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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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It’s not a surprise to investors out there that properties are staying on the market for what seems like a lifetime, if they sell at all. The Census Bureau estimated that there are approximately 2.1 million vacant homes for sale nationwide, up over 7% from a year ago. The total number of vacant properties not for sale or rent is estimated an astounding 17.9 million units.

For many the one option may be to wait out the market downturn and rent out the properties until the inventory glut clears out. For those that have no history of renting properties be prepared for a whole new world. Mike Mulligan of Property Managers of Virginia states that “investing in real estate is serious business and a big investment. Knowing and keeping up with regulations, legal issues and liabilities in the State of Virginia can seem overwhelming.”

Its is true, there is a whole new world out there of fair housing requirements, landlord tenant laws that may vary from county to county, tenant screening, property maintenance and expense and pricing your property for rental. For those that are not prepared with professional help and professional advice can be set up for disaster.

Of course just by hiring a property manager does not mean that you will be trouble free. But it does mean that you can have a life outside of managing your properties.

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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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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 →]

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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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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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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.

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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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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.

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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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