Category — Financial Markets

Ouch! Mortgage bonds had a horrible week with the 4.5% bond falling from a high of 100.75 to a close of 98.75 a whopping 200 points. Looks like we will begin next week with significantly higher mortgage rates, apparently the economy has begun to see the light at the end of the tunnel and the worst is behind it according to all the “good news” out last week that caused the selling of mortgage bonds. A key question is are we out of the woods or is it just a little rebound before the downtrend continues?

Unemployment dropped to 9.4%, from the prior month’s reading of 9.5% - breaking a streak of 9 straight monthly increases. People still aren’t spending. Savings rate stands at 4.6%, down from May figure of 6.2% but still up significantly from prior publications of negative to 1% all the while wages and salaries have declined 4.7% from the prior year. Consumers have still have little access to credit as credit cards and home equity lines have all but dried up. The only thing that could stimulate the consumer would be a reversal of wages or lower taxes and with the Fed Printing Press working 24 hour days, 7 days a week we can be assured tax rates will increase…significantly is my guess. Just next week the Fed will be auctioning off another $75B. How high can taxes go?… funny you should ask!

Housing has been rebounding. On Tuesday, the Pending Home Sales Index came in at an amazing 3.6%, where only a 0.7% rise was expected. The National Association of Realtors reported that Pending Home Sales rose in June for the fifth straight month, fueled by low home loan rates and bargain home prices. Its important to note that this figure is on contracts written and not closed…. But regardless it seems the Fed’s buying of mortgage bonds to keep rates low, over $ ONE TRILLION worth, and the $8,000 “first time” home buyer tax credit does seem to be helping sales to firm. Can we say missing the boat???

Be on the look out his week for rates to bounce a little lower due to last weeks oversold conditions, with hand on trigger to lock. We are still on a long term down trend but still below all major moving averages. Hopefully the 4.5% mortgage bond can get above the 50 day moving average of 99.41 and the 100 day next at 99.90.

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Before signing any papers for a loan modification, speak to an attorney or a state regulatory agency. You will want to speak with someone who is familiar with the governing process of these companies. Also, make sure the loan modification company has filed a contract with your state and that they hold a valid state license. In addition, make sure they are willing to go through the United States Postal service for pickup and delivery of funds and documents. If not, it could be that they are just trying to skirt issues of mail fraud.

Get educated on loan modifications. Know what your loan options are. Have several different real estate agents give you a comparative market analysis (CMA) to see what your home would sell for. Seek the advice of an attorney if you want to pursue keeping your home.

Here are some of the common things many “scam” companies will say when you call and ask them if they can help you save your home.

1. “By signing the title of your home over to us, we can salvage your credit. That way when the foreclosure is issued, it’s our name that will be recorded.”

Busted - In truth, a home foreclosure is always recorded against the borrower. It doesn’t matter whose name is on title. The person who borrowed the funds is responsible. If you fall for this, you now owe money on something you no longer own.

2. “We will help you out of this situation by giving you some money AND paying your delinquent payments. Just sign the title to your house over.” [Read more →]

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Over 275 subprime lenders, Countrywide, Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, Fannie Mae, Freddie Mac and now Wachovia……. getting bought out days before it would have to go the way of Lehman Brothers. The FDIC comes out to say that “Wachovia did not fail.” That is a major play on words.

The American public spoke today. I for one am getting tired of the “bailout talks.” Let the cards fall where they may. Giving $700 billion is nothing but a reward to those that got us in this mess. At what point would a rational person think there was a problem? After the 275 subprime lenders? It just did not have to go down this way. Why do taxpayers have to ante up? We did not do this.  There are other ways to fix this situation and saving some executives butt is not something to which I am inclined to say yes.

I say, hell no to the bail out. There has been way to much saving face with Wachovia, Bear, WAMU and all the others.

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Big news today was that Warren Buffet was taking a $5-10 billion stake in Goldman Sachs. Two important points to point out is over the last few days Goldman has repeatedly stated that it was in no need of equity and sufficiently capitalized. The second point is not to get too excited. Yes Warren Buffet is the greatest investor of all time and yes he is very shrewd and yes he makes a ton of money on his investments but I would not go as far as the media to say that his investment marks the bottom and would not follow his lead just yet.

Listening to the media there has been 3 prior bottoms as well. His $10 billion is protected to the tune of a guaranteed return of 10% a year. So the bottom is a lot closer for him than us little guys. But this is a good this as a vote of confidence in the sense that the investment community is more willing to make investments in the financial sector…and this could be a turning point. But probably not THE turning point.

On the flip side  Fed Chairman Bernanke and Treasury Secretary Paulson had some trouble selling the $700 billion bailout to the Senate Banking Committee. There is a lot uncertainty regarding this bailout funding and the market will be very reluctant to go higher until it can see the plan come together.

So once again we are in a hurry up and wait mentality.

