It's Friday... according to the Pres. we got 4 days before we "run out of money to pay our bills..." If this were true, I think the bond markets would be reacting with disfavor towards the U.S. Government issuing and we would see yields rising on interest rates as investors sold.
Point in fact the bond market is thriving, with yields reaching new lows. The 10 year is currently paying 2.85%.... this benchmark has paved a smooth path for the mortgage backed securities market which is currently up 20 ticks in early trading. I should emphasize early, we could see a sell off this afternoon as profit takers reap the rewards of a market that has reached yearly highs once again.
How this market is holding, scratch that, improving is something that sort of makes sense, but doesn't make any sense. As the equity markets bleed (approaching 12,000 on the DOW) investors are looking for safety, so they're running in flocks to the bond market. An interesting fact which could leave many burned if we get slapped with a down grade. Then again, the idea of a downgrade may be baked in (I don't really think this to be true) already. Probably not, but you never know, and if you honestly try and find a better long term safe investment where do you go in the world right now? It's on fire. So whether investors like it or not, MBS and Treasuries may be as good as it gets, and if that's the case better rates are coming in the short term.
Don't read this incorrectly. I still strongly believe higher interest rates are on their way, and when they hit, it's going to be with a vengeance. A locust invasion comes to mind. Get while the getting is good.
Friday, July 29, 2011
Thursday, July 28, 2011
Debt Ceiling a Downgrade and Mortgage Rates...
Obviously by the title of this post I am not going to be able to cover every intricate detail in regards to possible outcomes, but what I can share with you regarding this large area of concern investors have right now is half real.
Yes we are at a point where if the debt ceiling is not raised our government will run out of money because they continually spend more than they take in in revenue - namely taxes... Consequently for all the bells and whistles to continue and for the government to follow the business as usual course of action they are so comfortable with, the debt ceiling must be raised. Truth be told, there is no way we will be able to solve all of our fiscal problems without a debt ceiling increase, there simply is no time to work through and reform entitlements, and all the other social programs, along with discretionary spending before we run out of money.
With that said, our running into the debt ceiling is not the end of the world that the politicians are proclaiming, in fact our doing so should not mean an immediate default on our current obligations - a favorite talking point in both parties. What I love about financing is numbers don't lie, and the simple fact is we take in enough tax revenue each month (approximately 200 billion) to meet all our major obligations - interest on our debt 50 billion, social security 30 billion, medicare and medicaid 40 billion, military and disability pay 15 billion, let's estimate another 15 billion spent for good measure... add this up and we're left with 50 billion to spend on discretionary. This simple breakdown informs us that the major obligations will be met as long as our Treasury Secretary and the politicians he answers to make sure he pays the important bills first. Things that we will no longer be able to afford will most definitely have an impact on other areas of the government. Our troops will be paid, but their equipment might not be able to be maintained. All Michelle Obama's aids, they should disappear along with most of the staff our elected officials enjoy. Departments like the DOE, DOLR, EPA, State Department, along with others would see severe cuts in their expense accounts... in addition many private companies that depend on government contracts will suffer, so we will see carry over in the private sector should the government debt ceiling not be raised by 8/2.
With that said the debt ceiling not being raised, is not going to have the major impact on our economy that our government would like us to believe. Their power is generated by our (the people) believing that we need them if we want our lives to be better. The simple fact is we don't. True some national parks and monuments will be closed - but if they were to remain closed just because our disfunctional government told us they were, how long would it take before someone just cut the chain and started using the park as it was being used before the government put the lock on the door. Would everyone stop driving just because the DMV shut down and we didn't have the opportunity to enjoy standing in their line to take a terrible picture? Of course we are all worried about our retirement accounts, the stock markets, etc... Even with these things on our mind, it would appear as though the markets have baked in the possibility of the debt ceiling not being raised. If you look at trading over the last few weeks as the deadline looms closer and closer, it's business as usual in the stock market with gains and losses taking place daily. The bond market is still trading at near record lows (regarding yield). It is difficult to draw the conclusion (unless emotion comes into play) that the markets are truly concerned over the debt ceiling.
Of course in the background we have the ratings agencies and their poking the headlines with the fact that if the debt ceiling is not raised and the trajectory of our government's spending habits are not corrected we may face a downgrade. In fact even if the debt ceiling is raised there is a 50% chance that we see a downgrade. This is the real threat. A downgrade to our credit rating would have a substantial impact on our economy and have an immediate impact on the vast majority of Americans. Interest rates would spike and the cost of all debt (unless already locked into a fixed rate) would go up. That means everyone's credit card interest would increase, mortgage rates would go up, our Country would owe more in interest which would mean their needing additional revenue (and the only way those in DC know how to get it is by taxing), and we would find our typical cost of living costs increasing... Those that do not have the extra funds to pay would find themselves in more trouble, credit and obtaining it would tighten making lending more difficult... and the plot continues to thicken.
The threat of a downgrade is the real problem, and we need to make sure those in DC are working to resolve the real problem. Unfortunately the argument has been formed around the increasing the debt ceiling, and not about avoiding a credit downgrade. The assumption is as long as we can raise the debt ceiling we will not have a downgrade. Realistically this is not the case, and raising the debt ceiling and not making significant changes in our spending habits will most likely end in a downgrade. Dangerous water....
So what's this mean in relation to housing? Those locked into a fixed interest rate will be loving life... their payments will remain static while others are forced to make due in a shifting and more expensive market. As for the depressed real estate market and sales... I see home sales suffering and an addition dip in housing prices should future home sales deteriorate. We still have a large inventory of foreclosures, many are still underwater, and banks are not on stable ground yet... The stack of cards is teetering. The best solution is a strong foundation which begins with a fixed rate of interest.
Time will tell... I hope this can be avoided but I am concerned that we have missed the window of opportunity. Let's all hope our politicians can see the light and come to terms that appease the credit rating agencies and we can avoid a downgrade.
Yes we are at a point where if the debt ceiling is not raised our government will run out of money because they continually spend more than they take in in revenue - namely taxes... Consequently for all the bells and whistles to continue and for the government to follow the business as usual course of action they are so comfortable with, the debt ceiling must be raised. Truth be told, there is no way we will be able to solve all of our fiscal problems without a debt ceiling increase, there simply is no time to work through and reform entitlements, and all the other social programs, along with discretionary spending before we run out of money.
With that said, our running into the debt ceiling is not the end of the world that the politicians are proclaiming, in fact our doing so should not mean an immediate default on our current obligations - a favorite talking point in both parties. What I love about financing is numbers don't lie, and the simple fact is we take in enough tax revenue each month (approximately 200 billion) to meet all our major obligations - interest on our debt 50 billion, social security 30 billion, medicare and medicaid 40 billion, military and disability pay 15 billion, let's estimate another 15 billion spent for good measure... add this up and we're left with 50 billion to spend on discretionary. This simple breakdown informs us that the major obligations will be met as long as our Treasury Secretary and the politicians he answers to make sure he pays the important bills first. Things that we will no longer be able to afford will most definitely have an impact on other areas of the government. Our troops will be paid, but their equipment might not be able to be maintained. All Michelle Obama's aids, they should disappear along with most of the staff our elected officials enjoy. Departments like the DOE, DOLR, EPA, State Department, along with others would see severe cuts in their expense accounts... in addition many private companies that depend on government contracts will suffer, so we will see carry over in the private sector should the government debt ceiling not be raised by 8/2.
With that said the debt ceiling not being raised, is not going to have the major impact on our economy that our government would like us to believe. Their power is generated by our (the people) believing that we need them if we want our lives to be better. The simple fact is we don't. True some national parks and monuments will be closed - but if they were to remain closed just because our disfunctional government told us they were, how long would it take before someone just cut the chain and started using the park as it was being used before the government put the lock on the door. Would everyone stop driving just because the DMV shut down and we didn't have the opportunity to enjoy standing in their line to take a terrible picture? Of course we are all worried about our retirement accounts, the stock markets, etc... Even with these things on our mind, it would appear as though the markets have baked in the possibility of the debt ceiling not being raised. If you look at trading over the last few weeks as the deadline looms closer and closer, it's business as usual in the stock market with gains and losses taking place daily. The bond market is still trading at near record lows (regarding yield). It is difficult to draw the conclusion (unless emotion comes into play) that the markets are truly concerned over the debt ceiling.
