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.

Did You Have Your ARM Fixed By a Real Mortgage Professional?

If you are like the multitudes that rushed to convert your ARM (Adjustable Rate Mortgage) to a fixed rate mortgage, following the media's advice and not listening to true mortgage professionals, I'll bet you are wishing you hadn't wasted your money.  Fixed rate mortgages are still hovering in the mid-5s if you don't pay points and those ARMs, even when fully indexed are dropping below the mid-5s at this point and probably will fall further.

Now, if you are sought out the help of a true mortgage professional, they would have advised you not to fix your ARM if it wasn't broke.  Now, thousands, if not millions, of Americans have gone and wasted money seeking a general mortgage practitioner instead of seeking a specialist.  The end result is wasting money fixing something that wasn't broken in the first place.

Take a look at this chart to see what I am talking about, and what I have been for a while...

As you can see, there are clear advantages of keeping your ARM, especially if it is tied to LIBOR.  The chart above shows the 30-year rates and the fully indexed 6-month LIBOR rates (including the standard 2.25% margin).  I even threw in the Fed Funds Rate to show the correlation to the Fed's decisions and your LIBOR ARM.  (Keep in mind that pricing on new ARMs are not effected directly by the Fed's actions, but rather on market forces like normal mortgage rates).

As you can see, if you kept your ARM the entire time, there were times when your rate would have been significantly below those of the 30-year fixed, while the times when your rate would have exceeded the 30-year, it was not very significant and short lived as well.  ARMs are not really as bad as people think, that is the bottom line.  And rushing to get your ARM fixed right now may prove more costly over time than you could possibly think.

Now, there are reasons why you would want to convert your ARM to a fixed rate mortgage, but you need to seek a true mortgage professional that will put your best interests above his/her own and that is very hard to find these days.

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!

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.

Should You Really Change Your ARM?

Everyone still seems to think that changing your ARM (adjustable rate mortgage) to a fixed rate mortgage is in your best interests.  But is it really?  I have talked about this before, but people still contact me wanting to get their ARM changed when their ARM isn't really broken.  In fact, many of those ARM holders that contact me would actually be paying for a higher rate on a fixed mortgage than if they simply let their ARM adjust.

The media and most mortgage professionals are not going to tell you that.  Why?  They can make a killing during this "lull" by having you feed off the negativity that currently surrounds ARMs.  Heck, I could be doing the same thing, but I have found that most ARM holders that have come to me for guidance are better off in their ARM than converting to a fixed rate product.

There are of course some concerns, some of which are valid.  The primary concerns are the effects of the tightening access to credit.  Will the borrower likely qualify when they need to switch down the road?  Will they be able to afford to refinance later?  Will their home value drop significantly preventing a viable refinance?  The list goes on.

Whether or not you should be converting your ARM to a fixed rate mortgage depends on a lot of variables, but you shouldn't rush into a refinance, especially with indexes on their way lower.  Take a look at the chart below which highlights some ARM indices and the Fed Funds Rate and how they are all headed lower right now. 

In fact, if you let your LIBOR ARM adjust right now, your fully indexed rate will be below 6%, roughly where 30-year fixed rates are right now and those LIBOR rates will likely drop significantly after the next Fed rate cut.  Keep in mind that the Fed's decision does not directly affect mortgage interest rates, but it does have an impact on the indices that ARMs are based on.

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. 

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.

Has America Lost Confidence in the Fed?

Based on the markets' reaction to the Big Ben's speech, there is a definite lack of confidence in our Fed.  Part of the reason is that Big Ben failed to emphasize inflation as he has done in the past and we all know that inflationary pressures are running high. 

Couple that with the fact he said the Fed was ready to cut rates as drastically as it feels is necessary on or before their next meeting, and you can see why the confidence is lacking.  Lowering rates increases the same inflationary risks he seems to want to avoid placing a spotlight on.  Of course, you knew that already if you have been a regular reader of this blog as I have been mentioning the Fed opened Pandora's Box in regards to inflation since September.

In a CNBC poll, 70% of the respondents are in disagreement with what the Fed is doing, however nearly 50% believe they should be cutting rates even more than they have been.  23%, me included, believe they are cutting rates too much.

Have you lost confidence in the Fed?  Leave a comment expressing your opinion on the subject.

Are the Feds Finally Seeing Reality?

Ever since September 20, I have posted about the risk of inflation as the Fed rushed to lower rates and increase liquidity in the system.  Now it appears that the Fed is admitting that "stagflation" is occurring and they are in a bind.

Fed President Plosser (Philadelphia) stated this morning that the Fed is in a tough spot on monetary policy since the economy is slowing down and inflation is rising.  All I can say is it's about time the pulled their heads out of the ground.

We have been seeing signs of a slowing economy for several months and the last two months saw the PCE reports moving higher.  Remember I stated back in November that the PCE report, though within the Fed "comfort zone", was in fact changing direction as it ticked slightly higher.  Then, the last report had it pop higher to 2.2%, outside the Fed's comfort zone.

Since Plosser made his statement and we are heading into the CPI, PPI and then PCE reports starting next week, I wonder exactly how bad they think it will be.  Remember that I fully expect that PCE to climb over 3.0% before year end and the Fed to cut rates at least one more time creating more chaos in the system. (see What's In Store for 2008?)

These coming weeks will shape the future for bonds and mortgage rates, but expect reality to return to the markets as the real inflation numbers start pouring in.