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Everyone, calm down

John Ford — Sat, 26 Apr 2008 15:30:04 +0000

Mortgage guy Lou Barnes sees much to like and dislike in the US economy. And, much to like and dislike in the press and financial markets.

Stop the panic; hold the sugar
Commentary: All now hangs on the real economy
By Lou Barnes, Inman News

Long-term mortgage rates this week stayed about where they were last week, close to post-January highs: 30-year-fixed mortgages were just above 6 percent, and the 10-year T-note was at 3.82 percent.

However, the situation is changing and thick with propaganda. The keys: the difference between a retreat from panic and return to health, and rising global inflation.

New claims for unemployment insurance topped again at 375,000 last week and this week fell back again to 342,000 — on edge, but on the right side of it. Stock market types were pleased at the stability in March orders for durable goods, and downright thrilled that Ford made a profit last quarter (silly: made $100 million, lost $15.3 billion in ‘07).

The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts “Fire!” in the theater. This week he predicted (again) a “30 percent decline in housing prices.” All of them, Robert? Uniformly? Average?

Do the math: if half the nation’s homes stay price-flat, the other half must fall 60 percent. Is that it? Or did you mean to say, “decline 30 percent in a few places?” Some individual projects are off more than 60 percent right now (a Florida condo or two, spots in Arizona and California), but the worst dozen mini-metro areas have yet to decline as much as 20 percent.

In authentic data, the Office of Federal Housing Enterprise Oversight found that home prices measured by appraisal and weighted by location (California more than North Dakota; New York more than Arizona and Nevada combined, for example) rose 0.6 percent from January to February. Sales of existing homes are sliding gently, but still moving at a 5 million annual clip rate. Sales of new homes are off 37 percent in the last year, down to a half-million, but that is good news — the less new inventory, the better.

Yelling “Fire!” is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long proclaiming the credit crunch is over or credit markets are improving is just irresponsible nonsense.

Distress is measured by interest-rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.7 percent to 2.36 percent, sensible as the Fed at 2.25 percent is about to pause its rate cuts (keep some dry powder, guys).

The Treasury/junk spread has contracted from no-market 8.6 percent to a merely disastrous 7 percent. Retail mortgages are still 2.5 percent above Treasuries, almost a point out of line, and there’s no real market for jumbos or any other securitized credit. Tax-exempt munis paid 1 percent over taxable Treasuries last month, and now pay the same — improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening.

All now hangs on the real economy. The financial fire is contained, but the system is terribly vulnerable if a real recession develops, and it has not yet: GDP growth here is probably still above zero. The consumer is in real trouble (the Reuters/University of Michigan confidence measure today fell to a 1982 low), but the big end of business feels no pain, pulled along by trash-dollar exports and wildly overheated Asian and emerging economies.

Lost in housing, “subprime” myopia and domestic navel-gazing is the global rise of terrible inflation, nothing like it since the 1970s. The $120 a barrel oil price will have its consequences. Here, wages capped by foreign competition, food and energy inflation are slowing the economy. But Asia and emerging economies are in a runaway spiral. Recent annualized figures show: China 9 percent, India 7 percent (doubled in six months), Philippines 6.9 percent, Vietnam 19.4 percent, Singapore 6.5 percent, Russia 12.7 percent, South Africa 9 percent, Saudi Arabia 8.7 percent (highest since the ‘82 oil spike).

There are only three antidotes: the mad good fortune of a commodity collapse, a central bank-induced slowdown, or the ultimate violence of a market-induced slowdown.

Global central bankers are cornered, best shown by the Bank of England’s meeting this week. United Kingdom GDP in the first quarter “grew” by 0.4 percent, mortgage approvals are down 50 percent in a year (reduced demand unmet by broken financial markets), but inflation is out of 3 percent bounds. What to do? The Bank of England voted 1-6-2 to cut its rate from 5.25 percent by 0.25 percent: one for deeper, six were in favor, and two opposed any cut.

