The Economy

Medicare/Social Security Underfunding. Tougher FNMA Guidelines.

Rate Watch #695 Medicare/Social Security Underfunding. Tougher FNMA Guidelines Coming Soon

November 6, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.875%	1.00	5.04%
	5.125%	0.00	5.22%
15 Year Fixed Conforming
	4.5%	1.00	4.67%
	4.75%	0.00	4.85%
JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)
30 Year Fixed Stimulus
	5.75	0	5.85
	5.375%	1.0	5.55%
15 Year Fixed Stimulus	4.875%	0	5.00%
	4.625%	1	4.85

* conforming loan limits for 2009 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now mean "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county. You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by but not limited to the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining.

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

If you know someone who wants to receive this RateWatch newsletter each week, have them go to:
http://www.loanmine.com/ratewatch

II) Fundamentals

The BLS Employment Situation Report shows a loss of 190,000 jobs in October. Goods Producing jobs took a large hit. Only Education and Health (+45,000) and Professional & Business Services (+18,000) were up. The Unemployment rate rose to 10.2%. Crossing the 10% line may serve to erode consumer confidence. We are now a that phase in the economic recovery cycle where GDP is expanding and jobs are being lost and the average guy is confused. He is confused because he was not adequately informed about how economic cycles work. Jobs lag GDP. That is the way things happen.

Initial Jobless Claims were 512,000 last week. This is better than consensus and previous but still bad. Worker Productivity (GDP/hr worked) was up 9.5%. This is not the result of technology but of downsizing. Companies are getting as much produced with fewer workers. This, presumably, benefits the bottom line. Layoffs have been aggressive and hiring will be slow during the recovery in GDP. Some of those who lost their jobs do not have the skills for new jobs. Labor participation is going to be constrained by slowing birth rates and the demographics of a aging labor force. This may prove to be something other than "just another recession".

Factory Orders were +0.9%. This led a Bloomberg reporter to say "Orders placed with U.S. factories rose in September for the fifth time in six months, reinforcing signs that manufacturing will drive the economic recovery". Huh? The U.S. economy is a service based economy. Pending Home Sales +6.1%, ISM Index 55.7%, Construction Spending +0.8% - all are above consensus.

The SurePayroll monthly Small Business Scorecard survey shows: hiring up slightly (a 2.2% increase year-to-date), salaries down 7.3% and optimism down. Small business salaries are down so significantly because these are companies where the owners tend to take large pay cuts in hard times.

What is in fact happening us that large business are becoming more profitable but small businesses have not gotten the attention of the government and continue to hurt. The significance of this is that it is these small businesses which do the actual job creation and the implication is that economic recovery will be slower because the attention of the government has been elsewhere.

The report also shows the consistent correlation between average paycheck and number of jobs. Business are moving from high costs states to lower cost states. This has not gone unnoticed here in California.

The FOMC report revealed nothing new. Same story - increased GDP, no increase in jobs. The interesting thing is that the Fed is still saying that it plans of stopping its purchases of FHLMC/FNMA debt at the end of 1stQ2010. I do not believe that can happen without disastrous increases in mortgage rates and savaging of real estate prices in the high-value conforming counties.

III) The Technicals

The techs are bearish and we are likely to see higher Treasury yields and mortgage rates for at least 10 weeks. There is so much underlying angst in markets that the techs are probably not as useful at present than in times past.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I am just going to slip this in here and try to comment on it at some later date. This is an interesting article by Nouriel Roubini a professor at NYU. Roubini is one of those people who is capable of generating some original thought. This piece makes the case that investors are borrowing at low rates, shorting dollars and making risky investments in foreign assets as well as driving up commodity prices. He states that this will come crashing down.

Investors short the dollar to buy high yielding and highly leveraged global assets. The problem of course is that when everyone tries to sell those assets those asset prices will crash and then dollar will rally.

This is a risk stemming from low interest rates. While the Fed is keeping interest rates low to spur economic growth when these speculative bubbles burst we will hear that it was the Fed's fault for keeping interest rates so low for so long. These "dollar carry trade" speculative investments are a side effect of low rates. This can create further economic disruption. Attempts to alter fiscal policy to quash speculation have been unsuccessful in the past.

Read Roubini's piece. Even if this is not precisely what will happen it does give insights.

One more word on health care reform. Read this speech by Richard W Fisher of the Dallas Federal Reserve delivered here at the Commonwealth Club in SF last year. The present underfundings of social security and Medicare are not small and are not large - they are massive. The present value of the shortfalls over the next 75 years is $34 trillion. That means that unless we increase premiums or decrease benefits we would have to put $34 trillion into it today to pay what is promised.

Could someone please explain to me why we are even thinking of expanding health care coverage when we are not even close to adequately funding the present system?

V) New FNMA Guidelines

There may be a new force which will soon undermine housing value. FNMA is making their underwriting more strict. We can get FNMA on-line underwriting done with something called Desktop Underwriter (DU). This is a great tool because it gives us an idea of what we need to close a loan. FNMA will issue a new release of this on December 12. It appears that the biggest concern is that debt ratio are stricter than they once were. In the past I have gotten approvals with debt ratios above 60%.

The new FNMA guidelines call for a max debt ratio of 45% with allowance to 50% with strong compensation factors. The expression "strong compensation factors" is not defined but I would guess that the two big compensating factors are high credit score and low loan-to-value.

The bottom line here is that anything with a debt ratio over 50% will no longer be sellable to FNMA and anything over 45% could be problematic. This will translate into fewer qualified borrower/buyers.

There are some additional restrictions. Two unit properties (like my house) have more strict LTV and CLTV guidelines. Trailing spouse income will no longer be counted. This is damaging to people who are relocating.

There are tougher guidelines about credit scores and documentation but from what I can see the 45% debt ratio is the 1,000 pound gorilla.

While the goal presumably is to make FNMA/FHLMC securities of higher quality and attractive to investors I don't know if folks are aware of what the effect will be on housing values.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

A Look Inside This Week's GDP Report

Rate Watch #694 GDP

October 30, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

IV) Analysis

The better than expected GDP data will give a brief psychological lift to things. The jobs data points out what we already knew: namely that jobs lag GDP and we are going to have another jobless recovery. This is hardly new. This may create a problem for the administration which unrealistically pitched the stimulus as being something which would create jobs but that is a political issue not an economic one. I believe that the average person is capable of comprehending the fact that the economy is complex and that jobs recover after GDP.

I would like to squeeze one word in here about the health care debate. I have heard a lot of comments that insurance companies are the problem. Read this from Fortune magazine. It shows that Health Care: Insurance and Managed Care was the 35th most profitable (profit/revenue) industry in 2008. Health Care: Insurance and Managed Care has an industry profit of 2.2%. The pharmaceutical industry had a (profit/revenue) of 19.3%. In 2007 Health Care: Insurance and Managed Care was the 24th most profitable industry. In 2007 Health Care: Insurance and Managed Care was 34th.

V) The GDP Report

I rarely devote a newsletter to a single release of data especially one which will have been discussed so much by the time you read this but this one merits discussion.

Everyone would be well-served to read the synopsis of the data from the Bureau of Economic Analysis (part of the Commerce Department).

Overall, we have a 3.5% gain in GDP. That sounds excellent compared to recent GDP reports but 1.66% of that 3.5% was from motor vehicle output which was driven by cash-for-clunkers. The problem here is that the a significant part of the gain in 3rd Q is at the expense of future auto sales.

GDP = C+G+I+(X-M).

C= Consumer Spending

G = Government Spending

I = Investments (This is complicated because this is not "investments" in the sense that we use the word in personal finance. This does not mean stock purchases or even IPOs. I = capital deployed: new plants and equipment, for example.)

X= Exports

M= Imports

C (Consumer Spending) was +3.5% in 3rdQ2009 contrasted with -0.9% in the previous quarter. Even taking the subsidized pop in auto sales out this is still good news even if not as good as the headline 3.5%.

G (Government Consumption) was +7.9% in 3rdQ2009 compared with +11.4% in 2ndQ2009. Let's clarify: Federal Government Spending was +7.9%. State and local spending was -1.1% in 3rdQ2009 contrasted with +3.9% in 2ndQ2009. State and local governments do not have the ability to create money that the Federal government has and their ability to borrow is impaired.

