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.

The Shifting Mood Of The Market

The mood on Wall Street is all over the place right now. The "Credit Crunch" or "Liquidity Crisis" now seems to be a little bit harsh of a label for what is going on. Much of that panic and fear seems to have settled down. There are still plenty of concerns, and quite a bit to get worked out in the credit marketplace, particularly in the residential mortgage market. But I like the re-classification of the whole state of affairs by Barry Ritholtz as a Credibility Crisis. There is enough underlying strength in the economy, and even the housing market to keep this from being too critical of an event.

He suggests that liquidity is not the problem. The issue is that nobody with cash is willing to take the leap into credit products because the whistle has been blown on the obfuscation of risk via derivitization. In other words, nobody can see what they are buying, and now that risk feels risky, the money has moved to the sidelines until credibility can be restored. This market stagnation has locked up a lot of the fluid movement in the market, and caused several companies to freeze up and die.

The un-levering process - where companies scale down their borrowing - has an affect of pushing prices (stocks, bonds, and other dollar-denominated assets) down further, as they sell assets to cover borrowed funds, but think of it as 'cutting to the chase'; the values clearly needed to correct back down to a more stable level. If we can find stability before selling everything too far, we get closer to that 'soft landing' type of adjustment.

The sentiment regarding the Federal Funds rate, and the role of the US Federal Reserve is also shifting. Whereas the markets immediately assumed that a cut in the Discount Rate suggested a near-term cut in the Fed Funds Rate, there is now more chatter covering the reasons why the Fed still will not rush to make these cuts. Inflation needs to prove itself a non-threat, or we start this cycle all over again without allowing investors to feel the painful results of poor judgement.

The market is eagerly awaiting the reports on PCE (August 31) and Unemployment (Sept 7) for insight into the Fed's mindset. Some say the Fed will not cut rates before Unemployment ticks up at least 0.2% (to 4.8). And the PCE reading needs to show a year-over-year of below 2.0% (currently at about 1.9, but close enough to the 2.0 to remain a concern).

Stay tuned... as I often say, there are a lot of moving targets involved, and the mood changes as the data rolls in...

How A Recession In Housing Affects The Rest Of The Economy

Watch CNBC for 5 minutes and 30 seconds and you can get a good sense of the attention being paid to the day-to-day developments in the housing and mortgage markets. At this point it is no secret (or real surprise) that the housing industry is in a recession. We have increasing inventory, slowing sales, and decreasing prices. The construction unemployment rates are rising. The mortgage industry is facing a fairly turbulent adjustment with several companies collapsing on short-notice, and leaving several consumers left waiting for the money to buy their homes.

But most agree that these adjustments are good for the industry's long-term benefit. This is typical of the market cycle. Its just that the other side of the cycle carried the industry so far for so long, that this side feels more intense.

Paul Kasriel of Northern Trust highlights some of the ways in which the housing industry's growing pains can spill over into the greater economy:

"The tentacles of the housing recession are reaching beyond consumer spending. Freight haulers, both truck and rail, are reporting weaker volume growth because of the decline in residential construction activity. With fewer housing developments popping up in suburbia, newspaper advertising revenues are being adversely affected. And the producers of construction equipment, such as Caterpillar, are experiencing softer domestic sales."

It will be interesting to watch this develop. And of particular interest will be to monitor the role of the Federal Reserve, who is attempting to tread a fine line between averting a significant economic recession and giving the market participants false confidence through bail-out gestures.

Fed Cuts Discount Rate

Jim Cramer got what he was looking for. This morning, the Fed lowered their Discount Rate by .500%, taking it from 6.250% down to 5.750%. The discount Rate is the rate at which the Fed lends money directly to commercial banks, credit unions and savings and loans, including large lenders like Countrywide and Bank of America. It is different than the Fed Funds Rate, which is the rate at which banks lend money to other banks. The Discount rate is usually held 1.000% above the Fed Funds Rate, which makes the Fed a last resort for lending institutions to borrow from. They would generally rather borrow from other banks at a lower rate, but with the current liquidity crisis making that difficult, this move will help provide some liquidity at more desirable rates in the short term.

