Joseph-Brady.com

The Fed: Cutting the federal-funds target rate, September 18th, 2007: What events have led to this…

The much anticipated day has finally arrived, September 18th, when the Fed made the decision to cut the federal-funds target rate by 50 basis points as well as the discount rate by 50 basis points. The move was a bit stronger then expected. What has led to this? Why has this been somewhat expected and deemed necessary? The summer of 2007 is one that nobody in the mortgage industry will forget. Firms shut down literally overnight, locks were not honored, and rates increased dramatically.
        I witnessed this first hand after attending a seminar put on by ABC, American Brokers Conduit, a conduit for American Home Mortgage, at which Greg Frost was speaking. It was a great seminar and very informative, I walked out with greater knowledge of how to increase business and, of course, a few ABC knick-knacks they handed out. Only 2 weeks later they shut their doors practically overnight, no loans in our pipeline could go through ABC anymore. I still have the leather planner with the ABC logo they gave me at the seminar, always to remind me of the mortgage industry troubles I experienced first hand this summer.
        What has been deemed the ‘liquidation crisis,’ or ‘subprime meltdown’ in the US, reached a global level this summer. It began as a Wall Street risk adjustment for subprime loans as they were determined to be highly risky because of increased default risk. Government banks were forced to inject billions of dollars into economies to ease the worry of tight credit. Also, the Fed ‘opened the discount window’ for the first time since September 11^th, 2001, that is how serious this credit problem became. So exactly 6 years and 1 week after the events of September 11^th spurred a recession, the Fed has deemed the worsened economy worthy of a bold 50 basis point rate cut. This proves an interesting comparison attesting to cyclical economies.
        But what actually caused the ‘subprime meltdown?’ In reality it can be traced back to the booming housing markets. These markets were saturated with mortgage brokers who did not know their trade. People were being placed in high risk loans, option ARMs, Neg Ams, and loan amounts above what their income should allow. Many borrowers were not aware that their payments may jump dramatically in future years. However, at the time there were no problems because homes were appreciating at a greater rate than people’s principal or interest payments were increasing. While things were good, almost anyone could get the loan they wanted, until most recently home appreciation slowed or even declined short term in some markets. The decrease in home equity caused a higher risk to those subprime borrowers as they ultimately began defaulting. This is were the default risk adjustment was made by Wall Street, or the mortgaged backed securities, as they realized the increased risk from these subprime loans.
        Now that the underbelly of the ‘liquidation crisis’ is revealed, the Fed’s actions can be analyzed as one of the ways in which they seek to monetarily control the economy.  All of ‘opening the discount window,’ lowering the federal funds target rate, and buying or selling treasuries are three ways in which the Fed uses its controls. This summer all three were enacted, lastly with the reduction of the federal funds target rate.  The action, contrary to a standard misconception, is just a target that the Fed seeks to achieve and not an actual rate that they lower.  However, this action will hopefully ease this tight credit market and enable businesses to gain currency easier and be more liquid.  So did the Fed make a good decision? In my opinion they made a necessary decision in order to help the troubled credit market and the slipping economy. I believe that in the future things will still continue to economically decline, particularly the value of the dollar, which is continuing to slip.  However, the strong global economy will actually help the US during this time of slight economic downturn.

By, Joe Brady

The changing Philadelphia mortgage industry: Mortgage Firm Restructuring

An exact reversal of action, or restructuring, is taking place in this post-boom Philadelphia and national housing market. Large Philadelphia companies began acquiring many mortgage lenders and increasing employees when times had been good. And why not? Times were good and the mortgage industry was bringing in large cash flows. But times have changed. What began as employee expansion and a bright future for mortgage companies 2-3 years ago has now reversed. Firms are now selling off (if possible) or closing subprime divisions and laying off employees. In an article entitled “Wall St. losing subprime lenders” in the Philadelphia Inquirer, 1,200 people lost their jobs in light of Lehman Brothers Holdings, Inc. closing its subprime unit, BNC Mortgage L.L.C. This is just one example of corporations attempting to separate themselves from the subprime market. On Wall Street, any separation from the risk of subprime has led to an increase in company valuation. The list of companies who made moves to acquire mortgage firms in the past years includes Merrill Lynch, Bear Sterns, Morgan Stanley, Credit Suisse, Barclays, and Deutsche Bank. Now each company is struggling to separate itself from subprime and cut their loses.