Of course in the background we have the ratings agencies and their poking the headlines with the fact that if the debt ceiling is not raised and the trajectory of our government's spending habits are not corrected we may face a downgrade. In fact even if the debt ceiling is raised there is a 50% chance that we see a downgrade. This is the real threat. A downgrade to our credit rating would have a substantial impact on our economy and have an immediate impact on the vast majority of Americans. Interest rates would spike and the cost of all debt (unless already locked into a fixed rate) would go up. That means everyone's credit card interest would increase, mortgage rates would go up, our Country would owe more in interest which would mean their needing additional revenue (and the only way those in DC know how to get it is by taxing), and we would find our typical cost of living costs increasing... Those that do not have the extra funds to pay would find themselves in more trouble, credit and obtaining it would tighten making lending more difficult... and the plot continues to thicken.
The threat of a downgrade is the real problem, and we need to make sure those in DC are working to resolve the real problem. Unfortunately the argument has been formed around the increasing the debt ceiling, and not about avoiding a credit downgrade. The assumption is as long as we can raise the debt ceiling we will not have a downgrade. Realistically this is not the case, and raising the debt ceiling and not making significant changes in our spending habits will most likely end in a downgrade. Dangerous water....
So what's this mean in relation to housing? Those locked into a fixed interest rate will be loving life... their payments will remain static while others are forced to make due in a shifting and more expensive market. As for the depressed real estate market and sales... I see home sales suffering and an addition dip in housing prices should future home sales deteriorate. We still have a large inventory of foreclosures, many are still underwater, and banks are not on stable ground yet... The stack of cards is teetering. The best solution is a strong foundation which begins with a fixed rate of interest.
Time will tell... I hope this can be avoided but I am concerned that we have missed the window of opportunity. Let's all hope our politicians can see the light and come to terms that appease the credit rating agencies and we can avoid a downgrade.
Wednesday, July 27, 2011
Back With a Passion
Okay okay... I've been hearing it from many people, what happened to the blog? With this being my official "back in action" post I think it makes sense to open with a a short explanation regarding my absence over the last few months.
As is true with most front page news, the media has done an exceptional job keeping an incredible story from breaking and becoming national cover. Namely the fundamental changes that were made to the real estate finance industry due to the passage of the Dodd Frank Bill some time ago.
Last April 1, (a cruel joke that it was implemented on April Fools but is in fact law) 2011 new compensation rules went into effect that created specific parameters in which the originating loan officer could be compensated for the work performed when securing a home loan for a client.
The new rule, designed in the favor of large institutions essentially creates two boxes from which the borrower can choose from: lender paid compensation, and borrower paid compensation.
Lender Paid Compensation requires that the originating agent determine before your transaction begins with the lender what their compensation will be for all loans that will be originated in the future. Once this fee for service is determined, it cannot change even if everyone involved with the transaction agrees/wants the fee to change. In addition the borrower is not allowed to pay any portion of the fee collected by the loan originator. the idea behind this is that everyone should have to pay the same amount as everyone else - that is after all what's "fair." Of course there is nothing fair about the real world, a cruel truth proven by the fact that the borrower and loan originator no longer have the ability to determine the fee structure between themselves - that choice has been removed in the lender paid compensation model.
Borrower Paid Compensation works differently. The borrower and and loan officer have the ability to negotiate the fee for service collected at closing know as the origination fee, however if this compensation model is chosen, the lender is prohibited from paying any portion of the origination fee with any credit generated from the agreed upon interest rate. In other words, third party charges can be paid for with the credit, but the loan originators fee for service must be paid in full by the borrower either in cash brought to the table or with equity out of the refinance. In addition if this compensation model is selected, the loan officer cannot directly collect any portion of the origination, their compensation for the work completed must come from either a salary, or an hourly wage their company is paying them. This requirement makes it mandatory for any lending institution that wants to offer the borrower paid model makes all their loan officers W2 employees, which increases the cost of overhead and operating expenses making the cost of closing more expensive (starting to see why this legislation benefits the big banks). While doing so, it removes the incentive for the loan officer to work to reduce your cost of closing because they get paid regarding of whether you choose to close the loan or not (remember they're getting paid an hourly or salary as the wage), and will be told by management what the origination fee must be if a borrower chooses that compensation model.
In addition the regulations now required to operate and the red tape that must be cut through has become a close to insurmountable task. The end result is most loan officers and even some lending institutions have determined it simply doesn't make sense operating in such an environment. With the additional costs and regulations experienced loan officers are leaving the industry, and being replaced with "order takers" trained to a bare minimum, unfamiliar with the history of our industry and real responsibility of a loan officer - namely securing the best possible terms for their clients. It has become, this is what is available and the cost, take it or leave it.
I was unwilling to accept this as my fate, and knew there had to be a better solution for my clients. The end result was my opening a new brokerage. My new brokerage, Culture Mortgage, currently offers both lender paid and borrower paid compensation models, something most brokerages do not offer because of the new requirements. In addition I have aligned myself with lenders and arranged my lender paid compensation to be in the lowest tier possible, which means you get the best possible terms.
In the coming weeks, this blog is going to be reactivated and you will again see regular posts from me regarding market direction and changes going on within our industry. What I broke down above has had and will continue to have a profound impact on the real estate market. If you would like additional details, and there are many about this post your comments or send me a personal email.
It's good to be back.
As is true with most front page news, the media has done an exceptional job keeping an incredible story from breaking and becoming national cover. Namely the fundamental changes that were made to the real estate finance industry due to the passage of the Dodd Frank Bill some time ago.
Last April 1, (a cruel joke that it was implemented on April Fools but is in fact law) 2011 new compensation rules went into effect that created specific parameters in which the originating loan officer could be compensated for the work performed when securing a home loan for a client.
The new rule, designed in the favor of large institutions essentially creates two boxes from which the borrower can choose from: lender paid compensation, and borrower paid compensation.
Lender Paid Compensation requires that the originating agent determine before your transaction begins with the lender what their compensation will be for all loans that will be originated in the future. Once this fee for service is determined, it cannot change even if everyone involved with the transaction agrees/wants the fee to change. In addition the borrower is not allowed to pay any portion of the fee collected by the loan originator. the idea behind this is that everyone should have to pay the same amount as everyone else - that is after all what's "fair." Of course there is nothing fair about the real world, a cruel truth proven by the fact that the borrower and loan originator no longer have the ability to determine the fee structure between themselves - that choice has been removed in the lender paid compensation model.
Borrower Paid Compensation works differently. The borrower and and loan officer have the ability to negotiate the fee for service collected at closing know as the origination fee, however if this compensation model is chosen, the lender is prohibited from paying any portion of the origination fee with any credit generated from the agreed upon interest rate. In other words, third party charges can be paid for with the credit, but the loan originators fee for service must be paid in full by the borrower either in cash brought to the table or with equity out of the refinance. In addition if this compensation model is selected, the loan officer cannot directly collect any portion of the origination, their compensation for the work completed must come from either a salary, or an hourly wage their company is paying them. This requirement makes it mandatory for any lending institution that wants to offer the borrower paid model makes all their loan officers W2 employees, which increases the cost of overhead and operating expenses making the cost of closing more expensive (starting to see why this legislation benefits the big banks). While doing so, it removes the incentive for the loan officer to work to reduce your cost of closing because they get paid regarding of whether you choose to close the loan or not (remember they're getting paid an hourly or salary as the wage), and will be told by management what the origination fee must be if a borrower chooses that compensation model.
In addition the regulations now required to operate and the red tape that must be cut through has become a close to insurmountable task. The end result is most loan officers and even some lending institutions have determined it simply doesn't make sense operating in such an environment. With the additional costs and regulations experienced loan officers are leaving the industry, and being replaced with "order takers" trained to a bare minimum, unfamiliar with the history of our industry and real responsibility of a loan officer - namely securing the best possible terms for their clients. It has become, this is what is available and the cost, take it or leave it.
I was unwilling to accept this as my fate, and knew there had to be a better solution for my clients. The end result was my opening a new brokerage. My new brokerage, Culture Mortgage, currently offers both lender paid and borrower paid compensation models, something most brokerages do not offer because of the new requirements. In addition I have aligned myself with lenders and arranged my lender paid compensation to be in the lowest tier possible, which means you get the best possible terms.
In the coming weeks, this blog is going to be reactivated and you will again see regular posts from me regarding market direction and changes going on within our industry. What I broke down above has had and will continue to have a profound impact on the real estate market. If you would like additional details, and there are many about this post your comments or send me a personal email.
It's good to be back.
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