With mortgage rates moving faster than the Spread HD offense this morning, let's take a few minutes to recap what's going on, and what's causing rates to fall.
First, the bailout.
Late Sunday, Congress drafted the Emergency Economic Stabilization Act of 2008 bill and it goes to vote sometime today. The key provision in the bill that's helping mortgage rates is on Page 110.
The passage reads, summarized:
The U.S. Treasury gets access to $250 billion immediately
The U.S. Treasury has to ask the President for its next $100 billion
The U.S. Treasury has to ask Congress for its next $350 billion
Because of how the bill is worded, the U.S. Treasury can't go spending taxpayer money willy-nilly, lessening the likelihood of monetary supply inflation nationwide. This is good because anytime inflation pressures ease, mortgage rates stand to benefit and this is one of the catalysts for today's rate drop.
Another reason why rates are falling is death of banking giants Washington Mutual and Wachovia.
It's no coincidence that these two institutions shut down within 3 days of each other. Both were heavy pushers of the now-famous Negatively Amortizing Mortgage, the time-bomb assets of which clogged the banks' respective balance sheets.
Consider: When Washington Mutual was rescued bought by JP Morgan Chase & Co. and the buyer devalued WAMU's portfolio by a massive $31 billion, it forced investors to reassess Wachovia's mortgage portfolio, too.
Within minutes, Charlotte-based Wachovia lost a quarter of its value and was a Dead Man Walking. Then, before even a weekend could pass, Wachovia had been packaged and sold to Citigroup with the help of the U.S. government, leading to another $42 billion in mortgage portfolio writedowns.
That's $73 billion in mortgage losses practically overnight.
Surprisingly, this is good news for mortgage borrowers because each time a bank acknowledges losses like this, the mortgage market as a whole gets one step closer to discovering what an individual home loan is really worth on Wall Street.
In fact, it's this exact conundrum that defines the mortgage market domino chain, dating back to July 2007. If markets could just accurately answer "What is a mortgage worth?", this little credit mix-up thing would be over.
WAMU and Wachovia hitting the showers brings us one step closer, and at least for today, brings mortgage rates down.
Monday, September 29, 2008
Friday, September 26, 2008
WaMu becomes biggest bank to fail in US history
NEW YORK - As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse those of Continental Illinois National Bank, which failed in 1984 with $40 billion in assets; adjusted for 2008 dollars, its assets totaled $67.7 billion. IndyMac, seized in July, had $32 billion in assets.
One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.
Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.
"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.
WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.
JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital. Its stock rose in midday trading Friday on the New York Stock Exchange, gaining $1.90, or 4.37 percent, to $45.36.
The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.
WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.
The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which led a $7 billion cash infusion in the bank this spring, on the sidelines empty handed.
WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.
Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.
At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.
As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.
At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.
In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.
The bank in July reported a $3 billion second-quarter loss — the biggest in its history — as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.
JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.
JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.
The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.
"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.
___
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse those of Continental Illinois National Bank, which failed in 1984 with $40 billion in assets; adjusted for 2008 dollars, its assets totaled $67.7 billion. IndyMac, seized in July, had $32 billion in assets.
One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.
Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.
"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.
WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.
JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital. Its stock rose in midday trading Friday on the New York Stock Exchange, gaining $1.90, or 4.37 percent, to $45.36.
The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.
WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.
The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which led a $7 billion cash infusion in the bank this spring, on the sidelines empty handed.
WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.
Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.
At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.
As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.
At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.
In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.
The bank in July reported a $3 billion second-quarter loss — the biggest in its history — as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.
JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.
JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.
The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.
"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.
___
Run on Bank Helped Kill WaMu, But Your Money Is Safe
In the biggest bank failure in U.S. history, the Federal Deposit Insurance Co. seized Washington Mutual's assets Thursday. The FDIC then quickly sold most of WaMu (that's assets and liabilities) to JPMorgan.
Simply put, WaMu was victimized by a classic "run on the bank." Customers withdrew $16.7 billion in a 10-day period following the bankruptcy of Lehman Brothers, leaving WaMu "with insufficient liquidity to meet its obligations," its regulators determined.
A longer explanation is WaMu was victimized by mismanagement and misguided bets on exotic (and toxic) instruments such as option adjustable-rate mortgages.
The deal has major ramifications for JPMorgan and the banking industry as a whole, as Henry and I discuss in a forthcoming segment.
