Florida Mortgage Report

Is Bernanke Dazed and Confused?

If you think the markets are screwed up, wrapped in fears of recession and wondering whether they should buy or sell, you are not alone.  Why?  How can they expect to know what to do when Big Ben can't even tell what is going on?

In three separate articles I read this morning, each breaking down what Bernanke (and Paulson) said, each focused on a different part of what Bernanke mentioned, and all lead to different conclusions on the economy. 

CNN Money highlights Bernanke and Paulson's comments stating that the economy will not see a recession because of the Fed's actions.  Here is the opening remark...

Treasury secretary and Fed chairman say rate cuts and rebates should keep economy out of downturn.

Bernanke even opened the speech with this statement...

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt,"

That sounds like he is no longer concerned with the economy and, in fact, expects it to grow reasonably later this year.

Then there is this article, put out by MarketWatch, which talks about how Bernanke and his buddies stand ready, willing and able to cut rates further.  Why would there be a need to cut rates again if the cuts already in place will keep the economy from recession and return growth toward the end of the year?

Federal Reserve Chairman Ben Bernanke said Thursday the central bank was ready to cut interest rates further if fresh signs of a weaker-than-expected U.S. economy emerge.

So, should we fear recession, or as I have mentioned numerous times, inflation?  Bernanke and his buddies have been putting recession fears ahead of inflation, even saying inflation is a "non-issue", all the while the CPI and PCE numbers were ticking higher.

And then we head over to the Miami Herald which headlines reads "Bernanke warns economy worsening"...

Federal Reserve Chairman Ben Bernanke told Congress Thursday that the country's economic outlook has deteriorated and signaled that the central bank is ready to keep on lowering a key interest rate - as needed - to shore things up...

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so."

So, which is it?  Which should we be fearing more?  Recession or inflation?  I guess he is just doing a little CYA maneuvering right now because he probably is just guessing at this point. 

Still wondering why there is so much volatility in the markets today?  Still wondering why housing is so screwed up and failing to correct itself in many markets?  Big Ben and the government gang have the answers, right?  Don't count on it.

Fed Slashes Rate .50%: Mortgage Bonds Throats Slashed Also?

The Fed made their decision and went as most people expected even though their decision may not be the right one.  In another apparent attempt to keep the stock market content, the Fed chose to cut the Fed Funds Rate by another 50bp (.50%) bringing the rate down to 3.00%, fueling speculation of the rate dropping as low as 1.25%.

Before I get into the potential problems, let's look at the potential benefits...

• HELOCs may see a drop in their rates over the next month or two.
• Credit Cards may see drops in their rates over the next month or so.
• ARM holders should rethink their desire to switch to a fixed rate mortgage if their rates are indexed to LIBOR, and possibly other indexes as well.
• "Special financing" deals will likely continue as money is even cheaper.

Certainly some good can come of this, but remember that mortgage rates are not driven by this change directly and, in fact, will likely move higher on this news.  So, let's take a look at the potential problems...

• Mortgage Rates may tick higher (not lower)
• Inflation may grow uncontrollably
• Continued devaluation of the US Dollar = less real wealth for Americans (and foreigners with currencies pegged to the dollar)
• Stagflation environment (slowing economy with rising inflation) - inflation may actually help the cooling of the economy creating larger problems

As you can see, there are some potential problems as well, some big ones at that.  Since no one has a crystal ball, only time will tell, but the first test of their decision comes tomorrow with their favorite gauge on inflation, the PCE report. 

Did the Fed get fooled again?  What is your take?

Hold on Tight Folks, We Are Going for a Ride

As I have mentioned repeatedly (too many times to link), the roller coaster ride of mortgage rates will get pretty wild this week with a slew of news coming through and today is the beginning.

This morning's ADP report came in strong and that may weigh on the Fed decision later today as they certainly have to be wondering if another rate cut is a smart move, especially after being a little embarrassed last week with an emergency cut to minimize a financial meltdown created by a "rogue trader".