This move has a direct benefit to banks and lenders more so than to consumers. The Fed is taking baby steps to help put some lubrication into the markets while being careful not to send the message that they will serve as a 'lender of last resort' to bail out institutions and individuals who face suffering loss as a result of poor decision making. This move softens things a little, but is not a bail-out move. They will let the markets second-guess recent behavior and correct themselves, but need to help guide so as to avoid a complete systemic breakdown. Its a fine line, and this is a baby step. The next few weeks will certainly be interesting, to see how much adjustment can be made, and how much stability can be built back

What Do Fed Rate Actions Do To Mortgage Rates?

Thanks to this chart from HSH, you can see that the answer is "not much", at least not for mortgages based on long-term rates. The Fed changes the short-term or "overnight" rates to affect the costs of borrowing so that institutions and individuals will be more or less inclined to borrow to fund growth or expenditures. Higher rates means less spending, and the Fed has recently raised rates 17 times to try and slow down our hot economy to a more sustainable pace.

Mortgage rates are determined by the trade value of mortgage backed securities (RMBS), which are bond-type securities whose cashflow is generated by mortgage debt. The liquid value of these bonds reflect longer-term expectations of economic performance, and do not always move with the Fed Funds rate.

Back when the Fed was still raising rates (the incline on the tan line), there was a lot of expectation that this would pressure up the other longer-term rates. But it didn't, and we wound up with a flat and inverted yield curve. Then we heard an ongoing debate between economists who felt the inverted yield curve indicated the foretelling of a recession, and those who felt that this was a poor predictive tool. Now there are more folks on the recession bandwagon...

A higher Fed Funds rate does affect homeowners with significant home equity lines of credit however. HELOCs are based on the Prime rate, which moves in lock-step with the Fed Funds rate. If you have a sizable HELOC, you've probably already noticed your financing get a little top-heavy over the last few years. You will see some relief if the Fed starts to cut rates soon.

Contagion Visualized

Take a look at the interactive map of the credit crunch from Financial Times...

Fed Steps In To Calm Nerves?

Markets sure can be moody. Yesterday and today, the US Federal Reserve 'injected liquidity' into the markets to the tune of $38 billion in an effort to try and calm things down. Expectations of Federal Funds rate cuts have quickly changed, with 33% chance of a cut before the next Fed meeting in September. Last time the Fed changed rates off the scheduled meetings was in the wake of 9-11.

So the stock markets around the globe have been in a roil over all of this credit crunching. Shouldn't they be happy to see the Fed taking action? Or does the fact that they are reacting on the fly suggest to the markets that the Fed is officially acknowledging a problem? Security vs. Uncertainty. Markets hate uncertainty, and there will be a negative tone out there until it has evaporated.

While the Fed was raising rates in this last cycle - 17 consecutive 0.250% hikes over a two year period - mortgage rates often went down at each interval. This is often counter-intuitive, but if you can read between the lines it makes sense. Even though Fed rate hikes meant that the environment for interest rates was rising, the fact that the Fed was doing battle with inflation by raising over-night rates made bond investors happy, so they bought more bonds and brought long term rates lower. Security vs. Uncertainty again.

Meanwhile, check out Mr. Mad Money flipping his lid while talking about the current market conditions. Just another measurement of our current state of markets in 'panic mode'. If you are (or are not) familiar with Jim Cramer, here's a great chance to get a glimpse of the guy.

So Much For The Soft Landing Theory?

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

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

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

If You Pay Somebody Else's Mortgage, Can You Deduct Interest?

In another good bit from the Kiplinger Tax Letter, according to the IRS, the answer is no. Even if you actually paid any of it yourself. You have to be liable on the loan and an equitable owner to be eligible.