For the vast majority of people who bank at WaMu, which had 2200 branches and $188.3 billion of deposits as of June 30, the important thing to remember is your deposits are insured up to $100,000, and the Federal government will go to every extreme to make sure it's available.
"There will be no interruption in services and bank customers should expect business as usual come Friday morning," FDIC Chairman Sheila Bair told reporters last night.
The sobering truth, however, is that repeated declarations about the sanctity of FDIC insurance from Bair, President Bush, Treasury Secretary Paulson, Fed Chairman Bernanke and others failed to quell concerns among WaMu's customers. That suggests more "bank runs" could be in the offing unless the government moves quickly to restore confidence.
Simply put, WaMu was victimized by a classic "run on the bank." Customers withdrew $16.7 billion in a 10-day period following the bankruptcy of Lehman Brothers, leaving WaMu "with insufficient liquidity to meet its obligations," its regulators determined.
A longer explanation is WaMu was victimized by mismanagement and misguided bets on exotic (and toxic) instruments such as option adjustable-rate mortgages.
The deal has major ramifications for JPMorgan and the banking industry as a whole, as Henry and I discuss in a forthcoming segment.
For the vast majority of people who bank at WaMu, which had 2200 branches and $188.3 billion of deposits as of June 30, the important thing to remember is your deposits are insured up to $100,000, and the Federal government will go to every extreme to make sure it's available.
"There will be no interruption in services and bank customers should expect business as usual come Friday morning," FDIC Chairman Sheila Bair told reporters last night.
The sobering truth, however, is that repeated declarations about the sanctity of FDIC insurance from Bair, President Bush, Treasury Secretary Paulson, Fed Chairman Bernanke and others failed to quell concerns among WaMu's customers. That suggests more "bank runs" could be in the offing unless the government moves quickly to restore confidence.
New Home Sale | New Construction Sales Off Dramatically
New home sales in the U.S. tumbled in August to the slowest pace in 17 years, while the average sales price fell by the largest amount on record, demonstrating the depth of the problem that Washington is trying to solve.
The Commerce Department said Thursday that new homes sales fell by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.
It was a much bigger sales decline than the small 1 percent drop that economists had been expecting. The average price of a new home sold in August dropped by a record amount of 11.8 percent to $263,900, compared to the July average of $299,100. The median price was also down, falling 5.5 percent to $221,900.
Resale Home Sales - Home Sales Hitting New Lows.
The big drop in new home sales followed news Wednesday that sales of existing homes were down 2.2 percent in August to a seasonally adjusted annual rate of 4.91 million units. Both segments of the market remain under pressure from the steepest housing downturn in decades.
The report on new home sales showed that business was off in every region of the country except the Midwest, which posted a 7.2 percent increase. Sales plunged by 36.1 percent in the West and were down 31.9 percent in the Northeast. Sales fell a more modest 2.1 percent in the South.
The Commerce Department said Thursday that new homes sales fell by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.
It was a much bigger sales decline than the small 1 percent drop that economists had been expecting. The average price of a new home sold in August dropped by a record amount of 11.8 percent to $263,900, compared to the July average of $299,100. The median price was also down, falling 5.5 percent to $221,900.
Resale Home Sales - Home Sales Hitting New Lows.
The big drop in new home sales followed news Wednesday that sales of existing homes were down 2.2 percent in August to a seasonally adjusted annual rate of 4.91 million units. Both segments of the market remain under pressure from the steepest housing downturn in decades.
The report on new home sales showed that business was off in every region of the country except the Midwest, which posted a 7.2 percent increase. Sales plunged by 36.1 percent in the West and were down 31.9 percent in the Northeast. Sales fell a more modest 2.1 percent in the South.
Wednesday, September 24, 2008
Real Estate Professionals Take Close Look At Short Sales
Oregon Real Estate Agency drafts guidelines to educate both buyers and sellers
Portland Business Journal - by Wendy Culverwell Business Journal staff writer
A cooling market for residential real estate means plenty of opportunities for bargain hunters, but if a home's price isn't enough to wipe out the current mortgage, liens or tax assessments, buyer beware.
Hard data about short sales -- where the price isn't high enough to cover the seller's mortgage -- is difficult to come by. It is such a recent phenomenon that local and national real estate organizations didn't bother to track it.
But anecdotally, the short-sale phenomenon is increasing both in Oregon and nationally.
Questions about short sales were nearly unheard of a year ago, said Dean Owens, deputy commissioner for the Oregon Real Estate Agency, which licenses and regulates the industry.
There have been so many questions that the agency drafted guidelines for agents representing both buyers and sellers and is working with the Oregon Association of Realtors to ensure the rights of buyers and sellers are protected.
In a short sale, a buyer and seller can agree to a price, but a third party must bless the deal before it closes. That's typically the bank that issued the existing mortgage and faces writing off the unpaid balance. Typically, Owens said, banks wait until the last minute to approve short sales.
"The lender wants to be in the best position. It's not going to be in any hurry to accept the first offer," he said.
The Regional Multiple Listing Service reports 14,695 new listings through March, an increase of 7.2 percent from the same period in 2007. In two years, the inventory of available homes has grown more than fourfold and is enough to satisfy demand for more than nine months.
As a result, it takes an average of 83 days to sell a home, 18 longer than a year ago. Though prices have generally held, the slow market gives buyers an edge. For sellers, it can be a challenge to get a price high enough to pay off mortgages, home equity loans, tax liens and past-due home owner association dues.
Ben Andrews, principal broker and owner of Willamette Realty Group, said he's seen short sales affect business first hand. Five weeks ago, he wrote a full-price offer on a short sale property. The bank still hadn't responded as of this week, he said.
Even when a bank does sign off, Andrews said last-minute complications make him reluctant to recommend buyers pursue short sales.
For example, a bank may wait until closing to attach old debts, such as past-due tax bills or association dues, to the new owner, adding thousands to the agreed-upon price.
And if a bank doesn't sign off, the buyer can be left with no deal despite entering an agreement in good faith and paying inspection and appraisal fees. To Andrews, the risk that a short sale will go bad outweighs the prospect of getting a great deal.
"There's so many more deals out there with a lot more security," said Andrews, who estimates that about two percent of homes currently on the market are short sales.
W. Lee Dunn, president of the Oregon Association of Realtors, said short sales are nothing new, but the way lenders are waiting to approve deals is.
"It's very frustrating for buyers," said Dunn, who is a vice president at Prudential Northwest. Unlike Andrews, he thinks short sales can be a smart strategy for buyers who can stomach waiting 30, 60 or even 90 days to find out if their offer is accepted.
"A short sale can be a good buy. But they have to have a lot of patience, and that's not something there's an abundance of," he said.
In Oregon, listing agents are required to disclose when a sale will require a lender's sign off.
The National Association of Realtors hasn't tracked short sales until recently, according to Walter Molony, who researches real estate issues for the Washington D.C.-based industry association.
The reason? Short sales weren't of consequence, he said.
Sensing that short sales are an emerging issue, the NAR asked members in March if their most recent client made a short sale. Nearly 18 percent of the 483 people who responded said yes.
Portland Business Journal - by Wendy Culverwell Business Journal staff writer
A cooling market for residential real estate means plenty of opportunities for bargain hunters, but if a home's price isn't enough to wipe out the current mortgage, liens or tax assessments, buyer beware.
Hard data about short sales -- where the price isn't high enough to cover the seller's mortgage -- is difficult to come by. It is such a recent phenomenon that local and national real estate organizations didn't bother to track it.
But anecdotally, the short-sale phenomenon is increasing both in Oregon and nationally.
Questions about short sales were nearly unheard of a year ago, said Dean Owens, deputy commissioner for the Oregon Real Estate Agency, which licenses and regulates the industry.
There have been so many questions that the agency drafted guidelines for agents representing both buyers and sellers and is working with the Oregon Association of Realtors to ensure the rights of buyers and sellers are protected.
In a short sale, a buyer and seller can agree to a price, but a third party must bless the deal before it closes. That's typically the bank that issued the existing mortgage and faces writing off the unpaid balance. Typically, Owens said, banks wait until the last minute to approve short sales.
"The lender wants to be in the best position. It's not going to be in any hurry to accept the first offer," he said.
The Regional Multiple Listing Service reports 14,695 new listings through March, an increase of 7.2 percent from the same period in 2007. In two years, the inventory of available homes has grown more than fourfold and is enough to satisfy demand for more than nine months.