The post-boom housing market has also begun to slash the number of M&As, mergers-and-acquisitions, which had been booming since 2003. In a September 6^th Wall Street Journal article, Robert Kindler, vice chairman of Morgan Stanley, states that he “would not be surprised if deal volume is down 20% to 30% next year.” This is an abruptly different change in momentum as M&As had been $579 billion in July and now only $222 in August, and are expected to continue this decline into next year. Where did this slip in the M&As market originate from? It all stems from the mortgage meltdown and the high cost of money. With companies struggling to finance M&As and large banks focusing on staying liquid, money is being sopped up in different aspects of the economy and not permitting easy M&As. Not to say that there won’t be any, but the volume will be greatly reduced.

In light of these effects from the ‘liquidation crisis,’ credit is expected to remain tight going into next year. News from the Fed is still greatly anticipated come September 18^th as to where rates are heading. (I would expect a 25 basis point rate cut in hopes to ease the credit problems) Now the markets are really seeing a reversal of character as once M&A booms are now being reversed with cutbacks, layoffs, and an effort to disassociate with subprime mortgages. Now leading to a consolidated Philadelphia mortgage marketplace, with only those truly knowledgeable left in the industry.

By, Joe Brady

Countrywide in Trouble: how will this affect you?

Countrywide is in serious trouble! As the largest U.S. mortgage lender by volume, their problem is your problem. You may ask yourself how Countrywide’s problems may impact you, and why are they in trouble? By now everyone should be aware of the mortgage problems that have escalated recently. Things have not looked good as many lenders have gone belly up because of what began as a Wall Street ‘risk-adjustment.’ Initially this affected only the subprime mortgages, but then seeped through the whole industry, resulting in the Fed’s action to liquefy markets by injecting billions of dollars. This is particularly eminent now as Countrywide had to draw down $11.5 billion in order to increase their liquidity. On top of that, Merrill Lynch just downgraded Countrywide and their stock has plummeted roughly 30% over the past week. Not a good sign for the leader in the mortgage industry. But how does this affect you?

Well, Countrywide is to the mortgage industry as Coke and Pepsi would be to the soft drink industry. If you are craving that Coke or Pepsi product and they are having major liquidity problems, as Countrywide is, you may see your favorite products (maybe Sprite or Mountain Dew) disappear. It is the same with Countrywide, except their products consist of an assortment of loan programs. Due to these troubles, you may not be able to get that program you qualified for, a much more serious consequence as you may not be able to receive funding now. They are cutting those programs which are risky or are not backed by a select few. The next logical question may be which programs are being cut? I love my Mountain Dew and wouldn’t want to see that gone. Countrywide is now focusing solely on Fannie Mae and Freddie Mac loans, leaving all those who do not meet those guidelines out of luck. They are expecting that in the coming months, 90% of loans issued will be sold to Fannie Mae, Freddie Mac, or meet the criteria of Countrywide Bank.

So does this affect you? Yes it does. It affects the economy, markets, and anyone seeking a loan. However, there is solace somewhere in this mess. For those that are in search of traditional financing and have the money to do so will not be affected as greatly as those looking for 90-100% financing. Now more than ever a mortgage professional is needed to help you find the right program. So keep your eye on the market and don’t panic, yet…

 

By, Joe Brady

Philadelphia market conditions encourage rent-to-own

        As homes in the Philadelphia area are staying on the market longer, many sellers are turning to rent-to-own agreements. An article in the Philadelphia Inquirer titled Market forces change, by Joanne Cleaver, takes a look at a couple who spent $100,000 in remodeling their home, only to be forced to mark-down their asking price from $475,000 to $439,000. Now they are forced to look at rent-to-own agreements because they’d rather do that then lower their price further. Their reasoning? "It's like the stock market: You don't sell at the bottom," says the seller.

The question therefore begs, what are rent-to-own agreements and are they really beneficial to both parties? I prefer to call these rent-to-own contracts lease-options, as they give the buyer a ‘lease’ with the ‘option’ to purchase at a given point in time (but this is just a technicality in language that I prefer to use). The basic benefits for the buyer are as follows:

1. they can get in the home they want with little out of their pocket
2. gives a sense of hopeful future ownership
3. lock in purchase price
4. chance to repair past credit problems and qualify for appropriate funding in the      future

Benefits for seller:

           1.  quick transformation of equity to cash
     2. alternative option to lowering your selling price
     3.   great incentive for tenant to maintain property
     4.  calculated rate of return with little market risk

Described above is a brief overview of the benefits for traditional lease options. However, here at World Wide Credit, we have been advising REALTORs on how to create a market through the use of lease options, and still get paid. Typically real estate agents shy away from lease options because there is no reward. The premise of the lease options program involves matching up investors/sellers with potential lease options clients. With the current market conditions in Philadelphia and around the country, this different type of real estate may emerge as a practical alternative for REALTORs. Specific to this topic, we presented an audio and visual ‘webinar’ that had great response. For a copy of the presentation please feel free contact me.

