Florida Mortgage Report

Are President Bush and the White House Confusing the Issue?

Well, it appears that is exactly the case.  Why, in today's speech, it is apparent that the definition of "subprime mortgages" is misunderstood at many levels, all the way up to the President.  Subprime actually refers to the borrower and not the mortgage itself.  It means that the borrower has poor credit, if any, and cannot qualify for good interest rates. 

So, why is it that President Bush's proposal for a new "FHA Secured" program only target the 86,000 or so homeowners with good credit that simply find themselves unable to pay for their mortgage due to varying reasons.  The program will allow them to refinance and save their homes.

Did you catch that?  The program is for "good credit" only.  Subprime, by definition, do not have good credit. 

It is apparent, an maybe you even have the same misunderstanding, that there is a misconception of what constitutes subprime.  Many asked, including the White House staff, believed that subprime meant any "loan" that defaults or is in danger of defaulting.

So, the FHA will not necessarily be the best place to bail out subprime loans.  Why?  Because if the homeowner is already in default, they basically do not qualify.  (I am not an expert on FHA as I do not perform them, nor do I wish to.)

Back to the facts of foreclosures.  Everyone paints the picture of a homeowner losing their home, having to pack everything up with no place to go.  The reality is that a large portion of these foreclosures are second homes and investment properties, many of those "flippers" that couldn't do just that.  So, the question is whether or not a bailout is really even necessary or is it just to leave Americans feeling "warm and fuzzy". 

Did Anything New Come Out of the Hole? Jackson Hole that is.

As you more than likely already heard, Big Ben Bernanke was speaking today in Jackson Hole, Wyoming.  What is amazing is how investors and analysts really wanted to get him to say if the Fed Funds Rate was going to get cut on Sept. 18th.  Yeah, like that was going to happen.  I will get into the reasoning why later.

Big Ben did say something that is a hint of what will likely happen, and that is that downside risks have risen "appreciably" and that losses attributed to the credit markets have "far exceeded even the most pessimistic projections."  Remember that we warned that the problems probably went deeper than is being let one.

Another interesting point is that the Fed's favorite gauge of inflation, Core Personal Consumption Expenditures (PCE) was released this morning and the year over year rate was 1.9%, within the Fed's target range of 1 - 2%.  That clears the way for added "comfort" in cutting the Fed Funds Rate.  While PCE is the favorite gauge, it is not the only one that gets looked at and next week's Jobs Report will be a big one as well.

Well, that leads me back to why Big Ben will not state what the Fed will do three weeks from now.  If he says there will be a rate cut now, markets will react and be happy for now.  But what if he says that and then data comes out showing the need to leave rates the same?  What if they indicate a need to raise rates?  Granted the likelihood of even keeping the rates the same is low right now, but the markets would react very violently if the cut ended up being different than what he said it would be today.  It would behoove you to remember that when you think you will get an answer from Bernanke this far out.

He did mention another important point.  He stated the Fed was ready to take additional actions as necessary to boost liquidity and will act as needed to to limit the adverse effects on the broader economy.  This statement is as close to a hint as you will get about what the Fed will do.  Does it guarantee a rate cut?  Absolutely not.  But it does present an open door to do so "if needed".

Sources: MMG's economic calendar, Wall Street Journal Online and MarketWatch articles.

Finally, Reality Gets Some Recognition

I have talked to many a person, probably even blogged about it, but the media is finally letting the news out.  That is about the reality surrounding foreclosures.

We have heard time and time again about the rampant increase in foreclosures and we even hear the government talking about the need to "protect the homeowner".  The problem we keep hearing is that of the typical "family losing their home" scenario, driving into us the emotions that it just isn't fair that they are losing their home and now they are left on the street.

Today, MarketWatch writer Ruth Mantell took on the task of letting out the reality of many of the foreclosures that are occurring.  Yes, there is another side to the story, and one that does not have a very sad ending.

The fact is that investment properties constitute a major portion of the foreclosures happening, at least in the four states which she mentions, Florida being one of them.  Is it not coincidental that these were the same four states that were among the fastest appreciating over the last five years?

Yes, those "flippers" out there, fueled by infomercials, greed, and even TV shows on how to make a quick buck, got stuck.  As happens way too much, people who have no business getting into an investment do it anyway and lose it all.

Can you forecast the demise of a market?  Yes, there are some interesting ways you can see a destructive pattern occurring as I mentioned in this post.  Or you can just look at what the "herd" is doing. 

As with every cycle, markets rise and fall in patterns and you can see that when there is a herd mentality heading into a market, it is most likely time to sell and get out.  That is because of all the amateurs that look at the rates of return and say "I can do that" and jump right in.  It is at this point when the pros start selling to the amateurs and get out, sometimes after developing "systems of success" and marketing those systems to the amateurs.

Yes, there are many families that are losing their homes in this crisis, but it goes without saying that much of the current dilemma was brought about by amateur investors as well.

Interestingly enough, I will be speaking in Tampa on September 26th and 27th about "flipping" and how to do it with a higher degree of success. 

OK, Apparently not Everyone is Getting it?

What am I talking about?  How mortgage interest rates are driven.  I continue to see so-called experts, politicians, etc. stating that a Fed rate cut will help adjustable rate holders.  That is not the reality.

What drives mortgage rates are Mortgage Backed Securities (MBS).  These are the bonds that are a "package" of home loans that are sold on the secondary market.  Just as regular bonds trade, MBS trade on an open market and are subject to market forces, not what the Fed does with their rate.  In fact, many times mortgage rates move in the opposite direction as the Feds!

So, reality is very simply that the Fed cutting rates will not have a direct effect on mortgage interest rates.

That being said, some mortgage holders may benefit from a Fed rate cut.  If you hold a HELOC, that rate is typically tied to the Prime Rate, which is simply the Fed Funds Rate + 3 percent, you will see a small drop.  Also, anyone carrying a credit card balance will likely see a drop in that rate as well.

However, homeowners needing to refinance will not likely see a drop in the rate due to the Fed rate cut.  Adjustable Rate Mortgage (ARM) holders may not receive a benefit either.  Why?  Those rates are not directly tied to the Fed Funds Rate or even the Prime Rate.

If you are an ARM holder, take a look at what your index is doing.  LIBOR (London Interbank Offered Rate), which does typically follow the Fed rate, is actually  drifting higher right now.  A Fed cut may drop this slightly as well, so those coming due for an adjustment on a LIBOR based loan may benefit, but it is not a guarantee either.

Other indices used a lot are not determined by the Fed rate.  They are driven by economic data which shows inflationary pressures. 

So, if you are an ARM holder and you are coming due for an adjustment, take a look at your index and what is driving that rate.  Then look at your loan documents to see what your margin is.  Add the two together and you will have what your rate is about to become.

If you are looking to refinance, make sure you are dealing with a professional that is watching the Mortgage Backed Securities markets, and I mean in real time.  They can provide guidance on whether or not to lock or float your rate, potentially saving you a considerable amount of money.

Currently, you probably want to lock anything that is nonconforming as these loans are not trading favorably.  However, if you are seeking a conforming loan, you can check my Florida Mortgage Daily blog for my daily guidance.  Don't rely solely on my site or recommendations only though as your situation may require a different approach. 

Senator Schumer Goes on a Rant on the Heels of a Letter from Bernanke

In my post about the a Federal Bailout in the Works, I mentioned how Bernanke, long been an opponent of exotic mortgages, seems to have found that they have their place, or at least variations of them.  This information was derived from a letter he sent to Senator Schumer.

Yesterday was also met with Senator Schumer adding some ridiculous statements as well and he is now being called "subprime Chuck".  He wants independent auditors to tell corporations how to run their business better and he even wants Countrywide to share the load with consumers trying to refinance.  Didn't he read the other day that Bank of America basically needed to bail Countrywide out with their $2B investment?

He has also written numerous letters to the big auditing firms telling them to assist in the mortgage crisis and urging their clients to do their part in keeping our housing afloat by modifying subprime loans that at the risk of default.

Why in the world is he asking auditing firms to do this?  That is not their job.  Is this the best leadership we have on the subject?  Why did Bernanke send the letter to this guy with the topics we discussed?

