Posts from — October 2007
This Weeks Fed Meeting
On October 30 and 31st the Fed meets again. Looks like the odds of a .25% reduction in the Fed Funds is 100%. Chances of a reduction of .50% are sitting around 20%. Primarily the reason for the increased optimism of a reduction has been related to the horrible earnings announcements by the big banks and mortgage lenders, such as Bank of America who reported $1.45 billion in trading losses, Wachovia with $1.3 billion in losses and write downs, Countrywide reporting a 1.2 billion loss and Merrill Lynch who reported a $8.4 billion third-quarter write-off all due to their exposures to the subprime mortgage market. On the economic front all has been fairly well the last few months.
The only major news this week will be Wednesday’s Pending Home Sales and the ADP employment report. The ADP number has been historically inaccurate. The actual Employment number will be released on Friday.
Going into next week, I would float all short term rates and lock long term. Right now we are looking a 30 year fixed under 6% these rates have not been seen for a long time and should be taken advantage of before the fed announcement. Longer term I would float all loans as I believe we will have lower rates overall in the months to come.
October 27, 2007 No Comments
Get Rid of Your 30 YR Mortgage in Just 10 Years
There is a mortgage product that was introduced to the U.S. during the last few years. With this mortgage, homeowners can accelerate their payoff, with no monthly payment change in as little as 10 years to 15 years. Thats right, in most cases, you can continue to pay your current fixed rate payment and save 20 years of mortgage interest. I have to say, I love this product.
How it works, its simply a Home Equity Line of Credit just not a normal Home Equity Line from any bank. This loan combines your checking, mortgage and home equity line accounts into one super account. Each week you receive a paycheck, rental income or any other income and its automatically deposited into your bank account.
How it works, lets say your current mortgage payment is $2,500 a month and your paid net income of $2,000 a week. Well each week your depositing that $2,000 into your bank account, your mortgage immediately falls $2,000 and the lower balance used to calculate the interest. So every 30 days you’re essentially reducing your mortgage balance $8000 for 30 days at a time and then at the 1st of the month your bills are due and you simply write a check out of this bank account for the bills. Its really that simple.
Using the accelerated payoff calculator, a borrower with income of $4,000 per month, a $200,000 mortgage at 6.25% would have a payment of approximately $1,231. Lets say that after paying bills this homeowners has 20% left over each month or just $800. This particular homeowner would pay off their mortgage in 12.7 years. Remember, they are still paying only the $1,231 per month! So just by changing HOW they pay their mortgage NOT changing how much, they save $133,745 in interest expense and are mortgage free in just under 13 years!
One thing to point out this is an adjustable, home equity line of credit, based upon the 1 Month LIBOR Index. The highest the 1 Month LIBOR has ever been is 9%. An important point to make that the LIBOR tracks, nearly exactly, the U.S. Fed Funds rate, so its very transparent. But lets assume worst case. [Read more →]
October 19, 2007 3 Comments
Speak Softly and Carry a Big Stick
Fed Chairman spoke at The Economic Club of New York last night and todays stock market sell off was at least in part a reaction to his comments on the current financial crisis. Chairman Bernanke stated in his conclusion, that although the credit markets have seen some improvement, he thinks that a “full recovery of market functioning may take some time” and “we may well see some setbacks.”
Some positive notes to point out from his speech:
- Core Inflation has moderated but overall inflation risks remain
- Consumer Spending has thus far has not been effected
So, just what is core inflation? Core inflation itself, has no specific definition. There are 3 core measures the Fed uses.
- PPI or Producer Price Index - measures prices on a wholesale level
- CPI or Consumer Price Index - CPI measures a basket of goods or services. There are eight groups from where price data is collected. Housing, Food and Beverages, Transportation, Apparel, Education, Medical Care and Communication, Other goods and services
- PCE or Personal Consumption - measures the prices paid by consumers on a domestic level for goods or services
(CPI numbers will be reported tomorrow morning 10/16 at 8:30 am. Estimates are for 0.2%)
Consumer Spending was mentioned more than once throughout the speech and will be a heavyweight for a decision at the next FOMC meeting on October 30 - 31 and going forward. Chairman Bernanke and the rest of The Dream Team will have a watchful eye for any “spill over to other parts of the economy–for example, by acting as a restraint on consumer spending.” Consumer spending is huge for the overall economy as it accounts for a full 2/3rds of GDP. So its the uncontested heavyweight in the feds eye for now.
October 17, 2007 No Comments
$100 Billion Liquidity Fund; Banks Dipping their Toes in the Water
The principle drivers of the past housing boom where structured investments. In simple terms, wall street repackaged mortgages into securities, mixing the pot with different prime mortgages, derivatives, consumer, corporate debt and then subprime mortgages were added to the pot. Often times these securities became so convoluted they were just called asset backed securities. Wall Street and Investor appetites for these investments became insatiable and then out of seemingly out nowhere came the meteoric crash reminiscent of Bamm Bamm Rubble with his caveman club smashing everything in site. Now investors are holding billions in paper that no one wants.
Bank of America, JPMorgan and Citigroup, who announced $3 billion in subprime losses the same day, have started an estimated $100 billion dollar fund called called the Master Liquidity Enhancement Conduit or M-LEC, to help provide liquidity back into the markets and ease the current credit crisis. There is approximately $320 billion in structured investments and this “bailout” fund is designed in theory to buy this debt providing liquidity for new fundings. While this is a great first step in self correcting the mortgage problems, there are concerns that the fund is paltry compared to the $320 billion in holdings of these investments and some are hinting that the banks see a much larger problem on the horizon. This may be an indication from the big bank players, that we may only be in the 1st quarter of the game and that some financial institutions may be in more trouble than the market believes. There is still a lot of time left on the game clock.
October 16, 2007 No Comments
Oil Up, Stocks Down
Stocks are down today because oil is over $86 a barrel, a new record. Oil is up that high in part because of fears that northern Iraq might be invaded by Turkey in an effort to put down Kurdish rebels. Turkey is only considering this because of strained relations with the US. Those relations were strained by a US House resolution condemning the Turkish action in Armenia 80 years ago.
Whew! How do things get this complicated? The world has no reserve capacity of anything anymore. It’s not as if a shortfall in oil can be made up by pumping more out of West Texas. Everything is running full-out, so the smallest disturbance has consequences for everyone. At least we seem to have gotten out of hurricane season!
No matter how anyone feels about oil and how we use it, the big issue is capacity. We simply can’t pump it out of the ground fast enough, and that makes us vulnerable to the flapping of a butterfly’s wings somewhere far away. Either we need to find more of it or we have to conserve it, because the situation right now makes everything in our economy jittery over everything anywhere in the world.
October 15, 2007 No Comments
Subprime Bailout Debate
There is a debate going on between those that feel the Federal Government, Mortgage Lenders, Builders and Banks are under an obligation to assist homeowners whose loans are getting ready to and have adjusted and to assist those that are already facing foreclosure. The other side of the debate says that there should be no assistance and let the cards fall where they may, that a government bailout is a free license to go out without caution and the government will save you.
Side One: What are the government leaders saying by bailing out these borrowers? These home owners were given an opportunity; an opportunity that they otherwise would not have had. Subprime loans where designed, in theory anyway, to help those with bad credit get a loan and over the course of the next 2 to 3 years repair their credit and get into a low rate good credit loan. Problem with that is 90% of the people with bad credit have bad credit because they never pay their bills and can not manage their debt. The majority of subprime borrowers did nothing once the loan closed to repair their credit. They already have bad credit let them go to foreclosure. Bailing them out is just giving a green light to go out and mismanage their finances again. Give them tough love do not enable them. Screw ‘em. Let them drown. These borrowers need to learn from their mistakes. [Read more →]
October 11, 2007 No Comments
Good Bye to a Discount Realty Company
Image Courtesy of Indymedia Ireland
The writing is on the wall for discount realty companies……..Foxtons, the fourth largest real estate company in New Jersey (and one of the largest in the NYC Metro area) is closing up shop for good. What happened to them?This company arrived on the scene in 2000 with a big splash, promising rock bottom commissions from their agents. Sellers lined up quickly to get their home sold on the cheap. Everything looked great - until the downturn, when it went south in a hurry. Now they are looking for someone to take over the 4,400 listings left in the dust.
The reason Foxtons came and went so quickly is that the lowest possible commission is a promise that is full of problems. Low prices always mean that you have to make it up on volume, which is to say the pressure to “churn
and burn” felt by Realtors is even stronger. There isn’t as much incentive to get the best possible price for the client, but there’s a lot of incentive to move houses quickly. The seller is the loser, and it’s all because they were too cheap to realize that the investment in a house has to be matched by a small investment in the best Realtor possible. Now whose going to take and market 4,400 listings in this market at a 2% commission?
What did Foxtons in is the simple fact that we are in a market where you can’t make it up in volume. A few bad months were bound to break them, and now they are gone. Clearly, being the rock bottom on commissions didn’t make for a good business model. Sellers need to understand that they aren’t in their own best interest, either. You usually do get what you pay for.
October 10, 2007 1 Comment
Friday’s Employment Report and the Effect on Mortgage Rates
Stock investors are singing The Happy Song as the closely watched September employment report came in higher than expected, and the market was very surprised by a revision to the August -4,000 job loss report to a net gain of 89,000 jobs. These numbers had the S&P 500 closing at new highs and other index’s such as the NASDAQ and Dow Jones hitting new highs intra day before profit taking.The Labor Department reported that the U.S. economy added 110,000 jobs and experienced an unemployment rate of 4.7 percent during the month of September, higher than the 100,000 expected. This news sent bond and mortgage backed security yields quite higher, so those seeking to lock a mortgage rate over the next day or so will be paying higher prices.The latest jobs report again, proves that the off the cuff Mozilo recession talk was baseless and unfounded. Leaves you wondering why a CEO the largest mortgage company in the US would make such a statement without qualification. The in-line reading and revision to last month’s number however, have analysts reevaluating whether there is the possibility the Federal Reserve will lower rates again when it meets October 30th - 31st and whether the lowering last month was prudent.The major news next week will be the release of the FOMC minutes on Tuesday and Retail Sales on Friday so we will see if these numbers can bring down mortgage rates or if we are in for higher mortgage rates going into winter. It looks like to me, we could have higher mortgage rates for the next month, maybe even higher rates for the quarter as technical indicators seem to be breaking down but longer term 6 months to a year indicators still look in tact for lower rates. But again, any negative news on any given day can change the direction dramatically so stay tuned.The bond markets will be closed on Monday, October 8, but the stock markets are business as usual.
October 5, 2007 No Comments
NetBank; The First Bank Casulty of the Lending Crisis
While nearly 150 mortgage companies have shut down in the last 10 months because of soaring delinquencies and defaults, NetBank, seems to be the first FDIC insured bank casualty of the current credit crisis. In an futile attempt to avoid a shutdown, back in May 2007, NetBank shed parts of it lending lending business to Ever Bank and shutdown their third-party mortgage origination business. Taken over by Federal regulators, the Federal Deposit Insurance Corp. has been appointed as a receiver for the Alpharetta, Ga.-based NetBank and oversee the banks $2.5 Billion in assets. Online rival ING (NYSE:ING) will be taking over most of NetBanks operations.
This is important in the sense that NetBank is the first FDIC insured bank to cease lending operations and actually close altogether. Some mortgage banks have been claiming that because they are a bank and have deposits that they are not as susceptible to the Subprime mortgage defaults and bankruptcy because they have these deposits. NetBank proves that is not the case. Its been reported that the NetBank closure is the largest Savings and Loan closure since the end of the Savings and Loan Crisis of the late 1980’s, early 1990’s.
In other related news, just this morning Citigroup (NYSE: C) is reporting a 60 percent drop in earnings as it takes a $3 Billion write downs in under performing mortgage securities. Citigroup also moved out its earnings call 4 days from October 15th to October 19th. Watch this as this news could move Citigroup to a new 52 week low. More news to come on this.
October 1, 2007 No Comments
