The Credit Crunch and The Insolvency Arena

With the exception of yesterday and today, long term mortgage rates have been surging. Since Bernanke just finished his dog and pony show with congress yesterday, this is a good time to take stock (on second thought, don’t take stock; bad word choice). 

Things you already know: Dow lost 112 yesterday, it is down 300 today. Other markets were similar. Lots of lukewarm economic data (Sprint, Dell, Freddie Mac, etc.). Crude oil keeps jumping, dollar keeps slumping. But you all know this stuff…what is the real deal? 

The real deal is this – there are two things that scare economists and politicians. Recession and inflation. They are not perfect opposites, but almost. One sort of means things are shrinking/cooling off/slowing down/receding. The other sort of means fast expansion/heating up/going too fast/blowing larger. Both of them are like ‘things that go bump’ in the night. Is there really an intruder in here? In other words, just hearing noises that they might be making in the economy is enough to freak out economists and politicians. It is fear linked more to our collective perception of the evil, rather than a clear and present danger. A huge distinction considering the power of psychology on the markets. Are you one of those people that would say ‘if the press would stop harping about the housing market, consumer spending would not suffer so much…they are freaking people out!’ If you have had that thought, then you understand how powerful a word, and how powerful fear can really be… 

Economists worry about sustainable growth, stability, and who will publish their papers. Politicians worry about seeming important and relevant to the people who feed their bloated egos. An economist might want a little recession to clear things up – because in the long run, it might make for more sustainable economic prosperity. A politician does not care what takes place beyond the end of their nose – or term –  as the case may be. Slow downs and recessions shed jobs and make people tighten their belts. If you live and work on a college campus in New England or California, you don’t really care about details like that. On the other hand, if you are born to please at all costs, then you are likely to make a show of raging indignation. Grow!! I don’t care how fast! I want us all to be drunk on depreciating money! Let the people watch a lion eat something in the arena, maybe they will keep liking me! 

Okay, the last part was an exaggeration. But the point is this; these two forces play out as Main Street vs. Wall Street, Economists vs. Politicians, Bankers vs. Factory Workers. Depending on where you are in the economic food chain, even Democrats and Republicans rarely agree on these things. Surprisingly, though it is highly political, it does not often fall along party lines. And it has been going on for centuries. 

So here we are. Foreign markets still have a ravenous hunger for oil, copper, even grain. Since we are all so connected, these markets are applying upward pressure on prices here at home. The housing crisis and total rupture of the credit markets is putting the kibosh on our domestic growth. One message says INFLATION. One message says RECESSION. One message says DON”T LOWER RATES, IT WILL CAUSE MORE INFLATION. One message says LOWER RATES, WE NEED TO SPEED THINGS UP. 

But you want to know about your mortgage!! At Finworth, we had a massive wave or refinances with rates in the low to mid 5’s on 30 year fixed loans. That little mini-party only lasted a few weeks because the rates are about .75% higher these days. Of course, the surge in rates was tempered a little today and yesterday as the bond market celebrated the economic misery of others, but rates still are not that great compared to 10 or 15 days ago. 

Jumbos are still overpriced and sort of worrisome for all of us. Cheap money above $417,000 is still a long shot. The Fed Stimulus package increased the Jumbo limits in certain markets, but precious few. Almost all of them were in California and Finworth does not operate in that Country, I mean State. Again, the jumbo limit increases will not help you at all. Yes, we am bummed too, but it is probably for the best. 

So where are rates headed? 

We got way too cocky. We had been batting 1000 for the last 8 months. If we thought rates were going up – we nailed it on this blog. If we thought they were going down, we nailed it on this blog. We predicted each Fed Rate cut and the change in the yield curve on this blog. We even predicted stock prices dropping 1000 points! But, hey, it was mostly luck. Anyone who tells you different is either arrogant or crazy, or both. 

Rates dropped in a HUGE way a few weeks ago. And even though we jumped on it and helped a ton of our clients, we were almost caught off guard. We did not see it. We had predicted they would rise gently and never uttered a word about the precipitous and relatively sustained drop. So it is with humble pie and bruised hubris that we step back into the game of reading the tea leaves…here it goes… 

30 year fixed rates will drop a little today (maybe 5.875% or 5.75% with no points). Then, those same rates will rise to the low to mid 6’s and hold for several more weeks. With the exception of one or two bobbles, they will then go higher and settle in the high 6’s. Jumbos will hold near their current high levels until at least May 1^st. At that point, we think a little more money lube in the system, the Freddie and Fannie cap increases, the FHA expansions, and the re-entrance of some natural buyers into the arena will bring them down some. We think the Fed will lower rates .50% in March and .25% at the following meeting, then hold. We think the equity markets will be jittery for the rest of the 1^st quarter. We think it is possible to see the broader equity markets loose as much as 400 MORE points. Then, we think the stock market will recover in the 2^nd quarter, then explode in the 3^rd and 4^th quarters. We think at least 50 banks will fail and need bail out before Halloween. But, they will be small banks who did dumb things and over extended themselves in real estate. They probably deserve to fail. We think at least one bond insurer will need to start speaking a foreign language to talk to its board before this is all over. We think the housing market has not hit bottom yet. We think the commercial market will start to see a precipitous drop in the coming months and bottom out after residential hits the floor. We still think there will be a dead cat bounce in both residential and commercial markets (see the other posts for explanation of this). And finally, we STILL believe that we are already in a mild recession. We have been saying that for awhile and only now are at least a few others in agreement. We believe the combo monster of stagflation is unlikely. And that by next spring, the economy will be limping along just fine. And we will repeat our old statement (that sounded crazy 8 months ago and now it sounds less crazy!)…the housing market will NOT recover until the end of 2009 or beginning of 2010. 

Lastly, and biggest of all, we believe that if you are getting your mortgage from a stranger in this market, you are putting a loaded gun to your head. If you don’t use Finworth, use someone very reputable please. Ask them tough questions. Ask them how long they have been in the business. And if your ‘used car salesman alert’ goes off in your head, run, don’t walk. We are committed to ethical behavior and interactions, sensible lending practices, and in helping educate through our process. Whether you are buying or refinancing, find someone who knows what they are doing. What you do not know in this market can really, really hurt. 

Respectfully and Gratefully Yours,Steve Curnutte and the folks at Finworth Mortgage 

Borrow Wisely615.386.7102

Will the stimulus package help jumbo rates? Yes, for some parts of the country. But the truth is no one knows exactly how it will play out. Most of our clients own property in either Tennessee or Florida. The answers for each of these areas are different. But here is the general overview and timeline: 

1. Housing market starts to crack
2. Credit markets start to seize
3. People start to worry more about a recession than crazy inflation
4. The White House comes up with a suggestion for a stimulus package
5. The House passed the stimulus package last week
6. The Senate changes it, then votes it down
7. Today (Thursday) the Senate changes it again then passes it
8. After one more stop, the President is expected to sign it next week

Okay – what does this have to do with Jumbo mortgage rates? Well, inside the bill is a provision that would increase the conforming loan limit. Right now, Fannie and Freddie will buy things that are $417,000 or under; loans bigger than that have fewer buyers, more perceived risk, and higher pricing. In fact, pretty rotten pricing in the last few months. Presumably this increase, which would expire 12/31/2008, would allow a bunch of people with jumbo mortgages to refinance. It would also allow a bunch of big houses and condos to sell because more people could afford them. There are three problems with this. Actually, there are a bunch of problems, but only two that matter here. 

First, no one seems to be able to figure out what the heck they are talking about. Is it $625,000? Is it now $725,000? Is it a percentage over the median home values in an MSA? Will it include us? Even when you read the competing versions of the bill – it is remarkably befuddling. You think this stuff would be easy. So maybe it will apply to most housing markets in California, or in Greenwich, CT, or Charlottesville, VA, or even Poughkeepsie, NY, but probably not Nashville. Then again – who knows. 

 ***** update ***** 

The details that emerged last night about the stimulus package confirm that it will not impact borrowers in Tennessee. The only area in Florida that will be impacted will be Miami/Dade, but even then, the Jumbo was only increased to $433,500 from $417,000. Our sources are telling us that the President will likely sign this bill within a few days. But again, it will not increase the conforming loan limit in Tennessee markets beyond the current $417,000.

Second, just because the limit is increased does not necessarily mean that lenders will not still have some premium placed on the pricing. Maybe Fannie and Freddie will place it on the top. Maybe the actual lenders will.  

Third, by the time they get this increase rolled out, where will regular conforming rates be? Last week, a 30 year fixed was in the mid 5’s. Today, they hit the high 5’s. By next week, they may be in the 6’s. So allowing larger loans to have conforming pricing may not matter that much after all – who knows. 

Forgetting for a moment whether or not a stimulus package to Americans is a good idea – most folks that watch this stuff closely agree that it is as clear as mud. Who expects the government’s product to be anything different? 

But the real point here is that your jumbo mortgage could be in a spot to be refinanced sometime in the next few days or weeks. Your house that is on the market for $600,000 or more might move a little faster. And you might be able to finally consolidate that darn combo loan that you had to do last year to get around the jumbo issue. Oh, and since your entire mortgage data is public record, expect a ton of direct mail marketing junking up your mailbox. 

Most importantly, do not be duped or cajoled into something that does not make sense. As always, we would love your business. But if you don’t use us, please use someone who knows what they are doing and someone you can trust. What you do not know here can really hurt. 

Sincerely,

Steve Curnutte and the folks at Finworth

Borrow Wisely