I am getting the impression that the problem is much deeper than anyone is letting out and Bernanke, along with Congress, have no idea how to really deal with it.

Federal Bailout in the Works? Could Modified Option ARMs be the Savior?

 Ben Bernanke, our beloved Federal Reserve Chairman, wrote a letter to Senator Charles Schumer (D-NY) that was released today.  In the letter, Mr. Bernanke wrote that the private sector and Congress should create new, affordable mortgage products that would help some homeowners refinance their mortgages and keep their homes.  Sounds like a bailout is in the works to me.

The letter really doesn't add anything new to the markets, but rather reemphasizes what the Fed has been thinking since their statement after the August 17th cut in the discount rate.  The letter is being toughted as a "bullish" letter by bond strategists and shows Bernanke being sympathetic to concerns expressed strongly in the financial markets. 

Mr. Bernanke is scheduled to speak on housing and housing finance on Friday, the same day the Fed's favorite measure of inflation (Core Personal Consumption Expenditures or PCE) is released.  Coincidence?  Maybe, maybe not.  Chances are that the Fed Chairman will hint the direction the Fed will go at their next meeting, September 18th, though most already expect a 25 basis point (.25%) rate cut.

In the letter, Bernanke states the need for creative thinking to get the nation out of the subprime mess.  He stated that it might be worth considering whether the private and public sectors, either separately or collaboratively, could help the situation through the development of a broader range of mortgage products that are more appropriate for low and middle income borrowers, including those seeking to refinance.

He goes on to mention the need for these products to be designed to mitigate the risk of payment shock and be transparent with respect to their terms.  He then proceeds to hint the need for features that improve affordability, such as variable maturities or shared appreciation provisions.

Interestingly enough, the features he mentions in regards to "affordability" and to "shared appreciation" sound very much like the "exotic" loans that everyone claims are leading to the increase in foreclosures and the current liquidity crisis.  Option ARMs easily fit in the category of "shared appreciation" and "affordability" as they provide reduced monthly payments and the negative amortization can be considered as playing a part of appreciation.

So, the reality is that even Bernake realizes (or so it would seem) the benefits for Adjustable Rate Mortgages, Interest Only programs, and even a modified version of the Option ARM programs.  Obviously tighter margins and other "payment shock" preventative measures will need to be incorporated, but overall the products can prove very beneficial if used properly.

Some other things he mentions are that Congress should consider legislation (they already are) that would reform the FHA (Federal Housing Administration) allowing that agency to fill in the gap for the subprime lenders falling by the wayside.  Since the FHA has tighter lending standards, not everyone will qualify, though changing the FHA guidelines to allow those late on payments would help. 

Another Congressional reform potentially needed (also being considered) is that of Fannie Mae and Freddie Mac oversight.  A reform could allow them to buy more mortgages as a way of injecting more liquidity into the markets.  They may even be allowed to buy mortgages greater than $417,000.  Since they are the "conforming" market and have not been hit by the credit crunch, changes in these limits can bring increased stability and affordability to the markets.

As you can see, the government is working to "bailout" the mortgage industry and homeowners who are in trouble.  And, believe it or not, those "exotic" mortgages may be part of the solution, at least for the short term.

Are McMansions in Danger of Losing Their Tax Benefits?

Leave it to a Democrat, and one named Dingell for that matter, to screw up the economy even more.  Yes, this dude wants to draft a bill that would eliminate the mortgage interest deduction on homes over 3,000 square feet (my own home will get a new survey of 2,999 if this happens). 

The Michigan Democrat (Rep. John D. Dingell) who heads the Energy and Commerce Committee expects to introduce comprehensive climate change reform legislation once the House returns next month.  He stated that the bill will week to "remove the mortgage interest deduction on McMansions - homes over 3,000 square feet."  He is also seeking to impose hefty new federal taxes on gasoline.

He believes that the controversial proposals are essential to achieving the environmental goal of reducing carbon emissions by 60-80% by the year 2050.  "In order to address the issue of climate change, we must address the issue of consumption...We do that by making consumption more expensive", Dingell said. 

Is this guy for real?  Who elected him?  Is it any wonder people are fleeing Detroit right now?

He goes on to mention that houses, like autos, long have been known to contribute to greenhouse gas emissions through heating, cooling, electrical usage, etc. not to mention the roads and highways needed to make far-flung subdivisions accessible to buyers.

I guess this guy is a few sandwiches short of a picnic as he thinks this is going to help.  All this is going to do is drive people in the opposite direction and bring the US economy to a screeching halt. 

People will not stop wanting to live where they want to live or driving for that matter.  They will cut back on other things that they want in order to "get by".  The real estate market, like it hasn't been beaten up enough already, will see even more decreases in value.

Then, let's take a look at gasoline taxes effects on other industries.  All prices will go up across the board as production costs will rise, again not deterring production but rather passing the expenses on to the consumer.  Airlines, already overtaxed, would go through more turmoil just as their recovery is building.  Truckers will be overburdened by expenses. 

The list goes on and on, but the reality is that the whole economy would likely stop, unemployment would go nuts, and the the popular word on the street, "recession", would hit full force.

OK, I may be blowing things out of proportion as I am not an economist, but this guy does need to get his head cleared out.  I am concerned about the attempt to eliminate the mortgage interest deductibility, not just for myself, but for the majority of homeowners out there.  Not every "McMansion" according to his description, is high-valued.  Many, in fact, are less than $250,000, so it will hit Middle America really hard to lose this valuable deduction.

As for the other issues in the bill, let's just hope the bill doesn't get past.

Is Countrywide's Leader Trying to Persuade the Feds?

In an exclusive interview on CNBC today, Countrywide's CEO Angelo Mozilo mentioned a few things that may have been intended to help persuade the Federal Reserve to cut rates.

Mozilo mentioned that he thought the US economy was headed into recession and that more liquidity was needed to stabilize the markets.  Two things that clearly are aimed at the decision the Federal Reserve needs to make about further cuts in the Discount Rate and even a cut in the Federal Funds Rate at their meeting next month.

So, let's analyze why he made these comments and is he afraid that Countrywide is still in danger even with the B of A investment of $2B. 

The comment he made about the economy going into recession may not be that far from a reality down the road, but why did he mention it?  More than likely, he wants the Feds to cut rates no later than their next meeting, preferably earlier, and help further bailout Countrywide.  The reason is that that Fed's goals are to regulate inflation, or recession.  Their target is a range of 1 - 2% and the economic data that has been pouring in recently is showing the economy to be moderating into this range.  No data so far is indicative of a recession, other than the collapse of the financial market due to fear of a "liquidity crisis".  So, his comments were more than likely to try to persuade the Fed to cut the rate at the next meeting, if not call an emergency meeting to cut the Fed Funds Rate.

His other comment about liquidity is aimed at both the Fed Funds Rate and the Discount Rate.  Both of these rates, if dropped, will allow banks to borrow more funds at reduced costs, possibly bailing out lenders like Countrywide.  Any doubt why he would want more liquidity?  Countrywide has been borrowing as much funds as it can from all sources in an effort to stay afloat.  They are even offering higher rates of return on 12-month CDs as I mentioned in an earlier post.  All evidence points to Countrywide still having problems, Bank of America running in to get the "good pieces" first, and Mozilo is trying to patch the hole sin his ship.

Now, what does that mean to you as a homeowner?  If Countrywide, or any other lender goes under, your mortgage will not be called due, so just keep making your monthly payments.  The only change you will likely see is the name and address that you need to send the check to.

If the Fed Funds Rate gets cut, some will benefit from that.  This rate ties directly with the Prime Rate  (Prime = Fed +3%) and that is the rate that drives your credit cards and your Home Equity Lines of Credit (HELOCs).  It will not necessarily lead to lower rates on your mortgage or the ease of you being able to refinance.  The LIBOR does tend to track the Fed Funds Rate so those with Adjustable Rate Mortgages (ARMs) may see a decrease in the rates you pay.

So, back to the main story.  You decide why Mozilo decided to make those comments in the CNBC interview.  But, make sure you look closely at the numbers and read into what the "leader" of Countrywide is saying.  My take is that he is still trying to patch the holes on a sinking ship.  I hope I am wrong.