I (Nonresidential fixed investments) was -2.5% in 3rdQ2009 as contrasted with -9.6% in 2ndQ2009. The good news is the move in the right direction. The bad news is that the which will drive sustainable economic growth are not happening. To some extent this is a consequence of the destruction of wealth from the mortgage mess. A lot of folks who were "rich" 2 years ago are no longer as wealthy as they once were. These are the folks who provide the seeds of the investments which would create jobs.

The export and import numbers were striking. Exports were +14.7% in 3rdQ2009 contrasted with -4.1% in 2ndQ2009. Some of this might be do to the declining value of the dollar. Imports were +16.4% in 3rdQ2009 contrasted with -14.7% in 2ndQ2009.

The good news is that we are on the road to recovery. The bad news is that this level of recovery may, in the short run, not be sustainable.

Some of this will be about public opinion. The stimulus was sold as a jobs creating package not as a GDP enhancing package. It would make more sense to me for politicians to explain that jobs lag GDP at the start of the process. Now we see silly reports from the Administration explaining that the Stimulus Bill may not have created jobs but prevented jobs from being destroyed.

This period of crappy economic times is going to last a while longer. We will not have real stimulus without investments.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

when will the housing market stand on its own?

Rate Watch #693 When Will the Housing Market Stand on Its Own?

October 23, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

V) Is the Housing Market Ready to Stand on Its Own?

This past Monday I read an article by my friend Ilyce Glink. I started to write a reply and realized how complex this question was so I stopped, sent her an e-mail thanking her for the inspiration and started writing this. I also stole the name of this article from her. We mortgage folks are nothing if not shameless.

Let's enumerate what Federal Government supporting the housing market in manners that it did not three years ago:

1) First Time Home Buyer Tax Credits

2) Takeover of FHLMC and FNMA

3) Now taking losses on FHA. FHA traditional is for low down payment or higher risk borrowers.

4) TARP bailouts of banks to help them maintain the semblance of liquidity because they are near the front line of mortgage lending. TARP was about more than mortgages but mortgages a) caused the problem and b) benefited along with other forms of lending from TARP. Also, TARP was about more than banks,

5) Conforming loan limits which are $417,000 should really be much less according to the traditional method of calculating conforming based on median sales prices in October.

6) Jumbo-conforming to $729,750 in high-value counties to accommodate the total lack of private Jumbo securitization. This points to the fact that few, at present, are making any mortgages which are not guaranteed by the Federal government.

7) FHLMC/FNMA backed refinancings to 105% - Home Affordable Refinance Program, or HARP

8) Federal Reserve buying of FHLMC/FNMA paper. This is not chump change but about $1.5 trillion. This supports low rates which supports the housing market.

9) an easing of bank's ability to not write off mortgage debt per the traditional rules. In short, losses are deferred for the sake of pumping up balance sheets.

10) The Homeowner Affordability and Stability Plan HASP - plan to avoid foreclosures.

11) This week the Administration announced new support under the authority provided to Treasury by the Housing and Economic Recovery Act of 2008 (HERA) to provide funds to local housing agencies.

I started writing this list and was stunned with the size of it. I looked at it and it is intimidating. Let's go back and discuss a few of these. TARP did many things. One was to put about $205 billion into 700 capital-short banks. About $70 billion has been repaid. Confidence in the banking system has increased but the risks are still there. Commercial Mortgage losses have yet to be taken and item 9) the relaxation of accounting standards compromises the traditional standards for judging the health of individual banks and the banking system in general. TARP will end at the end of 2009 in the sense that no more money will go out. Congress and the administration could see the money coming back as a new pool of something to spend money on. TARP is a gigantic program with many aspects. It it the primary thing which has brought the banking system back from the brink but there is much about it to criticize. See this article for example.

Item #8 is of significance to us mortgage folks. If the Fed stops buying FHLMC/FNMA paper someone is going to have to start buying it. Mortgage rates will go up at least 0.5% I would guess but this step must occur before and of the other FHLMC/FNMA items are implemented. If a markets develops for FHLMC/FNMA paper then at some future time several years from now Treasury can consider returning FHLMC & FNMA to their former GSE status. This is not going to happen any time soon. The Fed has announced that they will stop buying agency paper at the end of 1stQ2010.

If the Fed stopped buying FHLMC/FNMA paper there would be a problem with the jumbo-conforming loans because the professional organizations of security dealers will not regard any FHLMC/FNMA pool with > 10% jumbo conforming to be classified as investment grade. This creates two difficult choices: 1) toss out jumbo conforming and send property values in California into the abyss or 2) have the Fed keep buying these jumbo-conforming.

In fact, I see no way that the Fed can stop buying mortgages at the end of 1stQ2010. The consequences would be disastrous. No one else is going to buy this paper and real estate prices here in California will dive. Added into this is the fact that we are just starting to see a second foreclosure wave from Option ARMs which are mainly jumbo. There is a TV piece from KGO Channel 7 (S.F. ABC affiliate) shot this past week addressing this wave of problems. I am the guy at the end of the piece.

Amherst Securities Group estimates that there is a housing overhang or shadow inventory of 7 million units will will come on the market in the next 2 years consequent to foreclosures. There is a capsule of the report on Yahoo.

Remember that the Fed does not borrow money, it creates it out of nowhere. It's only consequent concern is inflation resulting from expanded money supply. I spoke with my mentor, Jim Grauer, and he suggested that the Fed might continue to buy mortgages and stop or decrease its purchases of Treasuries instead.

The First Time Home Buyer Tax credits have been much discussed this past week. Really, all they do is move future sales into the present. Every one who buys a home under this program now is a buyer who will not be buying their first home in some future year. This, like cash for clunkers, causes Treasury to spend more money that it does not have with the sole purpose or dressing up the present data at the expense of future data.

HARP and HASP need to be phased out if the housing market is going to begin to think about standing on its own. These programs got off to poor starts and if they start to prove effective next year they could buy themselves more time. This is a WSJ article on HARP. The other problem with reworking the mortgages of those delinquent is the traditionally high recidivism rate.

Somewhere along the way what is going to happen is that all of the massive amount of money poured out there to cure the problem will cause inflation and interest rates will rise. This will be a painful part of the cycle but what could arise from this is jumbo mortgage securitization. The conforming loan limits will be parked at $417,000 for years and the jumbo-comforing if not already discarded will no longer be needed.

By the end of 2011 we should go back to the realistic way of allowing banks to mark their assets to market. Give that at least 2 quarters and terminate

I want to make a couple of summary points: 1) the timeline suggested above is intended as a starting point. The precise timing and the order in which to terminate these various programs should be in the hands of the Fed and Treasury. Going forward to restore the housing market to normalcy, politicians are more likely to contribute to the problem than the solution. 2) it is unlikely that the housing market will be able to stand on its own (meaning the way things were 3 years ago) at any time during the next five years.

When will the housing market stand on its own? More than five and less than ten years from now.

Second Order Effects

If the above sounds complicated consider this. One the Fed stops buying agency paper (FHLMC/FNMA/FHA) that paper will have to be purchased by investors who will be less inclined to buy equities. Perhaps some of the runup we have seen in equities has been caused by that $1.5 trillion than investors did not used to buy agency paper. The implication is that the Fed getting out of the agency paper market might cause a decline in equity prices.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Ranked Choice Voting

Rate Watch #691 Rates Were Down but Moving Up. Ranked Choice Voting.

October 9, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

The good news is that Initial Jobless Claims fell to 521,000. The bad news is that 521,000 is good news. Wholesale Inventories were -1.3%.

ISM Services Index was 50.9 indicating mild expansion for the first time in a year.

Thursday's Treasury auction went well but not as well as expectation so the market started selling. Lower prices = higher yields.

 

III) The Technicals

The daily downcrossed Thursday and yields then moved up sharply. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

In a word if you have not refinanced you should start now if there is any benefit. Rates were very low but the bottoms are short-lived. If you are not sure e-mail of call me.

If you are concerned about where mortgage rates are going all I would say is that there is very little, if ay, room for lower rates and a lot more room for higher rates. We could go up 0.5% in rate as easily as we could go down 0.125% in rate.

I want to emphasize again that the Fed announced that it will stop buying mortgage debt at the end of 1stQ2010 so there is every reason to believe that mortgage rates will go up then.