But Kiplinger's points to a limited exception based on a ruling back in 1997. It says that a couple could deduct interest that they paid on a home loan, that their relatives signed for. The reason was that the couple had poor credit, and the relatives stepped in to help. But the occupants of the home made the payments, lived in the house, and made all repairs and improvements. They experienced all benefits and burdens of ownership.

I guess the IRS does not concern themselves with risk of foreclosure as one of the 'burdens' of ownership. The charitable relatives took on this burden, but Uncle Sam doesn't seem to mind.

San Francisco Real Estate Professionals And The IRS

When it comes to defining a Real Estate Professional for tax purposes - which comes in handy if you are a high income earner and have passive losses on rental property - the IRS essentially says that you need to have an active role in managing the property, and spend at least 750 hours a year in doing so (That's about 1/3 of your 40 hour work week). Then your losses are not 'passive', and there is no limit to the detectability. Otherwise, your cap is $25k per year. Oh, but if your income is over a certain limit, you lose the write-off...

...still with me? One more step, and its key. If you cannot deduct losses based on income being too high, you can defer these losses until the sale of the property, and reduce your gain by the exact amount of losses racked up over the years.

In San Francisco, and California in general, this is a big deal. Incomes here are on the high end, and rental losses are as well, as the rental cost vs ownership costs for property are at a historical gap. Gaining access to the 'Real Estate Professional' treatment has potentially significant implications.

According to the Kiplinger Tax Letter a recent IRS ruling has clarified a deeper-level detail of this test, which helps tax payers gain the 'Real Estate Professional' status. It allowed a couple to have extra time to elect to treat multiple properties as a single entity, thereby working around the time test for each property individually.

More info on the IRS Real Estate Professional test can be found here. Please also consult with your tax planner if you think you need to navigate this test or have any landlord or passive loss issues related to real estate.

Foreclosure Chart, The Return Of The Investor?

RealEstateJournal posted this chart courtesy of Realtytrac showing the foreclosure data monthly in a quick article with tips for buying foreclosure homes. You can note a slight drop from May to June, but I don't think many are expecting that the housing market has 'bottomed-out' just yet. Today's release of New Home Sales data was a disappointment, and showed that we are still not eating away at the inventory.

I see continued optimism from real estate insiders, one notable exception would be Angelo Mozilo, CEO of Countrywide, who has made a few comments over the last 6 months relating this housing recession to the Great Depression, that this is the worst market he has seen, and enacted layoffs and cost-cutting measures. He has also been under the microscope for selling $118 million of his company's stock - a clear sign of lowered expectations... what are you gonna do...

I posted here back in May of 06 that the caliber of real estate investor had significantly changed, and that the pros had vanished. Soon after, the amateurs disappeared as well, and the only investor activity we have seen recently has been folks looking to capture a good gain on an inflated property, and 1031-Exchange it into something different.

In the last few weeks however, I have seen quite a bit more investor interest. Folks who are not afraid and who know that a market like this has "deals". They embrace the Warren Buffett's mantra of "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." But I wonder if they are premature and if the market is going to deteriorate significantly further before things settle down. I know those builders do not want to hold inventory into a declining market, so I expect to see further cuts in prices, and increased incentives. I'm not buying into the media's doom & gloom rhetoric, but I do not think there is any reason to be anxious just yet... Deals are certainly out there...

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco Bay Area

Has Been Stein Seen the Light?

Somebody forwarded to me an article by Ben Stein recently, and I noticed a stark contrast to the tone of the last Ben Stein article I recall reading back in January. I remember thinking when I read the first article that he was missing a key component of understanding housing as an investment. I assumed that he was not ignorant, but rather opted to deliver a streamlined and simplified message to his audience.

In the first article, Stein misses the concept of leverage when discussing return on housing. With leverage, you have to shift the focus to return on investment, not return on asset. I know he knows this, but now you can get an idea of why I had not - until the other day - read another of his articles.