As a result, it takes an average of 83 days to sell a home, 18 longer than a year ago. Though prices have generally held, the slow market gives buyers an edge. For sellers, it can be a challenge to get a price high enough to pay off mortgages, home equity loans, tax liens and past-due home owner association dues.
Ben Andrews, principal broker and owner of Willamette Realty Group, said he's seen short sales affect business first hand. Five weeks ago, he wrote a full-price offer on a short sale property. The bank still hadn't responded as of this week, he said.
Even when a bank does sign off, Andrews said last-minute complications make him reluctant to recommend buyers pursue short sales.
For example, a bank may wait until closing to attach old debts, such as past-due tax bills or association dues, to the new owner, adding thousands to the agreed-upon price.
And if a bank doesn't sign off, the buyer can be left with no deal despite entering an agreement in good faith and paying inspection and appraisal fees. To Andrews, the risk that a short sale will go bad outweighs the prospect of getting a great deal.
"There's so many more deals out there with a lot more security," said Andrews, who estimates that about two percent of homes currently on the market are short sales.
W. Lee Dunn, president of the Oregon Association of Realtors, said short sales are nothing new, but the way lenders are waiting to approve deals is.
"It's very frustrating for buyers," said Dunn, who is a vice president at Prudential Northwest. Unlike Andrews, he thinks short sales can be a smart strategy for buyers who can stomach waiting 30, 60 or even 90 days to find out if their offer is accepted.
"A short sale can be a good buy. But they have to have a lot of patience, and that's not something there's an abundance of," he said.
In Oregon, listing agents are required to disclose when a sale will require a lender's sign off.
The National Association of Realtors hasn't tracked short sales until recently, according to Walter Molony, who researches real estate issues for the Washington D.C.-based industry association.
The reason? Short sales weren't of consequence, he said.
Sensing that short sales are an emerging issue, the NAR asked members in March if their most recent client made a short sale. Nearly 18 percent of the 483 people who responded said yes.
Mortgage Rates Respond To A Rapidly-Devaluing U.S. Dollar
Monday, September 23, 2008 Wall Street made its verdict in the case of Government vs The Credit Markets, a knock-down, drag-out fight that may have ended last Friday.
Government wins, but not without inflation.
To an economist, inflation is the general increase in the price of everyday goods and services that occurs over time. It's an accurate description, but in the context of the government's actions of the last two weeks, we can get a better sense of what's impacting mortgage rates if we take that definition and reverse it.
Reversed, inflation is the devaluation of a currency, so more of said currency is required to buy the same quantity of everyday goods and services.
It's the latter interpretation that's driving Wall Street this week.
Investors assume that the government will have no choice but to print more money to service its debts, thereby diluting the dollar's value. Because there's more of them, after all, each dollar is worthless worth less.
This is sometimes called "monetary supply inflation" and concerns about it caused the U.S. dollar to fall 2.4 % versus the Euro yesterday -- the biggest one-day drop in history.
Dollar weakness then spilled over into the commodity market because all of the instruments are priced in U.S. dollars. Oil prices jumped $25 per barrel at one point before settling in a tad lower. This, too, was the biggest one-day movement in history.
And lastly, the mortgage market got hit. Because mortgage bonds are repaid in U.S. dollars, the value of those repayments dropped. This forced mortgage rates higher because the only way to entice investors to buy devalued mortgage-backed bonds is to offer them with a higher interest rate.
If you're wondering why conforming mortgage rates are up by 0.750% since last week, this is it -- it's because mortgage rates are responding to the expectations of a weaker dollar going forward. This is the reverse of what happened in August.
So far, non-conforming mortgages including jumbo and super jumbo loans are unaffected.
Government wins, but not without inflation.
To an economist, inflation is the general increase in the price of everyday goods and services that occurs over time. It's an accurate description, but in the context of the government's actions of the last two weeks, we can get a better sense of what's impacting mortgage rates if we take that definition and reverse it.
Reversed, inflation is the devaluation of a currency, so more of said currency is required to buy the same quantity of everyday goods and services.
It's the latter interpretation that's driving Wall Street this week.
Investors assume that the government will have no choice but to print more money to service its debts, thereby diluting the dollar's value. Because there's more of them, after all, each dollar is worthless worth less.
This is sometimes called "monetary supply inflation" and concerns about it caused the U.S. dollar to fall 2.4 % versus the Euro yesterday -- the biggest one-day drop in history.