Why?  The ADP, while not a very accurate predictor, is a good gauge as to how the Jobs Jamboree this Friday will turn out.  As strong as it was, the jobs news is expected to beat expectations now and that spells bad news for mortgage rates.

The good news in that report is that it is time for the Fed to rethink their decision due out this afternoon.  They may very well decide not to cut rates or only cut 25bp on the heels of the ADP report.  That would be good for bonds as it will likely destroy the stock market like last month.

Tomorrow continues the ride with the release of the Personal Consumption Expenditures Index (PCE).  Since this is the Fed's favorite gauge of inflation, and since it has been ticking higher lately, it will likely move the markets with its release.  It may also leave the Fed embarrassed again.  Remember that they said inflation would remain a non-issue so long as the public kept faith in them and that faith is dwindling.

Then, of course, is the Friday Jobs Jamboree, where a whole plague of data will hit the airwaves showing what's happening on the job front and, more importantly, the concerns surrounding wage-based inflation.

As you can see, make sure your seatbelts are fastened because this ride could be a rough one, or even a freefall for mortgage bonds.  See you on the other side!

Investors Rethinking Potential for Another Rate Cut

After the Fed did an emergency rate cut last week as the worldwide financial markets collapsed (mistakenly?), traders began expecting another rate cut coming from the Fed this Wednesday.  Once they realized the turmoil was created by a "rogue trader", their thoughts began to change.

Now traders are becoming increasingly skeptical about another rate cut and the markets are again reacting based on emotions, rather than logic.  With a huge plate of economic data coming this week, emotions will probably swing wildly with potentially drastic "mood swings."  If you don't have a stomach for volatility, get out, which means lock your rates and forget it.

Interestingly enough, the Fed's favorite gauge of inflation will actually come one day AFTER the Fed makes their next decision.  That presents two problems.  One, if the Fed doesn't cut rates, or not enough to satisfy the stock traders, we will likely see the repeat of last month's selloff (bonds and mortgage rates win).  Additionally, it may become very apparent that the Fed made a mistake the very next day with the release of the PCE data.

With the markets already moving lower with the expectation of little or nothing along the rate cut path, the Feds are under pressure to appease the markets or fight inflation.  Past moves suggest they will appease the markets and let inflation run amuck.

For those who can handle the volatility, you can try floating to see if there is a chance to win as the overall trend is still for lower mortgage rates.  However, expect a rollercoaster ride and one that may not end happily if you do.  Be ready to lock in a moment's notice and don't let greed get you.

Bond Bubble Bursting or Just a Correction?

Yesterday, bonds finally dropped, something that has been long overdue as I have been saying for a while.  As I have mentioned, it is never good when trading is controlled by fear and that is what we have been seeing as traders moved from stocks to bonds on fears of a recession.

So, the big question now is whether or not this drop, almost 100bp from its highs yesterday, will turn into a bubble burst or a correction that normalizes the market and continues the trend upward.  Next week's news will likely show the way of the future as next week is fully loaded with economic events, from the Fed meeting to the PCE release.

Looking back on yesterday, bonds ended the day down only 57bp on the day.  I say only because that number hides the real move, which was their drop from their highs totaling 94bp.  A move like that has got to raise concerns.  Bonds continue their drop today.

Where are they headed?  That depends on a number of factors.

The Fed's move Tuesday, hitting the panic button, is now paving the way for market expectations of another 50bp cut next week.  If you remember last month's market move after the Fed disappointed the markets, you can bet the will make a cut just to prevent the stock market collapse.  Mortgage rates generally move opposite the Fed, so they should tick higher off this news, but it depends on stock market reaction.

Later next week, the PCE numbers get released and that move show the Fed is screwing up, allowing inflation to grow quickly.  It is important to focus on not just one report, but both, especially the core numbers (exclude food and energy).  If numbers come in higher than last time, or even higher than 2% year over year, that would be bad for bonds.

I hope you like roller coasters because that is likely what we will see going into next week.

Just How Are Homeowners Affected by Changing Mortgage Guidelines

I have been asked this exact question several times but never bothered to make a post as the demand for this answer had not been very high.  Ironically, as I was reading my feeds which came in last night, Dan Green over at the Mortgage Reports had done a video presentation on this exact subject.  So, instead of reading, watch this video as I think he does a pretty good job explaining in black and white (with shades of gray).

Of course, if you still have questions or want to know how it affects you personally, please feel free to contact me.

Aurora Loan Services Closing?

I was just reading the message posted at Blown Mortgage about the possibility of Aurora Loan Services closing effective today.  As an approved broker, this is somewhat surprising to me as I have not been notified, nor heard of any substantiated rumors as such, so if you have any additional information, please add to the comment section here or email me.

At Implode-O-Meter, apparently there was an email submitted stating:

Dear brokers and loan officers,

It is with great regret to announce that Aurora Loan Services decided to close its doors effective immediately.  The reasons behind this decision is more than evident considering the market situation.

Any files that have been submitted and locked with Aurora will be finalized.  For those who want to submit a file, you will have until end of business day tomorrow to submit and lock the file for no more than 30 days.

Again, neither Morgan at Blown Mortgage nor I have substantiated any of this rumor and want to find out more, so please let us know if you have any additional information.

(Update:  News articles hitting airwaves now about Lehman Brothers and Aurora Loan Services below)

http://money.cnn.com/2008/01/17/news/companies/lehman.ap/index.htm?section=money_latest

http://www.nytimes.com/reuters/business/business-lehman-mortgages-layoffs.html?ex=1358312400&en=c09362ed691daffa&ei=5088&partner=rssnyt&emc=rss

The NY Times article states:

Lehman, which had built one of Wall Street's biggest mortgage businesses, said it will suspend wholesale and correspondent lending at its Aurora Loan Services unit. Aurora will continue to make home loans directly and service mortgages.

So, apparently Aurora Loan Services will only be shutting down its wholesale side, joining other lenders who have done the same thing.  Yeah, that should help them make money.

Are Mortgage Brokers a Dying Breed?

I have been reading a lot about how I am a member of a dying breed, one that should fall by the wayside and will not be missed.  Hmm.  I guess I should stop blogging right now, right.  Why should I, owner of a mortgage brokerage, even bother to help the consumer with free advice and information they need?  After all, I am a dying breed, right?

That's right, I am a mortgage broker so I must, by stereotype, rip off my clients at every chance I get.  I must charge the absolute maximum on every loan and if I can't get it, I will just say you don't qualify anymore so I can place you into another loan where I can get it.  And if you don't like it, too bad because I stuck you with a 3 year prepayment penalty and there's nothing you can do about it.

By now you probably realize I forced you into that loan you cannot afford, even though the house was beyond your means anyway.  You are obviously going to face foreclosure because I underwrote that loan in reality and not the lender who gave you the money.  As a matter of fact, I kept telling you to get the maximum loan possible so I could line my pockets with as much cash as I could while I was still in business.

Sure, I used YSP as way to get paid even more and hid it from you in plain site on the closing statements.  I wanted you in those adjustable rate mortgages because I knew I could get you back in here to rip you off on your next loan, again and again, that is unless foreclosure gets you first.  Wait, that just means I could get more money from you because now you can't get a loan from your bank and have to go through me.  Damn I am a devious person and didn't even realize it.

Oh wait, I just realized that not all brokers fit that stereotype (Isn't that called racism elsewhere?), and thankfully I don't.  Will mortgage brokers be a dying breed?  I certainly hope so, at least those that do fit the stereotype above.  Certified Mortgage Planners are the wave of the future in my opinion, whether they are brokers, correspondent lenders, or lenders. 

Mortgage brokers acting in this new role have an advantage as they can use the tools from across the lending spectrum to the clients advantage.  Wholesale lending will always be around because lenders lend and they will do so every chance they can. 