So in the recent article, his tune changes a bit. He isn't as suggestively sour on the financial aspects of house-as-investment, and focuses on pre-paying mortgage debt. But comparing the two pieces provides a great example of the fact that the decision to 'buy the house' and the decision to 'pay off the mortgage' need to be looked at as wholly separate investment decisions. They are totally unrelated. Stein seems ho-hum about buying a house for financial reasons (again, ignores the leverage component), but once you own the home, he suggests liquidity is more important than retiring debt.

I like the direction he is heading in...

John C. Glynn, CMPS

Real Estate Finance & Mortgage Planning

San Francisco Bay Area

Dead Fish Don't Have A Mortgage Plan

I knew this kid in High School who was about as anti-establishment as they come. Pretty interesting guy, but somewhat difficult to get to know or get a good read on. When the senior year yearbooks came out, the quote beneath his name read: "Only dead fish follow the stream". It captured what I perceived to be at the core of his personality. And the message was clear. What's a worse thing to be than a dead fish? And what could be more true an image?

... 14 years later, it remains one of the more memorable from that sea of inside jokes, cliche inspiration, failed attempts at humor, and so on. It popped into my head again recently when I read a headline about a mortgage survey administered by Re/MAX in the Detroit area. It made the case that some 2/3 homeowners with a 'nontraditional' mortgage were planning to refinance. This was yet another media criticism of the mortgage industry, and the 'nontraditional' loan type. The media has made the terms 'exotic' and 'nontraditional' synonymous with 'dangerous' and 'rip-off' in the context of the mortgage industry.

This got me thinking, as the 2/3 number seemed extreme to me. I can't imagine that 2/3 of the people with 'nontraditional' loans need to refinance into a market that is close to its 5 year high water mark. Generally, the media refers to anything that isn't a 15 or 30 year fixed loan as 'nontraditional', but it would help to have clarification.

Refinancing always involves a cost/benefit analysis and can be viewed as a snapshot of one's financial and credit profile as well as of the marketplace for money at any given point in time. "Based on where I am today, does the market offer me something better?" Something has to improve. It is unlikely that loans originated in the last few years are eligible for lower rates today - credit is at/near its tightest and most expensive levels in the last 5 years (though there are some cases). So this statistic has to refer to people who are looking for more protection in the form of longer fixed rate periods. They are likely rolling into a higher rate, higher payment or both.

Of people who need to refinance, there are a few possible motivations: they were misguided when they took out their current loan, they are misguided about what they need going forward, or more innocently, things have just simply changed.

Among those who intend to refinance based on changes in life, those who are not taking out cash are going to be refinancing specifically to change the terms of their loan. And if this specific sector is equal to 2/3 of those with 'nontraditional' mortgages, then this would indeed be worthy of a news headline with a story about how 'nontraditional mortgages' are bad for your financial health.

But I doubt this is the case. Cash-out refinancers would be re-financing regardless of the current loan (to a degree). The misguided folks are not adequately understanding how to evaluate the cost/benefit proposition, or they didn't when they took out that last loan.

The key takeaway here is that life does in fact change. Among this 2/3 figure, there are likely those who knew life would be changing around this time, and took out a mortgage that fit the timeline of expected change, and saved a bundle in the process. They are the guided ones. The 'dead fish' are the folks who are letting the current push them around.

Living fish also follow the stream for the most part, but they navigate. They know when to resist the current, move to the side, etc, as opposed to banging into rocks and driftwood - and washing up on shore.

Let's face it. Resistance can get you in trouble. Defiance can get you hurt. But if there is a stampede headed for a narrow escape, sometimes you'll be better off figuring out a different way out rather than trying to squeeze through that door with the rest of them - or better yet - knowing how to avoid being stuck in the first place. Don't be a dead fish. Get a plan in place.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco