March 21, 2008
by Dick Lepre
[email protected]
www.loanmine.com
IV) Analysis
The Treasury market is volatile which 1) makes forecasting difficult and 2) creates opportunities. I do believe that this is not going to be a case of constantly declining rates but one of a relatively brief window of opportunity. I say this because we are coming to the end of the secular bull market (long-term trend to lower yields) but the facts are that this is an extremely confusing time and there is a disconnect between Treasuries and mortgage rates. Mortgage rates could start getting lower even if Treasury yields rise.
There is still lack of clarity about the pricing and terms of the new jumbo-conforming loans. The biggest news this week was that FHLMC will do cash-out on these (whereas FNMA will not). Preliminary indication from FHLMC is that the requirement on cash-out jumbo-conforming are: LTV <= 75% and middle credit score >= 720. This is available for primary residence SFR & condo. No multifamily.
You can find the new conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.
If you have a loan which is now conforming as long as it is not a cash out or as long as it meets the FHLMC standards above and are interested please e-mail me or fill out a refi form on my web site. Once I get that I will contact you, discuss what you need and in less than 10 minutes I can take your loan application over the phone. What do I need? The most common things which people do not have at hand is their spouse's social security number and their gross monthly income,
The complete application is accessed from the top right nav bar at www.loanmine.com.
V) Things Are Happening
A lot has happened in the past few weeks regarding which I would like to comment.
1) The Bear Stearns thing. This is most interesting. It represents a daring move by the Fed to accomplish its main purpose which is economic stabilization. Bear was deeply into subprime and clearly had assets which were worth a lot less than folks though. The Fed brought in potential buyers and faced with the necessity of opening its books up it is clear that Bear was exposed a lot more than it had implied. One can figure this out from the fact that JP Morgan's offer was 7% of what the Bear stock closed at on Friday March 14.
In a bigger sense what this is about is the fact that Wall Street firms (primary dealers) act like banks in the sense that folks keep a lot of their liquid assets (which used to be in banks and S&Ls) in accounts with security firms. The Fed's guaranteeing the debt of a non-bank entity really recognizes that for decades it has been the case that the concept of banking was no longer the same. The collapse of one of these firms or even the suggested collapse and the run on its assets was not different in kind and in effect from a bank run.
The important point is that while I often talk about the goals of the Fed (low interest rates, increasing GDP, strong dollar etc.) those goals are less important that the Fed's main task which is stability of the banking system. It is only at time such as the present that this is a goal not to be taken for granted.
Comments that the Fed was somehow "bailing out the rich" while not paying attention to the little guy are inane. The stockholders of Bear were screwed. The people who were bailed out were 1) anyone with a Bear Sterns account and 2) anyone with deposits in any similar Wall Street firm and, to some extent, anyone with deposits in any bank. It is conceivable albeit unlikely that a run on Wall Street firms could set off runs on counterparty banks and then set off runs on those banks.
The point is that if folks decide on a massive scale to take their money out of wherever it is - be in a Wall Street firm, a commercial bank or an S&L the economy will grind to a halt.
The perceived safety of having ones assets in one of these place is the primordial purpose of the Fed.
It has also been suggested that actions such as this or the LTCM bailout in 1998 encourage dangerous practices. Maybe they do but similar logic would indicate that fire departments and insurance companies serve to encourage people to be less careful that their houses do not catch fire. The Fed is like the fire department. They show up in a big way when things go wrong but acting to abate disaster does not per se encourage dangerous practices. The stockholders, employees and executives of Bear Stearns took a beating and the Fed's actions will in no way encourage similar behavior in the future.
It is my belief that once "the dust settles" folks will recognize that having an independent Federal Reserve to adeptly handle the monetary part of federal policy works quite well. Political processes (the fiscal side) take too long to deal with fires. The Federal Reserve is not merely about one guy or even the Governors it is a large collection of economists with a great deal of experience and no political agenda.
As for Bear Sterns the story is truly amazing. Here was one of the firms as the center of the subprime mess and they clearly massively underestimated the risks of the subprime loans they were pushing. There is indeed a sense of justice operating here.
2) the liquidity thing. The Fed offered to provide $200 billion in liquidity by exchanging its Treasuries for MBS of primary dealers. This creates liquidity because those MBS are, at present, illiquid and the Treasuries are liquid. The Fed is to some extent sticking its neck out here by tying up a larger percentage of the Treasuries which it owns but it is doing this for a good reason. This is not mere talk. On Wednesday alone the Fed provided $28.8 billion in lending to primary dealers through this channel.
3) the bigger picture. I suppose that the big picture is reestablishing belief in mortgage backed securities. To some extent the fact that FHLMC & FNMA doing jumbo-conforming this is obviated but banks will eventual want to get back into the mortgage business.
Getting refinancing in place to lower the payments of folks who have ARMs will help to stimulate the economy and getting mortgage rates lower will help to stabilize home values. I still believe that home values will trend downwards for at least another year but the mechanisms for stabilizing the entities that will make those loans have been recast. Housing prices ran up because of unhealthy speculation combined with idiotic lending. The idiotic lending has stopped but it will take time for the demand to catch up with the supply. No act of Congress or Fed intervention will change that.
If you are interested please e-mail me or fill out a loan application or refi form on my web site. The complete application is accessed from the top right nav bar at www.loanmine.com.
If you have something to add to this discussion please post a comment on the blog.
Dick Lepre
RPM - SF
"...fire departments and insurance companies serve to encourage people to be less careful that their houses do not catch fire."
They don't, because people pay for own home owner's insurance and their taxes include payments to build and maintain the firehouse. But Bear Stearns kept itself out of a previous Wall Street bailout, so the analogy breaks down. Bear Stearns deserved a bailout the least. I agree though the risk was too great for the economy if Bear Stearns were allowed to fail. It was a case of "the lesser of two evils". JP Morgan had to be backed up with our $30 billion.
Posted by: Heymull | March 21, 2008 at 11:04 AM
Bear Sterns made their bed ... so they (stockholders) should pay the piper.
Posted by: Nats Jackson | March 21, 2008 at 05:25 PM