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Do not go to the bath room with an unlocked loan or open trade. The 10 minutes can cost thousands! Volatility and panic set in the market again as traders once again questioned the governments plan to buy mortgage backed securities and bid up commodity prices and sold the dollar. Looking forward to the fed having to auction off more Treasuries in their effort to raise the $700 Billion needed to finance the bailout. It’s pretty much a sure thing that anything the government estimates is off by 2/3rds. So it’s only a matter of time before they are in the trillions.

October Crude contracts were trading $25 higher at one point, the highest one day gain in history, closing up $16.37 higher on the day. With oil higher and heavy metals such as gold rallying nearly $45 an oz, we are once again touching on inflationary fears which would make mortgage rates soar. After hitting a recent high last Tuesday of 101.69 the 5.5% MBS have given up nearly 175bps to close at 99.9375. The Dow got hammered and gave up nearly all Fridays gains to close down 372 points.

If we are in a recession, mortgage rates don’t know it yet. The markets tend to be very omniscient.

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The market is hanging deep in its hole but has at least stopped digging. The weekend is thankfully approaching and trade is wondering just how many more things can be thrown its way come Monday morning and how it wants to be positioned. It has paid off to be long the flight-to-quality trade and given Paulson’s less-than detailed press conference, the dip buyers may yet be inclined to shore up prices at the lows.

The 10-yr yield hovers around the pivotal 3.76% level with a close below keeping bonds in the game but severely scrambled.  With the Dow, NASDAQ & S&P raring upwards, Treasuries and Agency MBS’s are taking the brunt of the blow as investors move safe harbor capital off the sidelines to deploy them back in the stock market.  As a result, Agency MBS pricing is off a full point as is GNMA (FHA) MBS.  Wow, what a week it was.

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The market backing off with the flight-to-quality taking a bit of a breather. Central banks have coordinated an injection of about $180B into the banking system (Bloomberg) and that seems to have calmed some nerves, for now. But the threat of broken banks hasn’t just gone away and funds will likely flow to treasuries, just not as panicked.

Once again, with each new fix the risk is it doesn’t work.  Not that anyone is paying attention to the mundane economic data being released, but initial claims came in on the high side of expectations at 455K vs an expected 440K mark and leading indicators off consensus levels as well.  The slumping economy’s impact on the credit crunch has not been addressed as much as the vice versa effect, the credit crunch’s effect on the economy.

Don’t discount the exacerbating effect on the current financial fiasco of an economy that is shedding jobs at an alarming pace.  So doom and gloom aside, agency MBS pricing is selling this morning as the central bank capital injections have temporarily soothed the flight to quality stampede.  FNMA 5.00% MBS are off 12 ticks (-12/32) while GNMA (FHA) 5.00% are off 7 ticks (-7/32).

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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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Fixed Rate Mortgage Backed Securities                            November 26th, 2007

Mortgage rates headed south yesterday to a 2 1/2 year low. News that HSBC, the largest bank in the U.K., was bailing out two of its Structured Investments or SIV’s sent investors to a flight to quality buying bonds. HSBC will be moving $45 billion worth of these SIV’s to its own balance sheet in a move that undermines the $100 billion Super Fund that was in the making with the largest banks of the U.S. HSBC has over $2 Trillion in assets to accommodate a move such as this and is unmatched by the larger U.S. banks.

With mortgage bonds trading at a 2 1/2 year high, those looking to lock in, have to at these levels. Even though there may be more room to move, in the nearer term profits will be taken causing rates to possibly tick up.

The only question is the 10 year treasury bond has moved a lot higher, a lot quicker than mortgage backed securities and at some point the 2% point spread between the two would have to narrow. With the U.S. being in a decreasing interest rate environment, I would take a educated guess that the spread will be narrowed by mortgage backed securities trading higher therefore reducing the yield on long term fixed rate mortgages. An excellent mortgage product to take advantage of the longer term view of reduced rates would be the HOA.

(Images Courtesy of Mortgage Market Guide)

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One of my first cars was a yellow 1966 Ford Mustang coupe. When I first got it it looked like a 25 year old car. I can remember when I got home from Marine boot camp at Paris Island my mother, as a present for my return, had totally renovated it and it was a beauty. Painted a glowing yellow, brand new carpet on the inside with beige leather seats. Everything was replaced, the dashboard, all the chrome inside and out. Everything was as original, even the radio. She did a tremendous job.

This car ran on regular gas, I do not think there is a station now that even sells regular gas, but even then, I had to hunt for the few that did. Gas then ranged .95 to .99 per gallon. Those were the days.When I look at gas prices today being at around $2.65 although it sounds like a lot the incremental increase over 20 years, yes I am showing my old age, from that time is not. I am guessing less than 5% a year. Now this is taking a picture of a specific time period and maybe the year before that was .65 or $1.50. I can only remember that Mustang!

So even if it is actually 5% price increases that is just a tad above normal and I do not think its reason to sound the alarm bell. What alarmed me was paying $5.65 for a gallon of milk last week. Now that is high. I have to say, I think its the only gallon of milk I have ever bought as I do not shop unless its for a 1/2 pound Hershey Bar, but how outrageous is that? Almost $6 bucks! For a gallon of milk? I think the fed should keep an eye on those milk prices, forget the gas.

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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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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.

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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.

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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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