A Sacramento mortgage lender's vision

An analysis of the current bailout legislation indicates that the Fed will get new, unprecedented powers. Among other things, the Fed will pay interest on  money banks deposit with it.  This technique is hoped to offset the current lack of liquidity in the financial sector and "...enable[s] the Fed to have credit policy that's independent of its monetary policy," a professor of economics at Carnegie Mellon University said.

Meanwhile there is an all out war over the bill. Both Dems and Reps are fighting tooth and nail to get special interest items added to the bill, slowing it's progress further. In the public eye, the legislation has become unbelievably unpopular, viewed as a blank check bailout for Wall Street with no consideration for the taxpayer's money or mortgage.  Questioning the drivers of this freight train, some point to Sec Treas H. Paulson's career as a Wall Street moneymaker at such firms as Goldman Sachs or at Bernake's lack of experience and highly academic approach. Treasury bonds have reacted to all of this with the lowest yields versus inflation since F.D.R was president.

This article includes the Mark Twain qoute: "I am more concerned with the return of my money than the return on my money".

As predicted in my earlier post, Wachovia is no longer with us; Citi has stepped up to acquire it's deposits and bank infrastructure for the paltry sum of $2.16 billion, in a move very similar to JP Morgan Chase's acquisition of WaMu. Why would anyone be interested in a deal like this, in this market? Well, the assets that back these transactions are at their lowest value in history; a fraction of what they would have claimed even a 6 months ago. It is not that risky of a gamble; it is comparable to buying a house today for $200,000 and finding out on the title report that it last sold in 2005 for $450,000. 

Marking to market(taking tainted loans, securities and assets off the balance sheet and pricing&selling them at fair market value)- this philosophy is what will correct the credit crisis. Throwing more and more borrowed cash at the problem isn't.

Although this is a few days overdue, you must have heard that WaMu is now toast. The final nail in it's coffin was filing for Chapter 11 Bankruptcy protection yesterday.  You may have heard that JP Morgan Chase bought out WaMu, and this is correct in that Chase now owns all of WaMu's retail branches.  In other words they swooped in like vultures and left the rest of the carcass to rot, picking up a national franchise with thousands of branches and immensely strong brand name for just 1.9 billion.  If you have money in a WaMu account and you need access to it, withdraw it now. If things sour anymore on the liquidity of WaMu's assets, the FDIC could be forced to freeze everything, meaning it could take weeks to recover your deposit.  Hardcore technical analysis of the debacle by Bloomberg.

Wachovia will soon be repossessed by FDIC as profiteers watch from the sidelines, waiting to pick the carcass.This was pretty much telegraphed though, as earlier this year they acquired World Savings, an obvious poor assessment of the risk that was present in the mortgage portfolio(World Savings was the inventor of the Option ARM aka Negative Amortization loan back in the 80's and was the top lender for that product ever since.)

This week's damage apparently passed to CalHFA as well. A housing bulletin dated 9-22 dropped the following bombs:

No more interest only PLUS, 40-Year Fixed, or HomeChoice Program. No New BLOCK Forward Commitments. The following down payment assistance programs are killed as well: High Cost Area Home Purchase Assistance Program (HiCAP) and CalHFA Housing Assistance Program (CHAP). As a grand finale, interest rates on 30-Year Fixed Mortgages were raised to 6.750%.

This is possibly the worst policy CalHFA could have chosen, except for simply disappearing altogether. They do have commitments to Citibank and Countrywide who are the purchasers of their mortgages, and already Countrywide is a wrecked train and Citibank is starting to show cracks. Liquidity is a thing that can instantly cripple any financial institution at any time, no matter how long said institution has been around.  But even before this CalHFA loans were less than ideal for my clients, CalHFA takes forever to process the loan, and incredibly picky, there is 3 times as much paperwork and sellers tend to discriminate towards buyers with other loan types.  If your loan was locked and approved, you are good...otherwise you will need to obtain something like a USDA or VA loan.

Interestingly enough bonds were down today, on concerns that the new Federal Bailout wont happen fast enough. There continues to be mixed reactions to the proposed legislation, with loud opposition being voiced. Some want punitive taxes assessed on certain CEO's and employees of corporations viewed as responsible for this mess. Some are questioning the sweeping power, lack of transparency and non-accountability of the bill; and the Bush administration's motives for proposing it. Asking for unprecedented, unconstitutional emergency powers over the backdrop of crisis is a move distastefully familiar of the Bush Administrations actions concerning passage of the Patriot act and the Iraqi war. Time magazine stated that "In many legislators' minds, President George W. Bush has cried wolf one too many times." The Times article goes on to analyze in depth the massive conflict that is being waged on Capitol hill between the Reps and Dems.

Dollar is at a 1 month low versus Euro on bets that the Bailout will stall in political red tape.