I need to share something because maybe you folks can help me. I received my absentee ballot for next months election for "I have no idea what". The first page tells me that San Francisco is sophisticated and uses "ranked choice" voting and I would "Vote for my first, second and third choices" for City Attorney and Treasurer. The three choice for City Attorney are Dennis Herrera, Dennis Herrera, and Dennis Herrera. The three choices for Treasurer are Jose Cisneros, Jose Cisneros, and Jose Cisneros. I was in a quandry. Should I rank the three Herreras? I confess that I gave up and simply vote for none of these.

Since I started on Ranked Choice Voting I may as well make a point. Unless something has happened in the past few years that I am not aware of there is a mathematical theorem from the 1950's called "Arrow's Theorem" (http://en.wikipedia.org/wiki/Arrow's_impossibility_theorem). Ken Arrow was a sort of mathematical economist who won the Nobel Prize in Economics in 1972.

While the math part of this can be intimidating I believe that the point should be taken that Ranked Choice has some inherent problems. The most controversial part of the set of requirement for reasonableness is probably that part called Independence of Irrelevant Alternatives. This means, in simple form, that if I prefer A to B then the introduction of candidate C should not wind up with my re-ranking B above A. It is this point on which Ranked Choice fails most often.

Another issue is that all of this assumes that voters act rationally. Here the word “rational” has the strict definition that people vote in their own best interest. That is, in my observation, not the case. Thus we are cursed with trying to impose a rational system on people whose behavior is irrational.

The important point to note is that while Ranked Choice Voting seems like a good idea to most people they are unaware of its fundamental flaws.

I have started using Facebook recently and post these newsletters and some commentary on the economy there. If you want to see these add me as a "friend". There are not a lot of folks named "Dick Lepre". I am not one of those folks who tells everyone what I had for dinner. It is just not that interesting.

V) Mortgage This and That

I want to make a few points about what is happening with the mortgage business and where the markets may be going in 2010.

We have seen a couple of changes in the past for months which make what we do a bit more difficult. One item is the HVCC appraisal guidelines which make it necessary for the lender to order the appraisal. This hurts some brokers and benefits bank and mortgage banking operations such as ours. One inconvenience we face is that we cannot contact the appraiser at the start of the process and get an estimate of value. This means that some folks are going to pay for appraisals only to find that the value is too low to support the intended loan. In declining housing markets this is more than academic.

The other new thing is the rules about disclosures. We used to send out an initial Good Faith Estimate and Truth in Lending. Now if the rate lock is different from what is on the disclosure we need to redisclose. We have the technology to deliver these in a manner so that you can electronically acknowledge receipt. Otherwise we need to stop for 3 days if this is sent by fax or mail. This simply means that more cooperation is needed from borrowers to make sure that loans fund on time.

Overlaying all of this is an intense measure of scrutiny. Our underwriters and funders are demanding things which they did not previously demand solely for the purpose of quality control. We do not want to have to but a loan back from an investor because a page was missing from a bank statement.

All of these inconveniences are the price of the lax way the mortgage industry had acted. The Federal Government has a substantial measure of responsibility by demanding subprime lending from FHLMC & FNMA and demanding more subprime under CRA (Community Redevelopment Act) for banks and S&L's wanting to expand.

The Dollar

Somehow even Forex got politicized this week. If has always been my belief that mixing politics with economics is a good way to obfuscate economics. Blaming Obama for the weak dollar is silly. The dollar is weakening because of an abundance of supply and fiscal irresponsibility (too much borrowing). I still find it utterly insane that we are in a prolonged discussion about health care reform and the possibility that the Federal Government will expand Medicare (I am using the expression "expand Medicare" here only to refer to any increased responsibility to cover health care expense) when Congress has for 6 consecutive years refused to increase Medicare cost to match expense. This approach to Medicare has a similarity to predatory lending. Possible outcomes are: 1) significant inflation 2) higher taxes and lower GDP 3) significant cutback in healthcare for seniors 4) economic disaster. Underfunding Medicare is irresponsible.

About Those Jobs

I know I have said this at least 10 times but it is important that folks understand that the economy is not the jobs market. We will very soon see the recession end which only means that GDP will start expanding. This is of little immediate benefit to the large numbers of people who are out of work. Job creation will come later when investors, businesses and the banking system are comfortable. Jobs always lag in recovery. This is another reason not to mix politics and economics. This administration (like every other administration) sold its economic policies as creating jobs. If that does not happen voters will recall that and opponents of the incumbents will point to unfilled promises.

Jobs are created when business, labor and capital come together with opportunity. Opportunities in the future are likely to be tech driven and technological breakthrough occurs on its own schedule. We are likely to be in for a few years of high unemployment. This will not be solved by government spending.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

October 09, 2009 | Permalink | Comments (2)

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

September 18, 2009 | Permalink | Comments (1)

Regenerative Medicine

I want to relate this to my comments of last week about health care reform. I find it extremely shortsighted that a “stimulus bill” was passed and Congress is talking about health care reform and they missed the important fact that a very large amount of money needs to be spent on research to reduce both the suffering and the expense of the diseases which strike the elderly who are the large consumers of health care. We should be allocating money for research into heart disease and cancer. We should recognize that the things which we have come to accept as the inevitabilitable consequences of old age are not really inevitable. If we try we can find regenerative medical techniques to treat Atherosclerosis, cancer, macular degeneration, and Parkinson’s. Regenerative medical techniques may save lives and money.

Let me clarify this: at present medicine seeks "magic bullet" techniques into treatment of disease. It sees to understand the underlying metabolic process and prevent disease from happening. Regenerative medicine seeks to eliminate the effects of disease rather than stem the cause. For example, it seeks to find ways to remove the harmful chemical byproducts of cholesterol (the big cause of heart disease) rather than prevent them from coming into being.

August 29, 2009 | Permalink | Comments (0)

Economics of Health Care Reform

Rate Watch #684 Economics of Health Care Reform

August 21, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

This cycle produced a small dip in rates. Existing Home Sales were +7.2% in July as prices were down 15% y-o-y. 31% of the sales were foreclosures or otherwise "distressed" sales. Housing prices will not stop falling until inventory diminishes. July brought inventory from 8.9 to 8.6 months. There are still a lot of foreclosures to come so while things are getting relatively better it is not as if the problem is about to end soon. What is important is that the market is working.

Initial Jobless Claims were 576,000. The share of mortgages which are delinquent rose to a record 9.24% for 2ndQ2009. While subprime delinquencies and foreclosures may have peaked we are now seeing late payments induced by these job losses.

Core PPI was -0.1%. Overall Housing Starts were down while single family construction was up. I suppose that implies folks are reticent to build apartment buildings. One problem I see is that banks are using lower cap rates (net operating income/loan amount) to determine how large a loan they will make on a commercial property. The situation is even worse for purely commercial properties such as office buildings.

III) The Technicals

It looks as if the technical daily bull is about to end. (Treasuries are getting killed as I wrote this.) The weekly is still bullish. The dip we called for was at best modest

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be at or near the August bottom I called for few weeks ago. The decrease in yields and rates has been rather small.

As if foreclosure statistics were not high enough check out this work of art.

V) Health Care Reform

I have found the very loud discussion about health care reform to be most interesting. I have read a lot about the discussion but still have no idea what "the plan" is. I suppose that this is by design. The Administration championed health care reform without being clear about exactly what plan it backed. It has left this up to Congress. This may have be a consequence of the very bad way that this went at the beginning of the Clinton administration when a plan was formulated out of view of Congress and then taken to Congress. Something went wrong here. Congress went on its summer recess and started talking to the electorate but the details are missing,

Consequently, the fact that the debate has spun out of control should be no surprise since no one knows what the details are. The worst possible thing has happened and that is that the discussion is close to becoming totally political.

The following are the questions which I would ask about any public plan:

1) what is the plan?

2) what will this plan cost?

3) where will the revenue to cover the cost come from?

4) will this decrease, increase or have no effect on current health care costs?

5) why are we not fixing the present structural deficits with Medicare before we expand public health care?

I am not implying that health care is all about economics but I do believe that we need to know what the economics are of any proposed plan. Any analysis should not come from politicians but from the Congressional Budget Office or an impartial panel of economists.

I would also comment that this is a complex topic and it is more important (I think) to get this done correctly that get this done quickly. I personally see too little sanity and objectivity in the present debate.

I also have concern about the timing. I would feel a lot better backing a government plan if we were not running a $1.8 trillion decicit.

The health care system in the United States is excellent. Whether you have cancer, heart disease, AIDS or pneumonia your survival rate is better in the U.S. than in any other country in the world. The problem, at least on the surface, is the health care in the U.S. expensive. While one might observe that American may consume too much health care and drive prices up I would offer that health care is not the worst way to spend money. Nonetheless, we should strive to make health care in the U.S. less expensive.

One point that is lost in the debate is that the U.S. govenrment already pays almost 60% of total health care expense. This is true is one allows for the indirect expense coming from the fact that health care benefits are untaxed income. The rest is Medicare, Medicaid, VA and other public health initiatives.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

August 21, 2009 | Permalink | Comments (2)

Elusive Leverage

Rate Watch #683 Last Call for Refis? Elusive Leverage

August 14, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

At a time when some are concerned about inflation and some about deflation good old Core CPI came through - Core CPI was flat. Industrial Production was +0.5% and Capacity Utilization was up to 68.5%. I want to mention again that data about manufacturing is less important than it once was because it is but a small part of the economy yet it is still psychologically important. UMich Sentiment was down presumably on concern about jobs.

Retail Sales Overall was -0.1% and ex-Autos at -0.6%. This is significant because the auto sector received a steroid injection from Cash for Clunkers. Initial Jobless Claims were 558,000 indicative of continued softness in jobs. This reduces the probability that GDP will grow this quarter.

Home prices fell a whopping 15.6% year-over-year in 2ndQ2009. Supply was increased by foreclosures and demand was tempered by job losses. This has a nasty effect on appraisals for those contemplating refinancing. There are also potential fiscal effects. 90% of the mortgages being made at present are guaranteed by the US government through FNMA, FHLMC, and FHA. Good luck, taxpayers.

Worker Productivity (GDP/hour worked) rose at 6.4% annualized for Q2. Usually productivity is driven by technology but this time it is probably about getting the same work done with fewer workers rather than more machines.

One thing of interest is that the spread between mortgage rates and the 10 year Treasury has gotten down to 40 basis points (0.4% in rate). That number was running over 125 last year.

III) The Technicals

The daily is in a bullish divergence. This occurs when the price falls and the tech rises. This is a signal of potential strong upward movement in price and lower Treasury yields. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be seeing a "last call for refis". We are about to have a technically induced dip (maybe) but concern exists because of the announced Fed policy of halting its Treasury buying program in October. It is difficult to see that failing to induce higher Treasury yields but these are strange times and the Fed could choose to continue to support mortgages.

My nomination for this week's most confusing piece on the economy is this article from Bloomberg. The article was headlined "U.S. Enters Recovery as Stimulus Refutes Skeptics" so it looks as if its intentions are more political than economic but the article states "The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years". This article has some amazing properties: the authors have apparently redefined "expand" as meaning "contract less" and somehow the stimulus bill had an affect 6 months before it went into effect.

One more cheap shot. This is from U.S. Senator Debbie Stabenow: "Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes." What is less funny is that this sensitive person is actually part of the Senate Energy Committee.

Let's be serious: it is good news that the economy is contracting at a slower pace and will likely start growing by the end of this year.. The major factors in influencing what GDP is doing at present are Fed intervention and last year's TARP related package. The Stimulus bill (American Recovery and Reinvestment Act of 2009) is not something on which judgment can yet be determined. One point is that the largest fiscal effect of that bill was really tax cuts but those tax cuts are temporary and that usually does not lead to increased spending but increased savings. There should be little surprise that the Stimulus Bill has not yet resulted in increased Consumer Spending.

 

V) Elusive Leverage

One thing we all have to deal with is that fact that it is harder for businesses and consumers to get the leverage they once did. It is a lot more difficult to get financing on commercial property. Some business which relied on short-term inexpensive debt (commercial paper) have taken to issuing longer-term debt (bonds) to make sure that they have cash.

None of this is surprising. Banks are reticent to lend much less lend on the insane terms of 3-5 years ago so money is less available.

VI) Other Stuff

This is a significant step forward more memory for devices such as Blackberries, iPhones, and digital cameras. This new SD card by Toshiba not only is 64 gigs but the underlying architecture will support future card capacity up to 2 terabytes. The new memory standard is called SDHC. This should be able to hold more than 500,000 songs with lots left over for girlie pictures. What more does a young man need?

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

August 14, 2009 | Permalink | Comments (0)

Get a Job?

Rate Watch #682 Get a Job

August 7, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

V) Jobs

And when I get the paper
I read it through and through
And my girl never fails to say
If there is any work for me,
And when I go back to the house
I hear the woman's mouth
Preaching and a crying,
Tell me that I'm lying 'bout a job
That I never could find.

- lyrics to "Get a Job" by the Silhouettes 1957

YouTube here

The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won’t be coming back. They are casualties of a changing economy. And that only underscores the importance of generating new businesses and industries to replace the ones we’ve lost, and of preparing our workers to fill the jobs they create.

- President Barack Obama July 2009

I keep writing about this to some extent because I feel that this is not properly treated by the media.

In 2001 we had a mild recession. In fact that was a very mild recession. What was strange was that job recovery was weak even as the recession (a dip in GDP) ended. The loss of jobs became a political issue which obfuscated the underlying realities.

Assuming that the current recession will wind down by or at the end of this year and we will start to see GDP growth I believe that we will be left with another jobless recovery. This is where the political view of the economy becomes useless or worse. The present administration may find that it has to explain that its stimulus package restored GDP but did not restore the jobs which it emphasized as the reason for the stimulus plan.

Presidents tend to pitch economic policies as creating jobs. That is politics much more so that it is economics. In reality job creation is little influenced by the President or Congress.

Jobs are, in essence, like any other commodity. There is a supply - the work force - and a demand. The demand for jobs varies according to the demand for the products and services of businesses.

Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or metaphysical force. They are a result of the nature of the way businesses work. Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.

Business opportunities are seen by a number of different companies and individuals who devote time and capital to business creation and expansion and the cycle always results in an oversupply. The consequence is recession.

This cycle was particularly nefarious because what was in oversupply was bad mortgage loans which undermined the banking system and created a liquidity crisis which cascaded to other businesses.

Some jobs will come back apart from whatever the government does. Construction jobs will return when there are signs that the current oversupply of housing has diminished. There may be some reticence because of tougher lending standards and the perception that construction is less likely to be profitable if values are flat. Some retail jobs will come back as people start spending more.

Significant jobs growth will occur as the result of new technological breakthroughs which create new industries and the jobs which go with them. The problem is that this happens on its own schedule. The jobs expansion which went with the growth of the Internet was not a planned event. It also was not accident. The works of a lot of individuals came together and created opportunities. President Obama's appeal about jobs is timely but then fact is that there is little which the government can do to create these new industries because, in fact, we do not know what they are. The President accurately states that these jobs will require more education that the old jobs. We may well find that our inability to educate our citizens for the jobs of the future is our most serious economic problem.

The role of the government in the creation of the jobs of the future may well be in investment tax credits for certain industries. The government has spent a lot of money to keep the auto industries going but these are not the industries where the jobs of the future are. One of the structural problems is that the industries of the future, by their nature, do not have large numbers of lobbyists. It is the entrenched industries and the labor unions associate therewith which do the lobbying.

There was a factor in the dot-com Internet stock bubble and that was that Wall Street created and sold a BS story about how to value Internet stocks. The subprime valuation myth was created by the same Wall Street firms. If a new tech driven set of industries comes into existence and creates these jobs it will be interesting to see if investors learned anything.

Yesterday I was at a meeting at a VC firm in Palo Alto. There was a very interesting pair of large graphic presentations on the wall of their conference room. It was from about 10 years ago and was all about how various dot-com startups were valued. I asked what that was doing there and one gentleman said, "That is to remind us of what can happen if we stop thinking rationally".

 

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

August 07, 2009 | Permalink | Comments (0)

Health Care. Mortgages.

Rate Watch #680 A Few Things About Mortgages.

July 24, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

Consumer Sentiment is down. People are concerned about their jobs. Initial Jobless Claims were 554,000 last week. This is happening despite an increase in equity values and a general feeling that the recession is near bottom and GDP will start increasing later this year. This is the picture of another jobless recovery. Maybe this is the picture of a jobless recovery much worse that the last one. There are some facts that are at the root of this: 1) technology eliminates some jobs and creates others but it generally supports an increase in Worker Productivity (GDP/hour worked) 2)the other big factor is that we have moved into a world economy.

We are moving into an era where the same amount of stuff and services can be performed with much less labor and no one is preparing for this.

III) The Technicals

The daily is down crossed. The techs say that we should see higher Treasury yields for the next week. The next bottom for mortgage rates should occur at or after the middle of August. The daily cycles usually last 15-20 days. That is 15-20 days of up and then 15-20 days of down.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I am going to wedge into this section a very brief statement about the discussion of health care reform. My point of view is that we are missing entirely the problem. The problem is not who is going to pay for it. The problem is that health care is too expensive and that neither the present system nor the President's plan addresses the issue of how to reduce costs. We need technologically sophisticated solutions to health care. The present paradigms for developing new sorts of medical care seem incapable of bringing it here and reducing the overall cost. We need transformation of medicine away from chasing and treating pathologies to a more cost-effective approach of maintaining health. When I say "maintaining health" I am not simply talking about diet and exercise but sophisticated therapies to remedy the ongoing effects of aging.

This is a topic in which I am actively involved and will address in detail in a future newsletter. This is too important to treat piecemeal here.

One of the present systems of U.S. Government supported health care - Medicare - is irresponsibly run. Congress should first fix it so that it makes fiscal sense.

V) About Mortgages

I want to cover a few topics about mortgages this week rather than lecture about how the federal government should be run. We can get back to that next week.

Home Affordability Refinance Program

First these were refinance mortgages which did loans up to 105% of the value. A revised bit of legislation moved this up to 125%. The notion was that rates were low but people who had lost equity could not benefit because they could not refinance.

These loans do not have relaxed underwriting apart from the loan-to-value guideline so it makes sense that allowing a lower rate refi does not increase the risk that the loan will default. Even if these loans eventually have higher than traditional default rates it will not be because the borrowers lowered their rate.

These do not allow cash out and do not allow you to pay off an existing HELOC. You can only do a HARP refinance of a FNMA loan with FNMA buying the new loan from the investor and you can only refi a FHLMC loan with FHLMC buying the loan from the investor. If your loan is not presently owned by FNMA or FHLMC you cannot get a HARP loan.

You can find out if your loan is FNMA or FHLMC by visiting their web sites at:

http://loanlookup.fanniemae.com/loanlookup/

or

https://ww3.freddiemac.com/corporate/

If you have a FNMA loan you can, at present, refinance it with any FNMA lender. If you have a FHLMC loan you need to refinance with your present lender but on September 1 FHLMC is supposed to be allowing any FHLMC lender to refinance.

I can refi any FNMA HARP loan to 105%. If a current loan is owned by FHLMC I can refi only some of them.

Jumbo/Conforming and Jumbo Mortgages

We have see a stabilization of the jumbo-conforming of Stimulus FNMA/FHLMC mortgage pricing. The vast majority of these seem to wind up being owned by the Federal Reserve because there is still a rule put in place by security dealer associations that no investment grade security may contain more than 10% of these mixed with traditional conforming.

Securitization of Jumbo Mortgages

Securitization of jumbo mortgage does not exist at present. Loans above the jumbo-conforming limits are made only by lenders who portfolio these. I see few early warning indicators that jumbo securitization will reemerge soon.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

July 24, 2009 | Permalink | Comments (0)

Next »

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

I want to relate this to my comments of last week about health care reform. I find it extremely shortsighted that a “stimulus bill” was passed and Congress is talking about health care reform and they missed the important fact that a very large amount of money needs to be spent on research to reduce both the suffering and the expense of the diseases which strike the elderly who are the large consumers of health care. We should be allocating money for research into heart disease and cancer. We should recognize that the things which we have come to accept as the inevitabilitable consequences of old age are not really inevitable. If we try we can find regenerative medical techniques to treat Atherosclerosis, cancer, macular degeneration, and Parkinson’s. Regenerative medical techniques may save lives and money.

Let me clarify this: at present medicine seeks "magic bullet" techniques into treatment of disease. It sees to understand the underlying metabolic process and prevent disease from happening. Regenerative medicine seeks to eliminate the effects of disease rather than stem the cause. For example, it seeks to find ways to remove the harmful chemical byproducts of cholesterol (the big cause of heart disease) rather than prevent them from coming into being.

Rate Watch #684 Economics of Health Care Reform

August 21, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

This cycle produced a small dip in rates. Existing Home Sales were +7.2% in July as prices were down 15% y-o-y. 31% of the sales were foreclosures or otherwise "distressed" sales. Housing prices will not stop falling until inventory diminishes. July brought inventory from 8.9 to 8.6 months. There are still a lot of foreclosures to come so while things are getting relatively better it is not as if the problem is about to end soon. What is important is that the market is working.

Initial Jobless Claims were 576,000. The share of mortgages which are delinquent rose to a record 9.24% for 2ndQ2009. While subprime delinquencies and foreclosures may have peaked we are now seeing late payments induced by these job losses.

Core PPI was -0.1%. Overall Housing Starts were down while single family construction was up. I suppose that implies folks are reticent to build apartment buildings. One problem I see is that banks are using lower cap rates (net operating income/loan amount) to determine how large a loan they will make on a commercial property. The situation is even worse for purely commercial properties such as office buildings.

III) The Technicals

It looks as if the technical daily bull is about to end. (Treasuries are getting killed as I wrote this.) The weekly is still bullish. The dip we called for was at best modest

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be at or near the August bottom I called for few weeks ago. The decrease in yields and rates has been rather small.

As if foreclosure statistics were not high enough check out this work of art.

V) Health Care Reform

I have found the very loud discussion about health care reform to be most interesting. I have read a lot about the discussion but still have no idea what "the plan" is. I suppose that this is by design. The Administration championed health care reform without being clear about exactly what plan it backed. It has left this up to Congress. This may have be a consequence of the very bad way that this went at the beginning of the Clinton administration when a plan was formulated out of view of Congress and then taken to Congress. Something went wrong here. Congress went on its summer recess and started talking to the electorate but the details are missing,

Consequently, the fact that the debate has spun out of control should be no surprise since no one knows what the details are. The worst possible thing has happened and that is that the discussion is close to becoming totally political.

The following are the questions which I would ask about any public plan:

1) what is the plan?

2) what will this plan cost?

3) where will the revenue to cover the cost come from?

4) will this decrease, increase or have no effect on current health care costs?

5) why are we not fixing the present structural deficits with Medicare before we expand public health care?

I am not implying that health care is all about economics but I do believe that we need to know what the economics are of any proposed plan. Any analysis should not come from politicians but from the Congressional Budget Office or an impartial panel of economists.

I would also comment that this is a complex topic and it is more important (I think) to get this done correctly that get this done quickly. I personally see too little sanity and objectivity in the present debate.

I also have concern about the timing. I would feel a lot better backing a government plan if we were not running a $1.8 trillion decicit.

The health care system in the United States is excellent. Whether you have cancer, heart disease, AIDS or pneumonia your survival rate is better in the U.S. than in any other country in the world. The problem, at least on the surface, is the health care in the U.S. expensive. While one might observe that American may consume too much health care and drive prices up I would offer that health care is not the worst way to spend money. Nonetheless, we should strive to make health care in the U.S. less expensive.

One point that is lost in the debate is that the U.S. govenrment already pays almost 60% of total health care expense. This is true is one allows for the indirect expense coming from the fact that health care benefits are untaxed income. The rest is Medicare, Medicaid, VA and other public health initiatives.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Rate Watch #683 Last Call for Refis? Elusive Leverage

August 14, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

At a time when some are concerned about inflation and some about deflation good old Core CPI came through - Core CPI was flat. Industrial Production was +0.5% and Capacity Utilization was up to 68.5%. I want to mention again that data about manufacturing is less important than it once was because it is but a small part of the economy yet it is still psychologically important. UMich Sentiment was down presumably on concern about jobs.

Retail Sales Overall was -0.1% and ex-Autos at -0.6%. This is significant because the auto sector received a steroid injection from Cash for Clunkers. Initial Jobless Claims were 558,000 indicative of continued softness in jobs. This reduces the probability that GDP will grow this quarter.