Dollar weakness then spilled over into the commodity market because all of the instruments are priced in U.S. dollars. Oil prices jumped $25 per barrel at one point before settling in a tad lower. This, too, was the biggest one-day movement in history.
And lastly, the mortgage market got hit. Because mortgage bonds are repaid in U.S. dollars, the value of those repayments dropped. This forced mortgage rates higher because the only way to entice investors to buy devalued mortgage-backed bonds is to offer them with a higher interest rate.
If you're wondering why conforming mortgage rates are up by 0.750% since last week, this is it -- it's because mortgage rates are responding to the expectations of a weaker dollar going forward. This is the reverse of what happened in August.
So far, non-conforming mortgages including jumbo and super jumbo loans are unaffected.
Tuesday, September 16, 2008
Home Mortgage Tips
#1 - You decide how much you want to spend on a mortgage. Don't allow mortgage lenders to influence your decision on how much to borrow. Never let a lender talk you into more than you can afford. Only you know how much you are comfortable with spending each month on your mortgage. Find a mortgage company or bank that will not pressure you to take on a mortgage that would put too much financial pressure on you and your family and will take your personal budget into account.
#2 - Shop around for the best mortgage FOR YOU! Contact several reputable lenders and get quotes on rates and closing costs. Make the banks and mortgage companies compete for your business!
#3 - Avoid loans with prepayment penalties. Choosing a lender that will charge you a penalty if you pay off or refinance, could cost you thousands of dollars.
#2 - Shop around for the best mortgage FOR YOU! Contact several reputable lenders and get quotes on rates and closing costs. Make the banks and mortgage companies compete for your business!
#3 - Avoid loans with prepayment penalties. Choosing a lender that will charge you a penalty if you pay off or refinance, could cost you thousands of dollars.
Wednesday, September 10, 2008
Pending Home Sales Drop 3.2% - NAR Report On Housing
Pending home sales fell 3.2% in July after gaining in June, according to a real estate group’s report released Tuesday, in the latest in a series of gloomy housing reports.
The Pending Home Sales Index fell to 86.5, after gaining 5.8% in June, according to the National Association of Realtors (NAR). It now stands 6.7% below July 2007’s reading of 92.8.
The index is a forward-looking indicator of housing sales, based on contracts signed during the month.
“This is more evidence that the housing market is still in a malaise,” said Michael Larson, a real estate analyst with Weiss Research.
Tighter lending standards have made it hard for buyers to get loans, which is hurting sales.
“Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings,” said NAR chief economist Lawrence Yuan.
The Midwest was the best performing region in July, with sales contracts up 2.8%. The index fell in the Northeast by 7.5% and in the West by 10.6%, while the South region was unchanged.
The July result was disappointing, according to Richard DeKaser, chief economist for National City Corp. but not unexpected. The index has held in a range between 83 and 89.4 over the past few months, but saw a sharp jump in June to 89.4.
The good news, according to DeKaser, is that the index has plateaued, indicating that a bottom in existing home sales may have been reached. And that bottom may mean that prices could stabilize in some areas, although at lower levels than they once were.
Bargains in areas of the country hard hit by the bust are drawing house hunters back into a few local markets, said Larson.
“We have seen sales pick up in some areas where homes are being basically liquidated for just about any price the sellers can get,” he said.
That could provide a boost to sales volume in the coming months.
Sales have been flat despite the fact that home prices are way down. The most recent S&P/Case-Shriller report found that home prices fell 15.4% nationally during the 12 months ended June 30.
“Pricing remains attractive, but the ability of home buyers to obtain financing has been made more difficult,” said DeKaser. “Lending standards had gotten increasingly tight.”
The weekend takeover of Fannie and Freddie, the two mortgage giants that were created to promote mortgage lending, should help. Funding costs for Fannie and Freddie will be significantly reduced, according to DeKaser, and those savings will be passed on to consumers.
Already interest rates have fallen to 5.88% from 6.26% a week earlier, according to Bankrate.com.
“We want to see if the mortgage rate decline stands,” said Larson. “That would help to stabilize things.”
The Pending Home Sales Index fell to 86.5, after gaining 5.8% in June, according to the National Association of Realtors (NAR). It now stands 6.7% below July 2007’s reading of 92.8.
The index is a forward-looking indicator of housing sales, based on contracts signed during the month.
“This is more evidence that the housing market is still in a malaise,” said Michael Larson, a real estate analyst with Weiss Research.
Tighter lending standards have made it hard for buyers to get loans, which is hurting sales.
“Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings,” said NAR chief economist Lawrence Yuan.
The Midwest was the best performing region in July, with sales contracts up 2.8%. The index fell in the Northeast by 7.5% and in the West by 10.6%, while the South region was unchanged.
The July result was disappointing, according to Richard DeKaser, chief economist for National City Corp. but not unexpected. The index has held in a range between 83 and 89.4 over the past few months, but saw a sharp jump in June to 89.4.
The good news, according to DeKaser, is that the index has plateaued, indicating that a bottom in existing home sales may have been reached. And that bottom may mean that prices could stabilize in some areas, although at lower levels than they once were.
Bargains in areas of the country hard hit by the bust are drawing house hunters back into a few local markets, said Larson.
“We have seen sales pick up in some areas where homes are being basically liquidated for just about any price the sellers can get,” he said.
That could provide a boost to sales volume in the coming months.
Sales have been flat despite the fact that home prices are way down. The most recent S&P/Case-Shriller report found that home prices fell 15.4% nationally during the 12 months ended June 30.
“Pricing remains attractive, but the ability of home buyers to obtain financing has been made more difficult,” said DeKaser. “Lending standards had gotten increasingly tight.”
The weekend takeover of Fannie and Freddie, the two mortgage giants that were created to promote mortgage lending, should help. Funding costs for Fannie and Freddie will be significantly reduced, according to DeKaser, and those savings will be passed on to consumers.
Already interest rates have fallen to 5.88% from 6.26% a week earlier, according to Bankrate.com.
“We want to see if the mortgage rate decline stands,” said Larson. “That would help to stabilize things.”
Friday, September 5, 2008
What Must Happen Before Real Estate Crash Ends?
Three years ago, the housing bubble burst. That set the stage for a pullback in new-home construction and consumer spending as home sales and prices began to fall. Many believe that at best we are only half way through the ‘housing correction’.
In spite of what you may have read or heard about the “unprecedented” decline in home prices, normal housing prices are still beyond the horizon. We are expecting to see many of the larger markets to bottom in 2010. There after we expect to experience a 3-5 year plateau before appreciation returns.
Here is why…
According to the latest data from the Census Bureau and the National Association of Realtors, median home prices in July equaled 3.6 times median household incomes. This may be down from the peak of four times incomes set back in 2005, but it is still far above the 2.9 times of the 1980s — when housing was more affordable and sales and construction grew at a steady pace.In the halcyon days of the early 1970s, when home sales and construction were at their peaks both in absolute terms and relative to the size of the population, the ratio of home prices to incomes was less than 2.5.
To get back to the average of the 1980s, home prices would have to fall another 20%, on average. Add another 10 percentage points decline for housing to be as affordable as it was in the 1970s.Of course, these ratios could be reached through a rise in household incomes. But this would take much longer, since incomes are growing less than 2% per year these days, owing to the drop in employment and the inability of workers to secure raises.
Simply put, the first step on the road to recovery is lower housing prices. We will know when they are low enough to be affordable when sales pick up and the inventory of unsold homes begins to decline.
In spite of what you may have read or heard about the “unprecedented” decline in home prices, normal housing prices are still beyond the horizon. We are expecting to see many of the larger markets to bottom in 2010. There after we expect to experience a 3-5 year plateau before appreciation returns.
Here is why…
According to the latest data from the Census Bureau and the National Association of Realtors, median home prices in July equaled 3.6 times median household incomes. This may be down from the peak of four times incomes set back in 2005, but it is still far above the 2.9 times of the 1980s — when housing was more affordable and sales and construction grew at a steady pace.In the halcyon days of the early 1970s, when home sales and construction were at their peaks both in absolute terms and relative to the size of the population, the ratio of home prices to incomes was less than 2.5.
To get back to the average of the 1980s, home prices would have to fall another 20%, on average. Add another 10 percentage points decline for housing to be as affordable as it was in the 1970s.Of course, these ratios could be reached through a rise in household incomes. But this would take much longer, since incomes are growing less than 2% per year these days, owing to the drop in employment and the inability of workers to secure raises.
Simply put, the first step on the road to recovery is lower housing prices. We will know when they are low enough to be affordable when sales pick up and the inventory of unsold homes begins to decline.
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