It seems that many arguments stating that mortgage brokers and the wholesale lending channel will go away are encased in what the Bank of American and Countrywide merger will do, which is eliminate the wholesale channel.  Interestingly enough, I was asked about this by Inman News and my quote was presented in this article.  One thing I would add, I never used Countrywide or B of A, and I am still here.

What about if YSP goes away?  Big deal as we will just charge a fee for service at closing like we do every time we offer the wholesale rates anyway.  YSP simply allows the borrower to pay less at closing through a higher rate. 

What's a wholesale rate?  Basically the same rate that lenders charge you points for, so mortgage brokers actually don't cost any more and in many cases are actually cheaper than going to the lender themselves (I have a testimonial to prove that also).

So, despite what you read, you can see that I will not be going away anytime soon, unless I am the one who decides to do so. 

When Inflation Gets Downplayed

You have heard me talk about the potential for inflation getting out of hand numerous times since the Fed started cutting rates.  You have heard me talk about stagflation for quite some time also.  Guess what, nobody apparently cares about inflation.

Today's CPI numbers come out and while bonds should be heading lower, they are actually rallying still.  They started out up 13bp!!  But where is logic and reasoning when you need it.

The media, investors,and even Big Ben himself have been downplaying inflation recently.  The bond market has been defying logic and reason basically since Christmas, rallying on fears of recession while avoiding the inflationary concerns.  Today's start shows that reality, and how the media is downplaying this mornings numbers as "benign"...

CPI = 0.3% (slightly above expectations of 0.2%)

Core CPI = 0.2% (in line with expectations)

Sounds fairly benign when you look at just those numbers, especially when you factor in that those numbers were down from last reports.  However, let's dig a little deeper and see some "reality"...

Final 3 months = 5.6% annualized rate

All of 2007 = CPI of 4.1% and Core CPI of 2.4%

Still think that is benign?  I doubt it, considering even the Core CPI is above the Fed's comfort zone.  The Fed's favorite gauge on inflation will be out soon and that is the PCE, which I expect to be outside their comfort zone again, possibly even higher than the last report.

Now, since inflation is the archenemy of bonds, including mortgage backed securities, bonds should be tumbling right now, not rallying.  So, at least for now, fears of recession are overshadowing fears of inflation.  When fears drive the markets, be careful.  When that fear subsides, or worse, shifts to the other side, markets reverse direction and usually do so quickly.

Mortgage Rates Rise at Fastest Weekly Pace

Do you think that the headline here will be representative of what mortgage rates do this week?  Do you think reality will set in and the markets will realize that the recent rallies were all based mostly on "fiction"?

If you have been following what I have been writing in various places around the RE.net, you already know what I am about to say.  If not, you probably better read on or you could lose thousands.

The markets are very finicky and when there is nothing left to hope for, investors will grab on to anything they can.  Such has been the case basically since Christmas, carried forward into the start of 2008.  On geopolitical news, continued "recession" fears and the dismal Jobs Jamboree, bonds have pushed themselves to the limit, and beyond.  Of course, when bonds, namely mortgage backed securities, push higher, their rates fall and that is how mortgage rates have managed to reach the lowest they have been in over 2 years.

But can it last, or are they likely to implode, potentially allowing rates to rise faster than a rocket during this coming week?

Fear is a powerful emotion, the most powerful actually.  It causes "temporary insanity" in reality.  With fear in control, logic and reason cannot be found.  Such is the case in the markets today, and mortgage rates have dropped.

But now, a new fear will arise.  Bonds hate inflation, in fact it is the archenemy of bonds.  So, much like the recessionary fears of late, inflationary fears will take center stage this week in the economic data to be delivered, such as CPI and PPI.  While the the herd flocked to bonds in the last weeks, they are highly likely to flee from bonds this week, and in droves.

Dan Green talked about the "herd mentality" in his post this morning.  That reasoning is enhanced by fear and will actually cause someone to jump off a cliff because everyone else is doing it.  You can expect this type of reaction throughout this week and likely next as the data comes pouring in.