eligible for purchase by Fannie Mae and Freddie Mac. OFHEO Director James Lockhart announced that, based on provisions in the proposed guidance, the current conforming loan limit will not be reduced for 2008. If the index used to calculate the maximum loan level should increase, the amount of the increase in 2008 would be reduced by the decline calculated in 2006 of 0.16%. Under no circumstance, however, would the maximum loan level for 2008 drop below the 2006 and 2007 limit of $417,000. OFHEO Director Lockhart also announced that OFHEO has transmitted to the Federal Register a revised Examination Guidance for procedures relating to the calculation of the conforming loan limit and implementation of increases or decreases in the limit. A proposed guidance was subject to public comment earlier this year and OFHEO has made changes to the proposed guidance in several areas. OFHEO is seeking additional comment on the revised guidance within 30 days of its publication in the Federal Register. Key provisions of the revised Examination Guidance entitled Conforming Loan Limit Calculations proposed for public comment are the following: -- As previously proposed, any decreases in the limit would be deferred one year. -- Decreases would have to total cumulatively more than three percent before a decrease would be implemented, a change from the proposed one percent de minimis amount. -- As proposed and clarified, if a loan is conforming at the time of origination, it remains conforming regardless of declines in the conforming loan limit, providing greater certainty for markets and asset securitization. -- As proposed, for simplification, the conforming loan limit will be rounded down to the nearest $100. The Guidance, as transmitted to the Federal Register for publication, may be found on OFHEO’s website at www.ofheo.gov/media/guidance/CLL101607FR.pdf. The notice for the Federal Register contains a summary of the proposed and final guidances, the revised guidance as well as an Appendix setting forth various scenarios relating to possible loan limit decreases. OFHEO also announced the publication of a new Mortgage Market Note on the conforming loan limit. The Note provides background information on the history of the conforming loan limit. It traces the growth in the loan limit relative to other key economic variables, such as household income. The Note also describes how the national loan limit has changed as compared with regional and state-level measurements of home price appreciation. The Mortgage Market Note is available on OFHEO’s website at www.ofheo.gov/media/mmnotes/MMNOTE072.pdf ###
OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Government Taking Steps To Ease The Bubble Burst

On the docket in the US Senate right now is a piece of legislation designed to help take some of the sting out of the current burn many are experiencing in the housing arena. With lending standards being raised so suddenly, and values starting to come down on a national level, there is increasing concern of a snowball effect from the segment of homeowners who cannot re-qualify for a mortgage to replace the one they currently have. Problems arise when the homeowner's loan terms change for the worse, and they cannot sell the home or refinance the debt. Stuck between a rising payment and a hard place (to sell)...

This proposal just passed the House with 89% approval. There are three points of significance. To understand the first point, it helps to understand the "Phantom Tax". Phantom Tax is a cost incurred by somebody who has a debt that is forgiven. If a borrower owes 250k on a home, but the home is worth only 200k, and that borrower agrees into a Short Sale of the home for 200k, the borrower is receiving a benefit of 50k in forgiven debt. The IRS views this as income, and taxes the borrower accordingly... This legislation currently before the Senate seeks to eliminate this tax. Its a huge gift to homeowners caught upside-down in housing.

The legislation also calls for an extension of the mortgage insurance deduction through 2014. It is otherwise set to expire at the end of the year, making mortgage interest non-deductible to all filers.

On the other side of the equation, there needs to be a way for Uncle Sam to make up for these expected short-falls in tax revenue. So the legislation also changes the current homeowner exemption rules. Currently, the tax law allows you to live in a second home as a primary home for 2 of the last 5 years, and then take the $250k capital gains exclusion ($500k for married couples). The proposed change would require filers to pro-rate the number of years that you have lived there as your primary home when taking the exemption. For example, if you have owned the home for 4 years, but lived there for 2 as a primary home, you would only get 50% of the exclusion. There is a grandfathering provision, but it will affect anyone selling a 2nd home eligible for this exclusion for sales beginning in 2008.

If you have questions about any of this, please consult with your tax advisor, or refer to the official language in the legislation for interpretation.

Credit Market Changes Visualized

I found a few charts recently that are very useful in conveying magnitude of the recent changes we have seen in the mortgage market. The first two are courtesy of the Weldon Financial Monitor, and the last one is an excel chart from a market analyst colleague of mine. Let's take a look.

Chart 1: 30 percent of lenders across all types of credit are reporting a tightening of lending standards - over the previous year, there had been a net easing of standards for the most part. Notice the spike corresponding to the news in early August... Tougher to get financing for just about anything...

Chart 2: Specifically for home financing, the lenders report the concerns that are influencing their decision to tighten standards. Housing market woes are topping the list.


The bar for qualification has been raised, as evidenced in the charts above. Somewhere between "qualified" and "not qualified" there is a spectrum of, "qualified, but paying a premium". This spectrum, and the premiums paid has always been there, but it is much broader now, and again, the bar is lower. So more mortgage borrowers are flopping into the "qualified, but paying a premium" category.

Chart 3: Just one example of this expanded spectrum can be seen by looking at the historical spread between conforming and non-conforming (jumbo) interest rates over time. The spike in 07Q3 matches up with the charts above.


The good news is that we are seeing this spread slowly trickle back down. The markets do not expect this spread to flatten back as far as it had been in recent years, but we saw the pendulum swing from one extreme to the other, and we are in the process of returning to a more neutral ground.

Stock Market Cheatsheet

I found this on Barry Ritholtz's Big Picture blog. It seems to sum up the recent stock market sentiment pretty well:

This is circulating via email around trading desks:

>

Cheat sheet: reacting to data and market releases

weak data = Fed ease, stocks rally

consensus data = lower volatility, stocks rally

strong data = economy strengthening, stocks rally

bank loses $4bln = bad news out of the way, stocks rally

oil spikes = great for energy companies, stocks rally

oil drops = great for the consumer, stocks rally

dollar plunges = great for multinationals, stocks rally

dollar spikes = lowers inflation, stocks rally

inflation spikes = will inflate all assets, stocks rally

inflation drops = improves earnings quality, stocks rally

More Making Fun Of The Mortgage Industry

Never Take Yourself Too Seriously.

Just What We Needed

I have never been a fan of professional wrestling. One of my closest friends in college used to impersonate several of the popular wrestlers from the 80's era of WWF and clearly had an appreciation for the humorous side of the 'sport'. Its because of him that I have any awareness of some of these personalities - who all seem like cartoon characters to me.

And now that I've put some distance between myself and pro wrestling, allow me to introduce you to The Nature Boy, aka Ric Flair. He was one of my buddy's favorites: a showy, muscle and bleach job who wore outfits that would make Liberace jealous. I just read about him on wikipedia, and I guess he is argued to be the 'best wrestler of all time'. Who knew?

So why do I bring this up here? Well, my industry faces challenges when it comes to public perception. Ask a friend or neighbor, and they can tell you about a mortgage broker who fumbled a deal, lied about closing costs, etc. The public image is one of my least favorite aspects of my business. And in the wake of the current 'credit crunch', the news is full of headlines criticizing the mortgage industry for misleading and mistreating consumers (I've commented on that here and here).

And now along comes Ric Flair Finance dotcom. I mean, honestly. I guess its possible that this guy has adequate knowledge of the financial markets, the ability to handle other people's personal affairs with care and understanding, and a work ethic and moral compass to ensure a high standard for professionalism. But I don't know anybody in the business who wears a bedazzled bathrobe to the office... I'm just sayin'...

Real Estate Markets Are Local And General

Its going to be interesting to see what comes of this adjustment in housing prices. In the San Francisco Bay Area, many are defiant when it comes to bubble talk. San Francisco has some of the highest demand for housing in the nation as exhibited by the lofty price per square foot that homeowners pay. Its a city with a one of the most beautiful natural settings in the world and has a unique and vibrant culture that acts as a magnet for visitors and residents from around the country and world. Employment and recreation opportunities are abundant. Rarely will you meet someone in San Francisco who complains "I've got to get out of this town"...

But its tough to just plug your ears and ignore some of the voices out there commenting on the state of our housing market and its potential to affect the overall US economy. As I always say, the analysts all look at the same data and come up with forecasts on both extremes, and our reality is likely somewhere in the middle. Barry Ritholtz at The Big Picture has a steady flow of alarming news and charts on the housing market. And John Mauldin has my attention this week after his analysis of the recent Fed policy statement, where he suggests that the surprisingly deep rate cut is indicative of a key change in their approach - proactive versus reactive - and signifies that the Fed is fearing the effects of a housing collapse on the greater economy.

I don't mean to spread the negative-only end of the outlook, but I think its prudent to be realistic, and I try to keep my ear close to the ground for more local news and data. To this concern, I recently came across an interesting site that helps 'check the weather' in the neighborhood. Allow me to introduce you to foreclosureradar.com, where you can type in any address and see a map showing the homes in various stages of foreclosure within the specified area. Its very interesting to play with, though the specific data is only available to paying members. I think you can get a sense of your local market by keeping an eye on this, and though of course its not exactly conclusive, its at least a little informative.

Eyes On Fed Today For A Cut - How Deep?

As I mentioned last week, today's Federal Reserve meeting is drawing as much attention as I have seen in the past several years. Expectations are really all over the place, and I am expecting to see results right in the middle. Here are some of the popular sentiments up and down the scale of expectations for today:

• Fed should not hike because of inflationary fears and dollar weakness. The weakness in the dollar is assumed to be inflationary because it will cost more to buy imports. Bernanke has proven the Fed's focus first and foremost on inflation...
• The Fed is already late in making cuts, and needs to lower Fed Funds by 50 basis points (by 0.500% to 4.750%) to avoid sending our economy into recession. Job growth has been recently weak, inflation is tame, and housing and mortgages are performing poorly. Time to put some slack into the system...
• The first cut in four years will be 25 basis points (by 0.250% to 5.000%). Also, the Fed will cite inflation as a concern, but should acknowledge that it is presently contained. This strikes a balance between slowly helping the economy without inviting inflation. The Fed should have a green light to cut because their favored inflation measure, the Personal Consumption Expenditure Index (PCE) is under 2% year-over-year. The result of this will likely be a disappointed stock market (expecting the 50 basis point cut), and a mild bond market. In the bond market, it would be preferred that there were no cut in the name of inflation vigilance, but there is room for the 25 basis points, which is already factored in.

My prediction is for something close to the last scenario. But if you are pondering a rate lock decision, you should contact me to discuss your personal situation before acting.

Tax Freedom Day

This is a note to everybody, but especially those of you filing taxes on your 6 month extension. Do you know how many days of the year your work efforts are dedicated purely to paying your federal tax bill? Or how many minutes into your workday it takes before you can start earning money for food, clothing... shelter?

Tax Freedom Day - the day in the year where your federal, state and local tax is considered paid for the year, assuming 100% of your salary to date was allocated to that payment - came on April 30 this year, the 120th day of the year. This is two days later than last year. View this Special Report for some good visual tools to help understand what this means, and what other budget items cost on average.

One of the key factors in the decision to go from renting to owning a home is the tax implications. Consumers with lofty tax burdens often seek the write-off of mortgage interest - one of the country's greatest tools to incentivize the American Dream. But just owning the house is only half the battle. Make sure you maximize this deduction over time, and learn to develop a tax-efficient plan for saving and borrowing. You can do this with active management of both sides of your balance sheet. Email me for more info.

An Eye Inside Bernanke's Stubborn Stance

PIMCO's Pual McCulley provides some great insight into the mentality of the Fed in this market, specifically with regard to the debate over when to cut Fed Funds and by how much. There are enough voices out there predicting that we are already committed to a recession, and that cuts to the Fed Funds rate will not steer our economy safely away from this fate. Others think we need cuts now, but time's a-wastin'. And then there is Ben Bernanke and the Federal Reserve. Standing firm on their inflation vigilance and sending the clear message to the markets that the Fed does not intend to bail us out. Expectations of impending cuts are riding high, but Bernanke is clearly patient.

Last time the markets hit perilous times, 2000 and the bursting of the dotcom bubble, Alan Greenspan's Federal Reserve stepped in with aggressive rate cuts. This became known as the "Greenspan Put", referring to a psychological insurance policy that was created for investors with the lowered rates and provided stimulus to the economy in the face of otherwise collapsing markets. In retrospect, Greenspan has faced criticism for acting too fast and too aggressively - as well as leaving the "put" in place for too long. Investors didn't have time to learn a proper lesson...

We are the child in need of discipline, Ben is our father. He has sent us to our room without dinner, punishment for reckless misbehavior. And now he must make sure not to starve us, but cannot feed us until the reality of our misdeeds has been realized and imprinted. This is his tightrope, and we wait for the door knob to turn...