Did the Feds Already Bailout Countrywide?

Interestingly enough, the Federal Reserve Board cut the Discount Rate last Friday in an effort to increase liquidity in the crumbling financial markets.  This rate has no effect on mortgages, but it allows banks, including lending institutions, access to "borrowed" money.  Additionally, the Feds extended the borrowing period of these funds to thirty days.

While that helped the markets overall, the most interesting part is the potential hidden reasoning behind that move.  As I have said before, I highly doubt the Feds would let Countrywide go under, though a bankruptcy trip would not be out the question.  The reasoning is that the mass panic and media frenzy that would ensue would destroy the markets, no matter how healthy they may be still.

So, did the Fed cut the Discount rate to bailout Countrywide?  While they would never come right out and say that, it may be a more likely scenario than you think.  Richard Bove, a well respected analyst at Punk Ziegel, thinks so.  He had mentioned his thoughts on Bloomberg radio yesterday, saying he thought the Federal Reserve had bailed out Countrywide, and others, with the cut in the Discount Rate.

He also went on to say that the Fed had panicked and he believed they merely prolonged the problems.  That means that the problems will likely continue.  Capital One shut its mortgage business down, laying off 1,900 and Thornberg Mortgage, a jumbo mortgage specialist, stopped taking loan applications last week and sold $20.5B of securities at a discount so they could pay down debt they were unable to refinance.

Back to Countrywide.  Will they survive after the perceived bailout attempt?  That remains to be seen, but Dan Green at The Mortgage Reports brings up another interesting revelation, one that he learned from his professor in finance class. 

Dan talks about Countrywide offering about .50% higher rates of return for similar investments, namely the 12-month CD, in comparison to everyone else.  As he had learned that this means Countrywide is desperate to borrow funds from as many channels as possible (not just the Fed) and shows that the company may have deeper problems than we are led to believe.

Now, since this debt is due way down the road (1 year) and the fact that the funds will be FDIC insured, Dan mentions the fact it appears Countrywide is taking on added risk it knows it will not be responsible for. 

Draw your own conclusions about Countrywide and the Fed's attempt to bail them out so far, but look closely at what the numbers show and that, to me and some others, shows that Countrywide is not out of danger by any means and that for them to survive will likely take a real Fed bail out. 

If You Want to Know Where Interest Rates are Headed, Watch the Right Stuff

While I have mentioned this on other blogs before, I feel the need to ensure readers of this blog understand what truly drives interest rates.  You see, with all of the turmoil happening, I have had many questions about where I see interest rates headed.  The always seemed surprised when I said the Federal Reserve has nothing directly to do with it.

You see, Mortgage Backed Securities are the only thing that drives interest rates, nothing else.  Since they are bonds, you need to understand this point...if bond prices go up, interest rates go down and vice versa. 

Since Mortgage Bond quotes are not readily available, including to the media, other securities are used in a vain attempt to see what interest rates are doing.  So, most of the media, and even the vast majority of mortgage professionals, use the 10-year Treasury Note as a gauge due to the ease of accessibility.  Tune into CNBC, Bloomberg or other financial media and you are going to see a ticker showing it.

While the T-Note tends to follow the Mortgage Bonds most of the time, there are, in fact, numerous times when they act complete opposite of each other.  It is kind of like comparing American Airlines with Southwest Airlines in trading.  Many times they trade the same direction, but plenty of times they don't.

Thursday was a prime example of how opposite Mortgage Bonds can be compared to the T-Note.  At one point, the T-Note was up 103 basis points while Mortgage Bonds were down 12.  For those of you who are watching the wrong indicators, it could have cost you, or your clients, a lot due to rate lock errors.

So, if you were expecting interest rates to fall on Thursday, they didn't.  However, Mortgage Bonds did manage to get themselves a little higher at the end of the day.  I do provide daily market updates on my other blog, but even those are dependent on my time and are only current at the time of posting.  Things can, and do change rapidly in the markets, especially in current times.

So, to drive the point home, if you, or your mortgage professional are not following Mortgage Backed Securities in real time, then it could be costing you.