The Fed will be cutting rates in a week and a half. It is what it is. There is no real reason that they shouldn't. If they were going to make a stand, they should have done that two cuts ago.
Goldman Sachs see rates reaching 3% within the next 12 months, which would be 1.5% lower than it currently is. What will this mean.
Continued downward pressure on the dollar.
Higher oil mostly due to the lower dollar.
Even though cutting is trying to give a kick in the pants to the economy to get everything jump started, I think you will continue to see a malaise in housing and business spending.
I think the bull has just run out of gas and no matter how you beat it, it just won't run. But I'm not going bearish either. I have a feeling that the cuts will be enough to avoid the fetal position in the economy and will avoid a recession overall. But don't expect to go anywhere, fast.
My impression. What do you think?
Thursday, November 29, 2007
The Fed will be cutting rates in a week and a half. It is what it is. There is no real reason that they shouldn't. If they were going to make a stand, they should have done that two cuts ago.
Posted by Mike Carpenter at 5:08 PM
Monday, November 26, 2007
I am a huge Cubs fan and our mantra is, "Wait 'til next year." We have been waiting for one hundred years now (just about 30 for me personally) but in the mortgage market, next year is shaping up to be absolutely horrid.
2008 is already turning into the year that we want to forget and it hasn't even started yet. Let's start with the obvious...2 million homeowners ARM loans adjust next year. Right now, about a third to a half of the loan applications that I am doing have ARM loans and are currently behind on their mortgage payments.
I have done more denials on these loans than I can ever remember. And really, there isn't one file that we have denied where I have thought, "We could have done that." Not one. Every situation has been one where the loan was going to foreclose at some point in the near future and it was just a matter of who the lender was at the end.
It is only going to get worse. Fannie and Freddie are facing serious liquidity issues that threaten to choke off the one constant source of funds through this crunch. I was in a conversation Friday where my Executive stated that by this time next year, if you want to refinance or by a home with less than 10% equity or down payment, it would have to be a FHA loan. That is truly sobering. And honestly, it wouldn't surprise me at all.
PMI companies are going to struggle to survive, if they even can with the wave of foreclosures coming.
And best of all, there is not a thing the Fed can really do to help it. Banks, lenders, credit unions, all of them have to hope that what is really coming, not just in home loans, that they are prepared. Most are not. You are going to see some more major consolidation in banking institutions as this shakes out over the next couple years.
If it gets as bad as it possibly could be, there will be a run on at least one major US bank. I would like for it to happen sometime in the first half of next year. I hope it doesn't happen. But I would not be surprised in the slightest.
Just wait until next year. 2007 is just the appetizer.
Posted by Mike Carpenter at 3:55 PM
Tuesday, November 20, 2007
Today was absolutely brutal for the two government sponsored enterprises (GSE). Freddie posted a much larger than expected loss for their third quarter and possible concerns about liquidity were raised about the company.
I have mentioned this before in multiple postings but it is worth saying again. You will a huge credit crunch if Fannie and/or Freddie start having liquidity issues. Well, obviously that day is here.
Look at Countrywide, one of my favorite targets, it was also just bashed because they use Freddie Mac as one of their main investors in their loans.
I have been discussing recently how Fannie specifically has been tightening their requirements going into 2008. I was worried at the time that Freddie would follow suit by adjusting interest rates based on credit score only for loans above 70% LTV's on 20 & 30 year fixed rate mortgages. Freddie announced that the exact same changes, starting on the same date as Fannie.
But instead of complaining about all this. How do you position Fannie Mae and Freddie Mac to meet their requirements set forth by Congress to provide liquidity, stability, and ability to fulfill the American Dream? Here are some of my ideas.
1) 100% financing needs to be a thing of the past. As of right now. It is too much risk for these companies. It is too easy for a borrower who has fallen behind on the mortgage or knowing that their home value has declined to just walk away. Why stay? Why try? What do they really have in the home? At 100% financing, a borrower cannot sell the home through traditional means (i.e real estate professionals) because they would have to bring money to the closing to sell the house. And that is why they bought the home at 100% to begin with.
I know that I would not be popular and I would cut a large number of potential buyers from the market, but it would be for a long term good.
97% max LTV on purchase and limited cash out refi's. No EA levels. The loan is approved or denied, otherwise, old school 5% down payment. I would be ok with EA level loans (higher rate loans) on homes with more built in equity.
2) Elimate interest only loans and 40 year mortgages. Unless there is substantial amount of down payment. I would put the max LTV for these at 75%.
3) I have no problems with ARMs, if used correctly. 3 year would be minimum initial teaser period.
4) Change how jumbo loans are determined. Why is it that for the MyCommunityMortgage & Home Possible loan, Fannie and Freddie are able to limit how much income you earn for where you live...but no matter where you live the highest loan you can get is $417,000?
I can tell you, where I live....$417,000 is an absolute monster of a house. In California, New York, Boston, it's nothing. Change this. My area, the jumbo limit should be somewhere around $250,000. If we get bigger than that we say, "That's a big loan." Sounds like a jumbo loan to me. But if I am in San Francisco, a $650,000 or higher, (I don't know that market) would be more acceptable. My point is that it should not be a one size fits all scenario.
5) Don't judge interest rates on credit scores. It is unfair at best. Discriminating at worst.
These are just some of my personal ideas. I haven't a clue what is required to dig these two behemoths out from their depths. But if things get worse...nobody is going to be able to qualify for a mortgage loan...boy that will be fun.
Posted by Mike Carpenter at 4:47 PM
Saturday, November 17, 2007
You would think that a company that has had accounting problems in the last few years, restating billions of dollars over a number of years, would be especially careful when they finally started reporting again right? And this would go double for a company that is a government sponsored enterprise that is highly regulated. Triple for a company that is in the middle of a housing crisis not seen since the early 1990's. I'm right...right?
Not right. Not even close.
Fannie Mae's stock (FNM) is at decade lows, partly after an article in Fortune magazine stated concerns that Fannie Mae was "camouflaging" loan losses. Fannie Mae called an emergency conference call to discuss their "technical accounting questions". Let's just say the call didn't go very well when investors openly questioned the company's executives about being truthful.
Now, I think most of this is overblown. But let's just say accounting isn't my strong suit. I do believe Fannie Mae is not trying to pull the wool over anyone's eyes. If there was a time to report significant losses, it would be now. Even for Fannie or Freddie who are supposed to be limited to exposure to most of these issues, write downs are expected. Fannie did write down and questions surfaced that it should be more.
I don't know what the real answer is. But it would be good for Fannie to be fully truthful in all it's dealings with investors, the government, and the public in general.
With all the changes happening, specifically at Fannie in regards to changing the rules regarding underwriting of their loans and now this...it's definitely not all rainbows and butterflies for Fannie. Which is really, really scary.
Monday, November 12, 2007
Wow, what a Monday. I didn't have to work today. I was paying thanks to those who fought for this country by not working. Seems wrong, I know. But I work at a credit union. What? Like I am going to force them to let me in.
But I did get to see a day where everything, and I mean everything was under selling pressure. Oil, gold, big techs, financials, foreign companies, the list went on and on. I guess it was not as bad as I make it sound. Companies like Johnson & Johnson, Proctor & Gamble, and others on the Dow, S&P, and Nasdaq. For the most part it was really split, but it seemed more gloomy than the numbers show.
Apple, Google, Rio Tinto, Citigroup, ExxonMobile, and I could keep going, all pushed lower. It just seems to me, that right now, we have already slipped off the ledge and we are holding on by our fingertips. I don't even remember seeing a cliff there!
Everything that had been keeping the market going forward, has reversed course, quickly. I have a bad feeling that tomorrow it will not be a sunshiny type day.
E-Trade (ETFC), lost 60% of it's value. A Citigroup analyst put their chances of being forced into Bankruptcy at 15%. The company rushed to dispute the rumor and said they are well capitalized. Who knows. E-Trade screwed up getting their nose into where it didn't belong, as discussed in this space before.
Scary, scary stuff. Where to put your money now. I mentioned two above JNJ and PG. I will throw in Colgate-Palmolive (CL), and keep with other companies such as PepsiCo, Coca-Cola, and McDonalds. We will see how the rest of this week shakes out. I may need to start making some changes to my portfolio if this continues.
Posted by Mike Carpenter at 5:07 PM
Saturday, November 10, 2007
Banks and techs led the way lower this week. I was able to avoid the issues in financials. I think those of you that read this know that by now. However, I was taken down in the tech area. My real life portfolio holds the cubes, QQQQ, which is major tech stocks. With the likes of Cisco Systems and Qualcomm both disappointing and being 2 of the top 5 holdings in the EFT, I took a beating there. I am now back to where I began in that EFT, even.
My portfolio here performed slightly better than the S&P. The S&P was down 3.34% this week. I ended up losing 1.34%. Four of my 10 stocks actually turned a profit this week, PepsiCo, Transocean, CocaCola, and my bigger winner of the week, Davita (DVA) with a gain of 2.1%. Yes, this was just the company rebounding from it's drubbing the previous week. But it is still a good sign that the stock could rebound in the face of a really ugly week.
And now the market is starting to really worry in earnest about the Holiday shopping season. It is now expected to be the worst in years. As a financial blogger and a parent I see two reasons for this:
1) Lack of disposable income with energy costs and food running higher than ever. Many are now trying to save their money instead of incurring more debt.
2) Lack of "must have" toys and items coupled with toy recalls that scare parents to death.
This week, for example, Toys R Us pulled the AquaDots toy off the shelves because the dots would release a date rape drug if ingested. And you guessed it, yours truly had bought an AquaDots toy for my oldest child for her birthday back in August. Thankfully, we ran out of dots a long time ago but we still find stray dots now, months later. It's scary and I really don't want to buy a lot of toys this year.
Oh yeah, and gas is expensive. And oh yeah, yeah, I still have to pay for food. And oh triple yeah, my wife wants a remote start for her car. It all adds up. Hopefully, the market turns in the next few weeks so Daddy can cash a little in for a nice surprise for everybody.
Posted by Mike Carpenter at 5:48 AM
Monday, November 5, 2007
Fannie Mae continues to tightening the noose around the mortgage lending market. While many lenders such as Countrywide and IndyMac are stating they want to write more conservative loans that meet Fannie and Freddie guidelines, Fannie Mae counters by changing and making sure that LESS people will be able to get a conventional financed loan.
Just last week, I detailed how a borrower who was pre-approved 6 months ago that now has a better credit score and $6 more per hour was turned down for a mortgage last week because of the changes that Fannie had made to their Flex products.
Now today Fannie Mae put out a lender announcement titled, "New Flow Business Pricing Requirements". So what the heck does that mean? Big changes to how the average loan for the average borrower is going to be priced. And it won't be less.
Starting March 1, 2008 a person that has a loan to value of over 70%, meaning less than 30% equity in the home) will have pricing adjustments if their credit scores fall into certain ranges. These adjustments start with credit score of 680 and less.
First, the average credit score in the country is between 660 and 679...so the average borrower will automatically have an adjustment to their interest rate unless they have lots of equity (not likely in declining markets) or do a 15 year mortgage or less (hope you like those higher payments).
How much can this affect the rate...expect to see the rates go up by .125 - .5% depending on the scores.
What really irritates me about this change is that pricing is solely based on credit scores. There are just so many issues that can arise that are outside of the individuals control that can affect the score. Divorce, sickness, death, mistakes on the report, can all have a material impact on the overall score. There are people who have never had a late payment in their life who have credit scores in the 660-679 range because A) They may carry higher debt loads or B) just might not have a long history of making payments. My opinion is that this change just sucks.
Be sure that Freddie will not be far behind in making changes to how they will price their loans too. Hopefully, it is not quite so arbitrary or idiotic.
It also makes me concerned that the PMI companies will also follow suit. Most PMI companies price the premiums solely off the credit score already, but knowing that Fannie is charging more gives the PMI companies free reign to do the same.
These changes make the modernizing of FHA lending all that more important. If these tightening measures continue, many well qualified borrowers will be turned away or pay well more than what they should be charged.
If you are looking at refinancing, look at doing it soon. It won't matter what the Fed does with the rates. It will just allow Fannie and Freddie to charge more.
Sunday, November 4, 2007
No, I'm not going to ignore it. DaVita Inc's (DVA) third quarter earnings missed estimates but even more concerning is that the company stated that they were uncertain about 4th quarter performance. They were so concerned about it, the company did not give specific guidance for the coming quarter.
Accordingly, the market sold off the stock. It sank 9% Friday. I have been doing this blog for a little over 3 months now and this is the largest one day drop for any of the stocks I have held. Not only that, this drop wasn't in reaction to other factors, such as RIG reacting to oil or ABX reacting to gold. This is a company specific issue.
So, what am I to do with the stock? Since I added the stock in mid September, it now has shown a loss of just over 1% with Friday's drubbing. I'm holding on to the stock for the time being but I am going to watch it's performance over the next few days closely. If it continues to fall (beyond what the overall market does), I am going to ditch the stock if it falls another 4%. I'll cap my loss at 5%.
You get many divergent advice on what to do with your stock holdings. Some say, buy and hold and only check your stocks once a year so you can re-balance your holdings. Others say you need to sell out of a losing stock to put your money to better use...which means you need to keep closer tabs on your portfolio.