McCulley points out that Bernanke is on a mission to redefine the trigger-point for the so-called "Fed Put":

...the goal, which I applaud, is to change consensus expectations about the location of the strike price: further, much further out of the money than under the Greenspan Fed...

Its a great piece to read, and very insightful. With Bernanke due up in 1 hour with a speech from Germany, we should get a glimpse of his mood heading into next weeks big policy meeting. I don't remember a time when there were more watchful eyes on the Fed in the last few years. This will certainly be interesting...

Some Upcoming Relief For HELOC Owners

As of this morning, Fed Fund Futures are showing a 100% chance of a .250% rate cut on September 18th. And because of the weak Jobs Report on Friday, the chance of a .500% cut has risen to around 80%. The chance of the Fed Funds rate being cut by 1.000% by year end stands at 56%.

The Prime rate - which is the underlying index for your HELOC - is 3% above the Fed Funds Rate, and moves in tandem with Fed Funds. Therefore, these cuts will have a direct correlation to the rate on your HELOC, so it's worth noting the expectations.

Making Sense Of Today's Market

When speaking with clients lately, it has been made clear to me that the current state of the mortgage marketplace has affected everyone on very different levels. Some people are clearly touched by the panic and have several questions about "what does this mean to me?", while others seem oblivious that this 'credit crunch' thing has anything to do with them now or in the future. More power to them. A panic state - when widespread - is a breeding ground for irrational individual behavior.

The financial talking heads in the media have a few challenges in getting rational information through to the public. For one, many of the faces on the news channels don't always follow it themselves. But when they surround themselves with economists and analysts who do get it, they need to make sure they speak in parlance that the general public can handle. CDOs, RMBS, ISM, and BBB- are not terms that reside within the daily vocabulary of people with professions outside of the financial arena.

To that concern, here are two articles that offer a broken-down explanation of what is going on right now in the mortgage market, why 'the subprime meltdown' affects other areas of borrowing money, the role of the Federal Reserve, etc. You can access them here and here.

Lessons To Be Learned While Countrywide-Hating

Do you remember when we used to party like it was 1999? That was 1999. And then 2000 came, and the stock markets took a digger. A bunch of people lost a bunch of cash, and everyone freaked out about how crazy and dangerous the markets were. Just months earlier, everyone thought they could quit their job to make a fortune day-trading shares of BBQ.com, and other great business latest and greatest IPOs. It was easy while it was easy, and then, the bubble burst.

But what happened after a little time passed? Everyone looked back and said things like "should have seen it coming" and "that was unsustainable growth - had to correct at some point". And this is always what happens in a market cycle. It booms, it busts, and you want to be there while it's booming or your neighbor is going to drive a nicer car than you - and we don't like that. If you are tired of my references to Kindleberger's Manias Panics & Crashes, skip ahead to the next paragraph. Otherwise, please note that the author walks the reader through the common traits of all history's asset bubbles, and many of his lessons are being learned - again - by today's housing market participants. To understand the psychology that drives a market to extremes, he cites a South Sea stock investor in 1720 who said, "When the rest of the world are mad, we must imitate to some measure.", and he generalizes that "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." No wonder... its in our nature. Monkey see, monkey do. Read it now to put today's market in context with history - and to give peace with the idea that we have seen it all before, and things will get worked out.

Moving along... one of the typical components a market de-bubbling is the scapegoating. Heads need to roll, somebody needs to take the fall, etc. Its formula. And rightfully, there needs to be an understanding of the players involved in creating the bubble. But don't join the witch hunt this time, because chances are you had a piece of the action this go around. I am not going to dispute any of the accused in Barry Ritholtz's list which includes: The Federal Reserve, Borrowers, Mortgage Brokers, Appraisers, Federal Government, Fannie Mae, Lending Banks, Wall Street firms, CDO Managers, Credit Agencies (Moody's, S&P), Hedge Funds and Institutional Investors. Read his paper for elaboration on each participant.

An interesting article came out on 8/26 in The New York Times specifically flinging mud at one of the mortgage players, "America's number one lender", Countrywide. From reading it, it seems some disgruntled ex-employees ran to the press in an effort to expose some of the more eye-popping sales realities of the firm. And if this article is accurate, it would represent a disappointingly low standard of professionalism for an atmosphere where business of a financial nature is to be conducted. But who knows... the media is going to push this kind of sensational stuff to build on the souring momentum of everything connected to this phase of the market.

Keep things in perspective. Stay calm. Great time to read a book.