Crude Oil is down as economy slows and consumption is reduced- precious metal futures are up on expectation the dollar will weaken further.

Our favorite Billionaire profiteer Warren Buffet has thrown his shoulder behind the bailout.

It appears that the bailout plan I wrote about has been increased. Latest information indicated that the bailout portion of the bill had ballooned to around 700-800 Billion and an additional 400 Billion was earmarked to shore up the troubled mutual fund industry (which has experienced massive depositor exodus in favor of safer assets). The method of raising this capital (a 6% or more increase in the National Debt) will be financed primarily by new auctions of treasury bonds.

This anticipated large increase in the supply of Tbills is playing havoc with all bonds; for once stocks agree seeming to be concerned with the deficit as well. Our currency, as expected took a steep nosedive on the news as foreign investors exited stage right. In depth financial analysis by Bloomberg of the subject.

A little more information was release by Sec Treas this morning concerning the exact method of the Bailout and how the funds would be used.

Most disturbing of all is a clause introduced in the legislation that does not allow oversight or court review of any actions or decisions by those releasing bailout funds, private contractors involved, or the end recipient of these funds. Nor does it allow after the fact lawsuits. I can't seem to find the article that mentioned this and I apologize; when I do it will be up.

This week has seen some of the heaviest damage to ever occur to bank, investment and finance companies in history. AIG, Merril Lynch, Lehman Bros, Wamu and other financial supports in various stages of collapse...for the blow by blow of these monumental events of the last few days I recommend the excellent article on Yahoo Finance The two weeks that changed Wall Street.

I wrote about some of this in my last post, of course. What has not been commented on is the new plan the Bush Administration has concocted, with Sec Treas Henry Paulson at the wheel. Announced on thursday, and further explained yesterday, the markets reacted predictably...with roaring approval. The Dow jumped near 1000 points on the news, and almost all bank stocks got a decent lift to their share price as well. The bizarre zero yield situation on 3 month Tbills I mentioned has completely reversed itself as bond traders rolled the dice on the new prospects for the economy and as money flooded back into equities.

Mr. Paulson when asked how much the plan would cost on Friday said only that it was "in the hundred billions". Today more concrete numbers were shocking...over 700 Billion is being requested just to start the program. What will these funds be used for? You may be shocked to know that they will be used to purchase subprime and other tainted securities from private corporations such as hedge funds, Goldman Sachs, and others. That is correct, the taxpayer will now be footing the bill for a system-wide epic bailout of Wall Street. Did I mention that the assistance will be in exchange for a Federal Government controlling interest in these companies, as happened with AIG and Fannie Freddie?

The bill would bar courts from reviewing actions taken under its authority. It would also raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion. That's $11,315,000,000,000.00. There is, however, a lot of opposition to the bill. Democrats are lobbying to include other bailouts on this bill...many groups are furious at the size and scope of the legislation. What is your opinion? Is this good or bad for the country?

It has been a little longer than normal since my last post...sorry about that, interest in refinance due to lowered rates has spiked and all of our workloads have increased!

From the not-so surprising news of Lehman brothers declaring bankruptcy on monday (no potential investor wanted any part of it) to the very surprising 100% U-turn in Federal Reserve policy on AIG, this has been a very intense week. Not to mention the fire sale of Merril Lynch to BofA or the near-zero yield of 3 month Tbills.

The AIG scenario is interesting because as late as the day prior to the Fed announcing their $85 Billion emergency bailout bridge loan, Sec of Treas had been quoted as saying no such thing would ever happen. The stock market, predictably, did not take this very well at all and the Dow lost quite a few points. Profiteers such as Warren Buffet are pleased however, they will be able to leverage their liquid wealth to take advantage of the fire sale of AIG's assets. Tuesday saw no change in Federal Reserve interest rates...disappointing some traders, but no surprise to those watching CBOT futures.

Treasury Movements For the last few months, Tbills have been being printed like crazy, which is pushing supply up and demand down, though the latter is tempered by the "flight to safety", where investors flee the stock market in favor of [relatively] safe government bonds. Most shockingly, we have seen the yield on 3 month Treasury Bills at almost zero, which is an unprecedented event. Why is this so disturbing? Well when you lend someone money, to profit, you need to charge a margin at more than the rate of inflation (which official numbers in August had this at 5.37%). 3 month Tbills are paying .01% of the current inflation rate. Essentially, a guaranteed loss. But perhaps smaller than the greater potential loss than such wonderful investments as Washington Mutual, who is struggling to keep their depositors from fleeing en masse, and today announced it was soliciting buyout bids. Ironic considering how good ol' WaMu ran around acquiring every banking company in sight for the last few years.

In other news, you should check out our home page, we've added our affiliation with Jim Wasserman and his SacBee real estate blog to the footer, added limited spanish language support and a dedicated CalPers/CalSTRS page, dedicated page for real estate investors, and many small cosmetic updates. Enjoy!

The rumblings of unrest in the financial markets earlier this week about Lehman Brothers, a heavyweight investment firm who was one the largest underwriters of securities during the last few years proved accurate.  Lehman Brothers has in recent days seen its stock price plummet as Korea Development Bank withdrew its interest in investing in the company.

At this moment Lehman Brothers is so undercapitalized they soliciting any and all bids for it's more choice assets which is evidence of a financial death sentence. Though there are some interesting parallels to the Bear Sterns debacle earlier this year(where the Fed loaned Chase Manhattan the funds to "rescue"), the attitude of Sec Treas Henry Paulson seems to be "hands off", with knowledgeable sources citing "political pressure" as staying the hand of the Gov, at least for the moment. Gee, let's see, we've seen the Fed bail out Countrywide, Bear Sterns, Fannie Mae AND Freddie Mac, 9 banks repossessed by FDIC...all in about 12 months...I can't see why anyone should be concerned about this....

According to the Chicago Board of Trade Fed Funds futures, the market is not expecting a cut in the Fed Funds rate, but the minutes from the next tuesday's meeting of the Fed should prove interesting, to say the least. My read of this thing at the moment is it will drive rates even further down on Monday as traders place bets the Fed and the Government will need to act again to save the economy.

More about Paulson's possible involvement And even more about the collapse of Lehman Bros (Yes I know, lots of Bloomberg links, but they are the industry standard)

Investors are gobbling up US Treasury bonds like candy.  The recent actions of the Government concerning Fannie/Freddie earlier this week that I wrote about have narrowed the spread between actual mortgage backed securities and treasury bonds, which has increased demand. Read more about it in this Bloomberg article.

With the recent increase of people looking to refinance down from the higher rates this year, I doubt we will see mortgage lenders loosening their credit standards. In fact, if demand increases I predict guidelines to tighten further as lenders will be facing overwhelming volume. I still can remember those 60 days about in 2007 where Underwriting divisions were talking 10, 12 14 days just to look at a loan file. Of course, this was caused by a pop in purchase activity combined with mass layoffs. Organizations like mortgage lenders do not handle large changes in volume well.

No matter how you slice it, rates are rock bottom right now. If my analysis is correct these are the lowest rates in about 3 years. If you bought with an FHA or VA loan even as early as 90 days ago, you may qualify for a rate reduction through a Streamline Refinance. Cool thing about that is you won't need to provide proof of income or assets, nor is there any money out of pocket, and best of all even if you owe more than you home is worth it doesn't matter, as no appraisal is required. Worth your time to check out.

CalHFA UPDATE: There has been little if any progress on the government side of things- We want to bring this to market, but us lenders have miles of red tape in the way.

Important message regarding FHA loans with downpayment assistance! Those in favor of Seller-Sponsored down payment assistance programs such as Nehemiah, Ameridream etc are well aware they will be outlawed at the end of the month! H. R. 6694 is a bill to REINSTATE these DPA programs. Add your voice to the fight and tell Congress these programs are necessary!

The Fannie/Freddie situation, as mentioned in my previous post, has moved through the foundations of the financial markets. Bond and MBS traders are placing bets that this latest Federal effort will not be enough to calm the storm and this is driving rates down; as of this writing the 30 year fixed rate is the lower than it has been all year.

It remains to be seen the full effects of this latest intervention. Only two things are clear at the moment- mortgage rates are now at a steep discount relative to where they were just a week or so ago, and nobody is sure how long it will last.

This situation was featured in today's Sacramento Bee, appearing with a few choice qoutes from our owner and president John Arvanitist. A selection from the piece:

Industry players, including John Arvanitis, president of Sunrise Vista Mortgage Corp. in Citrus Heights, said Monday that the federal government's move should calm the global financial markets.

[...]

Arvanitis said it's possible that lenders might also loosen standards that have been greatly tightened this year. That would expand the buyer pool and aid a recovery. But most interviewed Monday said it's too early to speculate.

In a semi-suprise move over the weekend, secretary Treasury Henry Palson used emergency authority to seize control of Fannie Mae and Freddie Mac. The market has reacted in a predictable way: bank stocks are up overall on hopes this action will provide much needed stability to the financial system as a whole; US treasury bonds yields have plummeted on concerns the damage to financial markets is worse than anticipated and that the Federal Reserve will be forced to cut rates again. The side effect of this is most shareholders were wiped out in the two companies: the US government now holds a share equal to about 80% in both Fannie and Freddie.

The immediate short term affect of the treasury bond actions has been a severe drop in rates. Mortgage rates are very aggressive right now; and if economic conditions hold this could continue. However, the market is so volatile that we continue to expect the unexpected.

One of our industry partners had this to say: