Category — Fed

I received a call Friday January 25th, 2008 from a freelance reporter in Los Angeles named Marcie Geffner who was doing a story for a well known bank website called BankRate. She wanted to interview me to get my opinion on whether those with adjustable rates should take advantage of the lower fixed rates and refinance.

You can see the whole Bank Rate article here.

This interview led me to some important points that I want to make. It’s not a marketing secret that scaring the crap out of consumers is a pretty useful sales tactic. People buy on emotion and make emotional decisions and the news media and advertisers sell products that way.

I have been pounding the table since May 2007 that the Federal Reserve would start to lower rates in the fall of 2007; you can see my Blog post. So this big whoop la comes as no surprise.

What needs to be understood is that mortgages just like any investment should be managed. Just like investments, different loan products “perform” better during certain periods and working with a Certified Mortgage Planner allows customers to take advantage of changes in market sentiment and conditions and save $10’s of thousands of dollars.

Managing a mortgage is not about getting the lowest interest rate. It’s about matching the mortgage to the client’s financial goals. When you match the mortgage to their financial goals rates do not matter. The loan program that you have is meeting a certain financial need of the borrower.

This is part of wealth creation I explain to clients. In this business I have meet many people who have achieved great wealth by aligning their mortgage (s) to their financial need. I have never met one that achieved great wealth because they received the lowest mortgage rate. [Read more →]

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In an emergency phone meeting, Monday night, the Fed Cut Rates .75%. The biggest one time rate cut since 1984. The Fed meet before its scheduled January 29th-30th meeting and is expected to cut ANOTHER .50% at that time. This move all but says we may be in a recession.

The stock market is scheduled to open with its worse drop in recent memory and bad news for Bank of America, reporting it a 95% drop in net income and may call in to question the buy out of beleaguered Countrywide.

If Bank of America does not go forward with the Countrywide buy, Countrywide is all but assured a spot in Federal Bankruptcy court and that would send additional shock waves through the financial markets.

Those with adjustable rates gotta be loving the current rate environment. I have been saying since May 2007 the Fed would lower rates and I would go with short term adjust ables. Those with a home equity line of credit will see their rate decline this month of at least .75%. All the short term adjustable rate indices’s, such as the LIBOR, MTA and CMT will have huge declines today and over the coming months so we will all see our payments going down. Who would have ever thought we would see the 30 year near 5%?

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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.

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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.

1. PPI or Producer Price Index - measures prices on a wholesale level
2. 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
3. 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.

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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 →]

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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.

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Well it finally happened, the federal reserve lowered interest rates. Its been my belief all year that the Federal Reserve would lower rates in the fall. Now that it has happened its important for consumers to understand what this Fed Rate Cut means to you and your mortgage.

First, for those that have a 30 year fixed rate mortgage it basically means nothing. The lower Fed Funds Rate DOES NOT mean that the 30 year fixed rate mortgage will go down. Actually, the 30 year can go higher as this chart illustrates. By December 2001, following 4.25% in cuts throughout the year, the 30 year mortgage was actually up to 7.07%.

Additionally, with the September 18th Fed cut the average 30 year fixed rate mortgage responded by increasing 5 basis points last week after the announcement. The chart above shows from the year 2001 to mid 20007, the 30 year fixed rate stayed relatively flat and has been predominately trading in a range of 5.875% to 6.25% since the spring of 2002.

But those that have short term adjustable rates, I myself having a monthly adjustable, may very well reap the rewards over the coming months and years if this rate reduction continues. You will notice by the two charts below, that the LIBOR rates, 1YR CMT and 11th District COFI have dropped nearly in tandem with the Federal Funds rate reduction. The LIBOR dropped from 7% in 2001 down to 1% not long after.

Fed Funds Rate since 1990:

Chart of LIBOR, CMT and COFI Indices since 1990:

The coming Fed rate reduction is why I have been a big fan of short term adjustable loans for the whole year. Short term adjustable rates are tremendous mortgage planning tools in a declining interest rate environment. Where people may tend to get into trouble, they get these loans in a increasing rate environment which makes no sense. Why would anyone get a short term adjustable in a increasing rate environment? Does not make sense to me.

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President Bush announced a new Federal Housing Administration (FHA) initiative called FHA Secure to assist approximately 240,000 homeowners in refinancing out of adjustable rate mortgages and keep their homes. FHA Secure is a temporary program and all loan applications must be signed no later than December 31, 2008. With the new FHA Secure program homeowners with strong credit histories and have made all payments on time until their loan reset but are now in default will be eligible for refinancing.

“Many hard-working American families who were able to make their mortgage payments under the initial teaser terms of the exotic loan are now struggling to make ends meet because their rates have doubled or tripled,” said HUD Secretary Alphonso Jackson. “FHA Secure will bring stability to the housing market and give eligible families who were in good financial standing before their loans reset a chance to keep their homes.”

To qualify for FHASecure, eligible homeowners must meet the following five criteria:

1. A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2009;
3. Three percent cash or equity in the home;
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

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Consumer confidence came out this morning. The figure at 105, down from 111.9 in July but up from August 2006. Of course the doom and gloom headlines to quote “Consumer Confidence Falls To Lowest Level in a Year”, I mean come on, expectations were for 104.5 so how come the headline does not say “consumer confidence comes in much better than expected.” Listen to the media as an investor and you will be sure to go broke. That I can GUARANTEE you!

What I can tell you is,,,,,,,, 105 is a far cry from a recession (so far), considering the consumer is 1/3 of GDP, wages are another component and wages are growing at 4% and corporate profits are expected to be in the low double digits so I think the chances of a recession are slim, unless the consumer confidence number falls another 35 points. What this does show is the resiliency of the American consumer in wake of the so called “subprime crisis” or mortgage meltdown or any other name the media has created. Gas prices are still high although a lot lower than the highs, food costs increasing and mortgage rates have ticked up a bit. So IMO, I think the number is strong considering the environment.

The biggest worry for the number is that it was not worse and may be a reason for the stock sell off. Obviously over the next month or so this number could be dramatically lower and with back to school coming we will see if the retail sales numbers are any indication. But as always the media plays a big role in consumer sentiment so we will see how they spin the recession talk and what effect this has on the number going into the coming months.

The 10 year note is trading off its highs up .25bps and less effected is the 6% mortgage backed securities trading up .6bps and seems to be hitting a ceiling of resistance at 100.16. Bond prices have been on a tear since the end of July and rates have came down nicely but may be running out of steam.

At 2pm ET today the Fed will release the Minutes from the August 7th meeting. It will be interesting to get the Fed’s views on the credit crunch, since it was just beginning to unfold at the time they met. The Fed Fund Futures are currently showing a 72% probability of a .25% cut at the September 18th meeting, with some predicting a chance of a .50% rate cut.

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There are currently dramatic and sweeping changes occurring within the mortgage industry. If you or any one you know needing a mortgage within the coming months, you need to read this!

Just last week there were two high profile lenders that shut their doors. One being the Wells Fargo subprime unit and more importantly American Home Mortgage and its wholesale counterpart, American Brokers Conduit. American Home Mortgage was no small potato. American Home Mortgage was the 10th largest lender in the U.S. and last year closed over $58 BILLION in loans. Its been reported, this shutdown left billions in UNFUNDED loans. Imagine a day, a week or an hour before closing and you get the call from a mortgage loan officer that the loan is not closing. [Read more →]

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