What you need to do is somewhere in between. You purchase a stock as an investment, something you are going to hold, presumably forever. Think Berkshire Hathaway. But you have to have a game plan. For example, my plan with DVA is to limit my overall loss to the stock at 5%. If the stock had sold off and the company was more certain of their performance going forward, I may have given it more room to the downside.
But the same applies to the other direction. I held Las Vegas Sands for over a 50% gain. But I knew that the company was headed towards a fall. It was just too hot. It posted lower guidance for the third quarter and lost 15% over 2 days. I was out long before the fall. I sold out on September 24th, LVS has lost 11% since that time.
You need to keep the pulse of the companies you hold. I suggest if you own individual stocks...you need to check them at least once a week or so. Know when their quarterly earnings reports are coming out. Read a little bit about the company again before they report. And know what gain or loss you are comfortable with. Knowing what you are going to do and what risk level you are willing to take....that is more important than any advice that is given.
Saturday, November 3, 2007
Fannie Mae has always stated that they are all about promoting home ownership. But what I find strange is that for a company that is wanting to raise it's cap to be able to invest in more mortgages, they are certainly tightening the reins on their products.
Fannie Mae has touted the Home Stay initiative, even in statements to Congress. They claim that they have written 40,000 ARMs into prime loans using this program.
Fannie provides this information regarding the Home Stay Initiative
Point one discusses EA loans. EA stands for, "Expanded Approval". These loans are approvable loans, with higher interest rates. So a borrower may receive an Approve (best rate) or any of the three EA levels (each level higher means a higher rate) and still get the loan.
The second point discusses the Flex Products which allow higher loan to value purchases (low to no down payment) and what is called limited cash out refinance loans (balance of mortgage owed plus closing costs). The key is that they will continue to offer these loans to borrowers with good credit.
Now here is where it gets tricky. As of October 22, Fannie discontinued offering EA level II and III on 100% LTV refinances and purchases. And discontinued EA III pricing on 97% LTV loans. See a slight contradiction here? They say they want to help, while at the same time, cut the loan offerings to the very people that need it most.
Want a real life example? I had a member come in Friday and reapply with me. He had put an application in with me in April and was approved at 100% financing at an EA level III. He did not have bad credit, he had a limited history and his debt to income ratio was in the low 50's. He wasn't the best borrower in the world, but he really just didn't have the history to give a better rate to at that time. His pre-approval had expired and had finally found a home he was interested in purchasing. We did the application again.
He had continued paying his one credit line on time, so his credit score had improved by 20 points. And the job he was at, his pay was based on time at the job. He had just started in April as an apprentice. He had graduated and now made $6 per hour more than what he did six months ago. His debt to income ratio was now in the low 30's.
But when I ran the loan through, the findings came back as an EA-II loan, which for 100% financing was now ineligible for delivery to Fannie Mae. Let me rephrase this, a person who was approved 6 months ago and now had a better credit score and income, was now being denied.
He was shocked. I was embarrassed to have to give him the news. My underwriters wouldn't listen to my requests. I was given the answer, have him put 3% down and we can do the loan. My member didn't have 3% to put down or able to get a gift. He was shocked. I was embarrassed to have to give him the news.
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Thursday, November 1, 2007
I had worried a bit that the rate cut would be just the .25% that was expected and the market would be disappointed that the Fed didn't add more fuel to the flame. Initial action after the cut and remarks was negative and I thought to myself, "Boy am I smart or what? The market is upset that the cut wasn't more." Then we had a rally...and I knew that I am not nearly as smart as I like to think I am.
And yesterday's rally? It was wiped away, by about three times as much, today. News out of the financial sector continues to disappoint. Of all banks, Citi's liquidity was called into question today. Rumors that Merrill and many other banks may have to write down the value of their assets in the coming quarters should keep investors on edge for the near future.
Oil is continuing to soar. It looks like hitting $100 per barrel will happen within the next couple of weeks if current pressures continue.
And in the face of all this stands the Fed. The .25% cut was not unanimous. It was only called for by six of the regional banks. I think the Fed is starting to have a conscious. What a time to have one? Hello folks....you have already cut by .75%. Inflation in energy and food continues to rise, almost on a daily rate. The dollar buys less and less each day, which on exacerbates the prices for energy and food more.
What a mess. I have been saying for a while now, this is going to end badly. We are going to find ourselves in a situation where the only answer to the inflation issue, is to raise the rates to a point where no one will want to borrow any money. You think banks are felling the pinch now? Wait until you hear the wail from that sector when that day comes to fruition. How long can it be pushed off? Three years? Five years? We will all just wait and see. I hope I am not nearly as smart as I think I am.
Posted by Mike Carpenter at 4:13 PM