Home prices fell a whopping 15.6% year-over-year in 2ndQ2009. Supply was increased by foreclosures and demand was tempered by job losses. This has a nasty effect on appraisals for those contemplating refinancing. There are also potential fiscal effects. 90% of the mortgages being made at present are guaranteed by the US government through FNMA, FHLMC, and FHA. Good luck, taxpayers.

Worker Productivity (GDP/hour worked) rose at 6.4% annualized for Q2. Usually productivity is driven by technology but this time it is probably about getting the same work done with fewer workers rather than more machines.

One thing of interest is that the spread between mortgage rates and the 10 year Treasury has gotten down to 40 basis points (0.4% in rate). That number was running over 125 last year.

III) The Technicals

The daily is in a bullish divergence. This occurs when the price falls and the tech rises. This is a signal of potential strong upward movement in price and lower Treasury yields. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be seeing a "last call for refis". We are about to have a technically induced dip (maybe) but concern exists because of the announced Fed policy of halting its Treasury buying program in October. It is difficult to see that failing to induce higher Treasury yields but these are strange times and the Fed could choose to continue to support mortgages.

My nomination for this week's most confusing piece on the economy is this article from Bloomberg. The article was headlined "U.S. Enters Recovery as Stimulus Refutes Skeptics" so it looks as if its intentions are more political than economic but the article states "The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years". This article has some amazing properties: the authors have apparently redefined "expand" as meaning "contract less" and somehow the stimulus bill had an affect 6 months before it went into effect.

One more cheap shot. This is from U.S. Senator Debbie Stabenow: "Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes." What is less funny is that this sensitive person is actually part of the Senate Energy Committee.

Let's be serious: it is good news that the economy is contracting at a slower pace and will likely start growing by the end of this year.. The major factors in influencing what GDP is doing at present are Fed intervention and last year's TARP related package. The Stimulus bill (American Recovery and Reinvestment Act of 2009) is not something on which judgment can yet be determined. One point is that the largest fiscal effect of that bill was really tax cuts but those tax cuts are temporary and that usually does not lead to increased spending but increased savings. There should be little surprise that the Stimulus Bill has not yet resulted in increased Consumer Spending.

 

V) Elusive Leverage

One thing we all have to deal with is that fact that it is harder for businesses and consumers to get the leverage they once did. It is a lot more difficult to get financing on commercial property. Some business which relied on short-term inexpensive debt (commercial paper) have taken to issuing longer-term debt (bonds) to make sure that they have cash.

None of this is surprising. Banks are reticent to lend much less lend on the insane terms of 3-5 years ago so money is less available.

VI) Other Stuff

This is a significant step forward more memory for devices such as Blackberries, iPhones, and digital cameras. This new SD card by Toshiba not only is 64 gigs but the underlying architecture will support future card capacity up to 2 terabytes. The new memory standard is called SDHC. This should be able to hold more than 500,000 songs with lots left over for girlie pictures. What more does a young man need?

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Rate Watch #682 Get a Job

August 7, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

V) Jobs

And when I get the paper
I read it through and through
And my girl never fails to say
If there is any work for me,
And when I go back to the house
I hear the woman's mouth
Preaching and a crying,
Tell me that I'm lying 'bout a job
That I never could find.

- lyrics to "Get a Job" by the Silhouettes 1957

YouTube here

The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won’t be coming back. They are casualties of a changing economy. And that only underscores the importance of generating new businesses and industries to replace the ones we’ve lost, and of preparing our workers to fill the jobs they create.

- President Barack Obama July 2009

I keep writing about this to some extent because I feel that this is not properly treated by the media.

In 2001 we had a mild recession. In fact that was a very mild recession. What was strange was that job recovery was weak even as the recession (a dip in GDP) ended. The loss of jobs became a political issue which obfuscated the underlying realities.

Assuming that the current recession will wind down by or at the end of this year and we will start to see GDP growth I believe that we will be left with another jobless recovery. This is where the political view of the economy becomes useless or worse. The present administration may find that it has to explain that its stimulus package restored GDP but did not restore the jobs which it emphasized as the reason for the stimulus plan.

Presidents tend to pitch economic policies as creating jobs. That is politics much more so that it is economics. In reality job creation is little influenced by the President or Congress.

Jobs are, in essence, like any other commodity. There is a supply - the work force - and a demand. The demand for jobs varies according to the demand for the products and services of businesses.

Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or metaphysical force. They are a result of the nature of the way businesses work. Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.

Business opportunities are seen by a number of different companies and individuals who devote time and capital to business creation and expansion and the cycle always results in an oversupply. The consequence is recession.

This cycle was particularly nefarious because what was in oversupply was bad mortgage loans which undermined the banking system and created a liquidity crisis which cascaded to other businesses.

Some jobs will come back apart from whatever the government does. Construction jobs will return when there are signs that the current oversupply of housing has diminished. There may be some reticence because of tougher lending standards and the perception that construction is less likely to be profitable if values are flat. Some retail jobs will come back as people start spending more.

Significant jobs growth will occur as the result of new technological breakthroughs which create new industries and the jobs which go with them. The problem is that this happens on its own schedule. The jobs expansion which went with the growth of the Internet was not a planned event. It also was not accident. The works of a lot of individuals came together and created opportunities. President Obama's appeal about jobs is timely but then fact is that there is little which the government can do to create these new industries because, in fact, we do not know what they are. The President accurately states that these jobs will require more education that the old jobs. We may well find that our inability to educate our citizens for the jobs of the future is our most serious economic problem.

The role of the government in the creation of the jobs of the future may well be in investment tax credits for certain industries. The government has spent a lot of money to keep the auto industries going but these are not the industries where the jobs of the future are. One of the structural problems is that the industries of the future, by their nature, do not have large numbers of lobbyists. It is the entrenched industries and the labor unions associate therewith which do the lobbying.

There was a factor in the dot-com Internet stock bubble and that was that Wall Street created and sold a BS story about how to value Internet stocks. The subprime valuation myth was created by the same Wall Street firms. If a new tech driven set of industries comes into existence and creates these jobs it will be interesting to see if investors learned anything.

Yesterday I was at a meeting at a VC firm in Palo Alto. There was a very interesting pair of large graphic presentations on the wall of their conference room. It was from about 10 years ago and was all about how various dot-com startups were valued. I asked what that was doing there and one gentleman said, "That is to remind us of what can happen if we stop thinking rationally".

 

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Rate Watch #680 A Few Things About Mortgages.

July 24, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

Consumer Sentiment is down. People are concerned about their jobs. Initial Jobless Claims were 554,000 last week. This is happening despite an increase in equity values and a general feeling that the recession is near bottom and GDP will start increasing later this year. This is the picture of another jobless recovery. Maybe this is the picture of a jobless recovery much worse that the last one. There are some facts that are at the root of this: 1) technology eliminates some jobs and creates others but it generally supports an increase in Worker Productivity (GDP/hour worked) 2)the other big factor is that we have moved into a world economy.

We are moving into an era where the same amount of stuff and services can be performed with much less labor and no one is preparing for this.

III) The Technicals

The daily is down crossed. The techs say that we should see higher Treasury yields for the next week. The next bottom for mortgage rates should occur at or after the middle of August. The daily cycles usually last 15-20 days. That is 15-20 days of up and then 15-20 days of down.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I am going to wedge into this section a very brief statement about the discussion of health care reform. My point of view is that we are missing entirely the problem. The problem is not who is going to pay for it. The problem is that health care is too expensive and that neither the present system nor the President's plan addresses the issue of how to reduce costs. We need technologically sophisticated solutions to health care. The present paradigms for developing new sorts of medical care seem incapable of bringing it here and reducing the overall cost. We need transformation of medicine away from chasing and treating pathologies to a more cost-effective approach of maintaining health. When I say "maintaining health" I am not simply talking about diet and exercise but sophisticated therapies to remedy the ongoing effects of aging.

This is a topic in which I am actively involved and will address in detail in a future newsletter. This is too important to treat piecemeal here.

One of the present systems of U.S. Government supported health care - Medicare - is irresponsibly run. Congress should first fix it so that it makes fiscal sense.

V) About Mortgages

I want to cover a few topics about mortgages this week rather than lecture about how the federal government should be run. We can get back to that next week.

Home Affordability Refinance Program

First these were refinance mortgages which did loans up to 105% of the value. A revised bit of legislation moved this up to 125%. The notion was that rates were low but people who had lost equity could not benefit because they could not refinance.

These loans do not have relaxed underwriting apart from the loan-to-value guideline so it makes sense that allowing a lower rate refi does not increase the risk that the loan will default. Even if these loans eventually have higher than traditional default rates it will not be because the borrowers lowered their rate.

These do not allow cash out and do not allow you to pay off an existing HELOC. You can only do a HARP refinance of a FNMA loan with FNMA buying the new loan from the investor and you can only refi a FHLMC loan with FHLMC buying the loan from the investor. If your loan is not presently owned by FNMA or FHLMC you cannot get a HARP loan.

You can find out if your loan is FNMA or FHLMC by visiting their web sites at:

http://loanlookup.fanniemae.com/loanlookup/

or

https://ww3.freddiemac.com/corporate/

If you have a FNMA loan you can, at present, refinance it with any FNMA lender. If you have a FHLMC loan you need to refinance with your present lender but on September 1 FHLMC is supposed to be allowing any FHLMC lender to refinance.

I can refi any FNMA HARP loan to 105%. If a current loan is owned by FHLMC I can refi only some of them.

Jumbo/Conforming and Jumbo Mortgages

We have see a stabilization of the jumbo-conforming of Stimulus FNMA/FHLMC mortgage pricing. The vast majority of these seem to wind up being owned by the Federal Reserve because there is still a rule put in place by security dealer associations that no investment grade security may contain more than 10% of these mixed with traditional conforming.

Securitization of Jumbo Mortgages

Securitization of jumbo mortgage does not exist at present. Loans above the jumbo-conforming limits are made only by lenders who portfolio these. I see few early warning indicators that jumbo securitization will reemerge soon.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

Regenerative Medicine

I want to relate this to my comments of last week about health care reform. I find it extremely shortsighted that a “stimulus bill” was passed and Congress is talking about health care reform and they missed the important fact that a very large amount of money needs to be spent on research to reduce both the suffering and the expense of the diseases which strike the elderly who are the large consumers of health care. We should be allocating money for research into heart disease and cancer. We should recognize that the things which we have come to accept as the inevitabilitable consequences of old age are not really inevitable. If we try we can find regenerative medical techniques to treat Atherosclerosis, cancer, macular degeneration, and Parkinson’s. Regenerative medical techniques may save lives and money.

Let me clarify this: at present medicine seeks "magic bullet" techniques into treatment of disease. It sees to understand the underlying metabolic process and prevent disease from happening. Regenerative medicine seeks to eliminate the effects of disease rather than stem the cause. For example, it seeks to find ways to remove the harmful chemical byproducts of cholesterol (the big cause of heart disease) rather than prevent them from coming into being.

Economics of Health Care Reform

Rate Watch #684 Economics of Health Care Reform

August 21, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

This cycle produced a small dip in rates. Existing Home Sales were +7.2% in July as prices were down 15% y-o-y. 31% of the sales were foreclosures or otherwise "distressed" sales. Housing prices will not stop falling until inventory diminishes. July brought inventory from 8.9 to 8.6 months. There are still a lot of foreclosures to come so while things are getting relatively better it is not as if the problem is about to end soon. What is important is that the market is working.

Initial Jobless Claims were 576,000. The share of mortgages which are delinquent rose to a record 9.24% for 2ndQ2009. While subprime delinquencies and foreclosures may have peaked we are now seeing late payments induced by these job losses.

Core PPI was -0.1%. Overall Housing Starts were down while single family construction was up. I suppose that implies folks are reticent to build apartment buildings. One problem I see is that banks are using lower cap rates (net operating income/loan amount) to determine how large a loan they will make on a commercial property. The situation is even worse for purely commercial properties such as office buildings.

III) The Technicals

It looks as if the technical daily bull is about to end. (Treasuries are getting killed as I wrote this.) The weekly is still bullish. The dip we called for was at best modest

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be at or near the August bottom I called for few weeks ago. The decrease in yields and rates has been rather small.

As if foreclosure statistics were not high enough check out this work of art.

V) Health Care Reform

I have found the very loud discussion about health care reform to be most interesting. I have read a lot about the discussion but still have no idea what "the plan" is. I suppose that this is by design. The Administration championed health care reform without being clear about exactly what plan it backed. It has left this up to Congress. This may have be a consequence of the very bad way that this went at the beginning of the Clinton administration when a plan was formulated out of view of Congress and then taken to Congress. Something went wrong here. Congress went on its summer recess and started talking to the electorate but the details are missing,

Consequently, the fact that the debate has spun out of control should be no surprise since no one knows what the details are. The worst possible thing has happened and that is that the discussion is close to becoming totally political.

The following are the questions which I would ask about any public plan:

1) what is the plan?

2) what will this plan cost?

3) where will the revenue to cover the cost come from?

4) will this decrease, increase or have no effect on current health care costs?

5) why are we not fixing the present structural deficits with Medicare before we expand public health care?

I am not implying that health care is all about economics but I do believe that we need to know what the economics are of any proposed plan. Any analysis should not come from politicians but from the Congressional Budget Office or an impartial panel of economists.

I would also comment that this is a complex topic and it is more important (I think) to get this done correctly that get this done quickly. I personally see too little sanity and objectivity in the present debate.

I also have concern about the timing. I would feel a lot better backing a government plan if we were not running a $1.8 trillion decicit.

The health care system in the United States is excellent. Whether you have cancer, heart disease, AIDS or pneumonia your survival rate is better in the U.S. than in any other country in the world. The problem, at least on the surface, is the health care in the U.S. expensive. While one might observe that American may consume too much health care and drive prices up I would offer that health care is not the worst way to spend money. Nonetheless, we should strive to make health care in the U.S. less expensive.

One point that is lost in the debate is that the U.S. govenrment already pays almost 60% of total health care expense. This is true is one allows for the indirect expense coming from the fact that health care benefits are untaxed income. The rest is Medicare, Medicaid, VA and other public health initiatives.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Elusive Leverage

Rate Watch #683 Last Call for Refis? Elusive Leverage

August 14, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

At a time when some are concerned about inflation and some about deflation good old Core CPI came through - Core CPI was flat. Industrial Production was +0.5% and Capacity Utilization was up to 68.5%. I want to mention again that data about manufacturing is less important than it once was because it is but a small part of the economy yet it is still psychologically important. UMich Sentiment was down presumably on concern about jobs.

Retail Sales Overall was -0.1% and ex-Autos at -0.6%. This is significant because the auto sector received a steroid injection from Cash for Clunkers. Initial Jobless Claims were 558,000 indicative of continued softness in jobs. This reduces the probability that GDP will grow this quarter.

Home prices fell a whopping 15.6% year-over-year in 2ndQ2009. Supply was increased by foreclosures and demand was tempered by job losses. This has a nasty effect on appraisals for those contemplating refinancing. There are also potential fiscal effects. 90% of the mortgages being made at present are guaranteed by the US government through FNMA, FHLMC, and FHA. Good luck, taxpayers.

Worker Productivity (GDP/hour worked) rose at 6.4% annualized for Q2. Usually productivity is driven by technology but this time it is probably about getting the same work done with fewer workers rather than more machines.

One thing of interest is that the spread between mortgage rates and the 10 year Treasury has gotten down to 40 basis points (0.4% in rate). That number was running over 125 last year.

III) The Technicals

The daily is in a bullish divergence. This occurs when the price falls and the tech rises. This is a signal of potential strong upward movement in price and lower Treasury yields. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be seeing a "last call for refis". We are about to have a technically induced dip (maybe) but concern exists because of the announced Fed policy of halting its Treasury buying program in October. It is difficult to see that failing to induce higher Treasury yields but these are strange times and the Fed could choose to continue to support mortgages.

My nomination for this week's most confusing piece on the economy is this article from Bloomberg. The article was headlined "U.S. Enters Recovery as Stimulus Refutes Skeptics" so it looks as if its intentions are more political than economic but the article states "The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years". This article has some amazing properties: the authors have apparently redefined "expand" as meaning "contract less" and somehow the stimulus bill had an affect 6 months before it went into effect.

One more cheap shot. This is from U.S. Senator Debbie Stabenow: "Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes." What is less funny is that this sensitive person is actually part of the Senate Energy Committee.

Let's be serious: it is good news that the economy is contracting at a slower pace and will likely start growing by the end of this year.. The major factors in influencing what GDP is doing at present are Fed intervention and last year's TARP related package. The Stimulus bill (American Recovery and Reinvestment Act of 2009) is not something on which judgment can yet be determined. One point is that the largest fiscal effect of that bill was really tax cuts but those tax cuts are temporary and that usually does not lead to increased spending but increased savings. There should be little surprise that the Stimulus Bill has not yet resulted in increased Consumer Spending.

 

V) Elusive Leverage

One thing we all have to deal with is that fact that it is harder for businesses and consumers to get the leverage they once did. It is a lot more difficult to get financing on commercial property. Some business which relied on short-term inexpensive debt (commercial paper) have taken to issuing longer-term debt (bonds) to make sure that they have cash.

None of this is surprising. Banks are reticent to lend much less lend on the insane terms of 3-5 years ago so money is less available.

VI) Other Stuff

This is a significant step forward more memory for devices such as Blackberries, iPhones, and digital cameras. This new SD card by Toshiba not only is 64 gigs but the underlying architecture will support future card capacity up to 2 terabytes. The new memory standard is called SDHC. This should be able to hold more than 500,000 songs with lots left over for girlie pictures. What more does a young man need?

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Get a Job?

Rate Watch #682 Get a Job

August 7, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

V) Jobs

And when I get the paper
I read it through and through
And my girl never fails to say
If there is any work for me,
And when I go back to the house
I hear the woman's mouth
Preaching and a crying,
Tell me that I'm lying 'bout a job
That I never could find.

- lyrics to "Get a Job" by the Silhouettes 1957

YouTube here

The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won’t be coming back. They are casualties of a changing economy. And that only underscores the importance of generating new businesses and industries to replace the ones we’ve lost, and of preparing our workers to fill the jobs they create.

- President Barack Obama July 2009

I keep writing about this to some extent because I feel that this is not properly treated by the media.

In 2001 we had a mild recession. In fact that was a very mild recession. What was strange was that job recovery was weak even as the recession (a dip in GDP) ended. The loss of jobs became a political issue which obfuscated the underlying realities.

Assuming that the current recession will wind down by or at the end of this year and we will start to see GDP growth I believe that we will be left with another jobless recovery. This is where the political view of the economy becomes useless or worse. The present administration may find that it has to explain that its stimulus package restored GDP but did not restore the jobs which it emphasized as the reason for the stimulus plan.

Presidents tend to pitch economic policies as creating jobs. That is politics much more so that it is economics. In reality job creation is little influenced by the President or Congress.

Jobs are, in essence, like any other commodity. There is a supply - the work force - and a demand. The demand for jobs varies according to the demand for the products and services of businesses.

Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or metaphysical force. They are a result of the nature of the way businesses work. Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.

Business opportunities are seen by a number of different companies and individuals who devote time and capital to business creation and expansion and the cycle always results in an oversupply. The consequence is recession.

This cycle was particularly nefarious because what was in oversupply was bad mortgage loans which undermined the banking system and created a liquidity crisis which cascaded to other businesses.

Some jobs will come back apart from whatever the government does. Construction jobs will return when there are signs that the current oversupply of housing has diminished. There may be some reticence because of tougher lending standards and the perception that construction is less likely to be profitable if values are flat. Some retail jobs will come back as people start spending more.

Significant jobs growth will occur as the result of new technological breakthroughs which create new industries and the jobs which go with them. The problem is that this happens on its own schedule. The jobs expansion which went with the growth of the Internet was not a planned event. It also was not accident. The works of a lot of individuals came together and created opportunities. President Obama's appeal about jobs is timely but then fact is that there is little which the government can do to create these new industries because, in fact, we do not know what they are. The President accurately states that these jobs will require more education that the old jobs. We may well find that our inability to educate our citizens for the jobs of the future is our most serious economic problem.

The role of the government in the creation of the jobs of the future may well be in investment tax credits for certain industries. The government has spent a lot of money to keep the auto industries going but these are not the industries where the jobs of the future are. One of the structural problems is that the industries of the future, by their nature, do not have large numbers of lobbyists. It is the entrenched industries and the labor unions associate therewith which do the lobbying.

There was a factor in the dot-com Internet stock bubble and that was that Wall Street created and sold a BS story about how to value Internet stocks. The subprime valuation myth was created by the same Wall Street firms. If a new tech driven set of industries comes into existence and creates these jobs it will be interesting to see if investors learned anything.

Yesterday I was at a meeting at a VC firm in Palo Alto. There was a very interesting pair of large graphic presentations on the wall of their conference room. It was from about 10 years ago and was all about how various dot-com startups were valued. I asked what that was doing there and one gentleman said, "That is to remind us of what can happen if we stop thinking rationally".

 

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Health Care. Mortgages.

Rate Watch #680 A Few Things About Mortgages.

July 24, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

Consumer Sentiment is down. People are concerned about their jobs. Initial Jobless Claims were 554,000 last week. This is happening despite an increase in equity values and a general feeling that the recession is near bottom and GDP will start increasing later this year. This is the picture of another jobless recovery. Maybe this is the picture of a jobless recovery much worse that the last one. There are some facts that are at the root of this: 1) technology eliminates some jobs and creates others but it generally supports an increase in Worker Productivity (GDP/hour worked) 2)the other big factor is that we have moved into a world economy.

We are moving into an era where the same amount of stuff and services can be performed with much less labor and no one is preparing for this.

III) The Technicals

The daily is down crossed. The techs say that we should see higher Treasury yields for the next week. The next bottom for mortgage rates should occur at or after the middle of August. The daily cycles usually last 15-20 days. That is 15-20 days of up and then 15-20 days of down.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I am going to wedge into this section a very brief statement about the discussion of health care reform. My point of view is that we are missing entirely the problem. The problem is not who is going to pay for it. The problem is that health care is too expensive and that neither the present system nor the President's plan addresses the issue of how to reduce costs. We need technologically sophisticated solutions to health care. The present paradigms for developing new sorts of medical care seem incapable of bringing it here and reducing the overall cost. We need transformation of medicine away from chasing and treating pathologies to a more cost-effective approach of maintaining health. When I say "maintaining health" I am not simply talking about diet and exercise but sophisticated therapies to remedy the ongoing effects of aging.

This is a topic in which I am actively involved and will address in detail in a future newsletter. This is too important to treat piecemeal here.

One of the present systems of U.S. Government supported health care - Medicare - is irresponsibly run. Congress should first fix it so that it makes fiscal sense.

V) About Mortgages

I want to cover a few topics about mortgages this week rather than lecture about how the federal government should be run. We can get back to that next week.

Home Affordability Refinance Program

First these were refinance mortgages which did loans up to 105% of the value. A revised bit of legislation moved this up to 125%. The notion was that rates were low but people who had lost equity could not benefit because they could not refinance.

These loans do not have relaxed underwriting apart from the loan-to-value guideline so it makes sense that allowing a lower rate refi does not increase the risk that the loan will default. Even if these loans eventually have higher than traditional default rates it will not be because the borrowers lowered their rate.

These do not allow cash out and do not allow you to pay off an existing HELOC. You can only do a HARP refinance of a FNMA loan with FNMA buying the new loan from the investor and you can only refi a FHLMC loan with FHLMC buying the loan from the investor. If your loan is not presently owned by FNMA or FHLMC you cannot get a HARP loan.

You can find out if your loan is FNMA or FHLMC by visiting their web sites at:

http://loanlookup.fanniemae.com/loanlookup/

or

https://ww3.freddiemac.com/corporate/

If you have a FNMA loan you can, at present, refinance it with any FNMA lender. If you have a FHLMC loan you need to refinance with your present lender but on September 1 FHLMC is supposed to be allowing any FHLMC lender to refinance.

I can refi any FNMA HARP loan to 105%. If a current loan is owned by FHLMC I can refi only some of them.

Jumbo/Conforming and Jumbo Mortgages

We have see a stabilization of the jumbo-conforming of Stimulus FNMA/FHLMC mortgage pricing. The vast majority of these seem to wind up being owned by the Federal Reserve because there is still a rule put in place by security dealer associations that no investment grade security may contain more than 10% of these mixed with traditional conforming.

Securitization of Jumbo Mortgages

Securitization of jumbo mortgage does not exist at present. Loans above the jumbo-conforming limits are made only by lenders who portfolio these. I see few early warning indicators that jumbo securitization will reemerge soon.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643