So is the seller in the article doing the right thing? In their situation, it would make perfect sense. They are sticking to their claim and not “selling at the bottom.” This is just an example of the changing marketplace and how lease options may soon become the most viable option for sellers who cannot sell at the price they want.

By, Joe Brady

Philadelphia Mortgage Rates Report: Monday August 13th, 2007 (1:00 pm EST) – Neutral to Locking

In response to a stabilizing global market, bond prices have moved slightly higher early this morning. Amidst last weeks rush to liquidate credit markets, the ECB has now injected $278.9 billion, with $65 billion today. The Japanese were also active as they pumped $5 billion into Japan’s money markets. These bold and abrupt actions have eased liquidation fears as European stocks begin to move higher throughout the day. This is expected to spillover in the US markets as well, easing the downward stock pressure of last week. Also providing market confidence is Goldman Sachs.  Early this morning they acknowledged a significant loss of value in their Global Equity Opportunities fund and are now placing an additional investment of $3 billion into the fund (with the aid of outsiders) as a show of confidence and step toward adding liquidity.

With the potentially market rebound, bond prices are expecting to decline slightly as money moves out of bonds and into stocks. A neutral to locking position is therefore strongly advised. But, when in doubt, lock.

The changing credit markets are putting some pressure on the Fed and stirring much debate on whether or not interest rates should be cut. There is an increase concern of inflation with this monetary injection into the markets; however, also an ongoing unease with the sub-prime mortgage problems throughout the economy. The debate falls as to whether or not a rate cut and ‘bailout’ for risky investors should take place. This leaves much to question and an anticipation for the Fed’s next move on September 18^th.

By, Joe Brady

 

Mortgage rates: industry wide shake-up

Last Thursday the mortgage lending industry was hit with a shockingly abrupt rate increase due to a Wall Street “risk-adjustment.” This risk adjustment translated into across the board rate increases, particularly on non-conforming and non-A paper loans. What is this risk-adjustment and how does it affect mortgages at a consumer level? The answer is buried under a selling and buying cycle among Wall Street and lending. Basically, Wall Street has now accounted for the increased mortgage defaults and continuing housing slump; resulting in an allocation of additional interest points needed to compensate for this higher risk. For a different take and more in-depth explanation of the recent changes, check out what Brian Brady has to say.

However, as a home buyer or owner, the daunting news may not affect you as much as you think. For some larger loans there may be additional dollars spent on higher interest rates as expected. But the fact of the matter remains; if you are looking for a loan you can still get reasonable pricing, the work falls on the mortgage planner finding the correct program for you amidst the industry’s consolidation. Many programs are still viable options for those with mediocre or low credit, including FHA, which many people have turned to since the tightening of the subprime market. 

There are many benefits to an FHA loan, particularly for people with low or no credit scores. For a little background on FHA, this program has been around since 1934 and was a result of the Great Depression. The Federal Housing Administration (FHA) wanted to encourage home ownership at a time when many people were laid off and had to put down about 50% on a note that would balloon in later years. Doesn’t sound too appealing, and that’s where FHA stepped in. Now at this rocky time in the industry, it just makes sense that more people would turn to FHA. However, there are still some misconceptions, one that FHA has a hand in the loan process. This is incorrect, all FHA does is insure loans made by FHA-approved lenders. Lenders are therefore glad to give FHA loans because they are fully insured in the event of default. The best part about the FHA agency is that it is the only government entity that does not cost taxpayers money; it runs solely from its own income. So if you think you cannot qualify with little or no credit, think again with an FHA loan.

Also there may be an increase in Fannie Mae and Freddie Mac loan amounts, particularly important in higher cost housing markets. As reported in an article from the Wall Street Journal, the Senate Banking Committee is calling for this increase in loan amounts. This would allow people to get loans easier, especially here in the San Diego market where many home loans are well above the conforming limit. 100% financing programs are still available for people with good credit and the ability to make payments.

So, despite hesitations that may be well warranted, this is not the time to panic or shun away from getting that loan you want. All you have to do is talk to the right person who is willing to put in the time and effort to get you the loan you want. Good luck!

By, Joe Brady