The U.S. Federal Reserve meeting next week may look a lot like that.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

Credit crisis continues, comrades

John Ford — Fri, 18 Apr 2008 22:00:43 +0000

Worst part of credit crunch far from over

Commentary: Not enough capital exists to support current, new loans
By Lou Barnes, Inman News

Psychology on Wall Street changed completely this week, to economic optimism and concern for inflation, and assumption that the Fed is done with rate cuts or will be shortly. Low-fee fixed mortgages are 6.375 percent, jumping with all interest rates, long and short. The Fed-forecasting 2-year T-note has soared from 1.7 percent to 2.24 percent.

This week, “credit” appeared only in sentences including this clause: “The worst is over.” The worst probably is over for write-downs of the abysmal “structured securities” of the 2001-2007 era. However, euphoria at that prospect masks these things: the financial system is still too busted to function properly; credit is extremely scarce and expensive; the system is terribly vulnerable to recession-cycle credit loss ahead; and inflation here, there and everywhere is forcing global economic slowdown.

The loopy reply from the stock market: Business is great! Earnings are down but are headed up! Global trade will fix everything!

Let the data talk.

The opening line in the Fed’s April beige book: “Reports from the 12 Federal Reserve Districts indicate that economic conditions have weakened. …” In the Fed’s lexicon, a slow economy is “mixed,” one turning sour is “soft,” and one in trouble has weakened. The Fed does not use the term lightly.

Retail sales were 0.1 percent positive because of higher gasoline prices (ick), and industrial production upticked a 0.3 percent hair, capacity in use hanging at 80 percent stall-speed. New claims for unemployment insurance are also at an edge, about 375,000 weekly; extended claims rising near 3 million signal recession. CPI was OK: overall 0.3 percent, core 0.2 percent.

The Street’s party rests on good results at IBM, Google and Caterpillar, and coulda-been-worse financials: Merrill wrote down only $6.6 billion, Citi only $16 billion. Only.

Give the financials this: Despite the huge write-downs consuming most of the new capital raised by the two firms, their losses net of write-down were $1.96 billion and $5.11 billion, respectively, which means their current operations are making good money. In time they will re-capitalize themselves. In time for the economy?

The commentariat this week, even informed non-spinners, has announced “relaxing” of the Crunch, “normalization” beginning. They are partly correct, but not the part that matters to the economy. The Bear Stearns lesson is sinking in: No large institution will be allowed to fail, here or in Europe, or anywhere. Central banks will not allow it. So, big money fearful of that event has stopped its panicked buying of Treasurys (even gold), begun to unload, and up rates have gone.

Nevermind that they were worried about the wrong thing. The Crunch is still full-on: The spread between retail mortgages and the 10-year Treasury is still 2.5 percent, at least 0.8 percent out of line. Fixed-rates in the mid-sixes intercept housing recovery, eliminate the benefit of payment-reducing refis to crimped household budgets, and makes ARM-escape impossible. The jumbo loan market is still completely broken, and the new mini-jumbos are a high-priced joke. Issuance of securitized credit of all kinds is at standstill.

In the broad credit markets, Libor is the global mark for all short-term borrowing. The Wall Street Journal this week discovered the Libor-setting British Bankers’ Association had for months conspired to understate the wildly high true cost: Three-month dollar Libor is 2.91 percent today (really) versus 90-day T-bills at 1.43 percent, five times a normal 0.3 percent spread.

The Treasury/Libor spread (called the “TED” spread for ancient reasons, Treasury/Eurodollar) has always been considered a default-risk measure: ultra-safe Treasurys versus unsecured bank-to-bank loans. We know now that no one need fear a major institutional failure, and so the heart of the Crunch is coming clear: Libor is high-cost because loans are scarce. Same for mortgages. Pure supply/demand.

How can loans be scarce with the Fed hosing loans into banks? Because system capital is impaired. There isn’t enough capital to support current loans outstanding, let alone new ones. How the economy makes it through a slow, grinding recapitalization without adequate credit … that’s the question. That part of the worst is not over at all.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

Congress is hard at work to keep people in houses that they cannot afford.

John Ford — Fri, 11 Apr 2008 23:31:01 +0000

I couldn’t have put it better, myself.

Lou Barnes lists the problems facing the US economy and offers some suggestions on how to fix it.

Well, more so that he lays out the problems.

What he seems to be suggesting is one sure way NOT to fix it: Congressional plans that help homeowners put off the inevitable – foreclosure.

Americans to financial leaders: can you guys fix this please?

Commentary: Another week of credit crunch with no solutions

By Lou Barnes, Inman News

More news of a slowing economy today pushed money away from stocks and toward Treasury bonds, but in the routine since January, not to mortgages. The lowest-fee 30-year deals are still stuck just under 6 percent.

Today’s surprise was a big earnings miss and write-down at General Electric, which is disturbing because it indicates the slowdown spreading beyond finance and housing (although GE is an immense financial enterprise). The same contagion showed in the newest small-business index (the National Federation of Independent Business), which was down in March to the lowest reading since the second quarter of 1980. In the 28-year interval, unlike measures of consumer confidence, the NFIB has never recorded a false negative: every index downturn has coincided with recession.

Yet, the crucial indicator for the economy — jobs — has yet to break hard. Last week’s spike in new claims for unemployment insurance completely reversed this week.

The race is still on: will we get an effective public-policy response to the credit crunch before the economy fails, or after? Incredibly, now eight months into this, we are still very much alive — rattled and angry with one another, but alive. There is still time.

However, public-policy formation this week moved in reverse.

Alan Greenspan, 82, republican, was once regarded as the finest central banker of all time. Unlike any predecessor, since his retirement he has frequently offered economic and market commentary. While his commentary has not been particularly harmful, it also hasn’t been enlightening, either, and has served to undercut the authority of his successor.

Since the onset of the crunch, Greenspan has been consumed by an effort to defend his record, insisting that markets should be allowed to work unhindered, and regulators should not intercede in excess. This week he said that he did “not regret a single decision” as Chairman.

Although most of the criticism hurled at Greenspan is either mistaken or debatable (especially that he kept the Fed’s cost of money too low for too long from 2002-2004), his term marked the most colossal regulatory failure in American history, the failure to intercept the credit bubble.

Paul Volcker, 80, democrat, Federal Reserve Chairman from 1979-1987, six feet six inches tall, chewing a stogie always, brutal inflation-fighter, personal creator of the worst recession since the Depression (11 percent unemployment, 22 percent prime), no published memoir, no lucrative speaking tour, rose this week to criticize current Fed Chief Ben Bernanke. Volcker finds the Bear Stearns intervention a bad precedent, and feels the same for emergency financing of Wall Street dealers. Once revered for his courage, he revealed his inner one-track: punishment is good.

Great work, guys.

President Bush returned from Europe to focus on Iraq.

Congress is hard at work to keep people in houses that they cannot afford.

Bernanke has dark circles under his eyes, and seems to have lost weight.

Treasury Secretary Henry Paulson found the notes he misplaced last month. Too bad. “Those institutions that need capital should raise it.” One did: WaMu found some old Texas Savings & Loan sharpies who dumped $7 billion into the wreck, structured a deal that pretended not to control the institution, doubled the shares of stock outstanding (stockholders who had already lost 75 percent of value were “diluted” into loss of half of the remainder), and shut down all of WaMu’s mortgage offices and wholesale lending, firing 3,000 very able mortgage personnel in favor of yappers at a “call center.”

WaMu is in mothballs, embalmed until the sharpies find the moment to sell the branches and their deposits. “Capital raising” in the marketplace has permanently extinguished yet another source of credit.

In this leadership vacuum, the American people are confused, worried, and pissed off, which is the soul of good sense. Except in one respect: the economy is still alive! If we’re a little lucky, the people will tire of blame and pretend solutions, and begin to send out the word: “Would you guys get together and fix this, please?”

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

More home sellers stuck paying buyer's closing costs

John Ford — Mon, 10 Mar 2008 19:30:00 +0000

I have never had a buyer ask a seller to pay some or all of the closing costs on a loan. Doesn’t mean it can’t happen, especially in a slower market.

It can’t hurt to ask, right?

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Top concern: Will excess funds be returned or used elsewhere?

– By Jack Guttentag, Inman News

QUESTION: "The market is not doing well here and we agreed to pay up to $8,000 of the buyer's closing costs. Is there anything I can do to keep the amount as far below $8,000 as possible?"

ANSWER: At this point, no. If you agreed to pay "up to" $8,000 of the buyer's costs, you will almost surely end up paying $8,000 or very close to it. The reason is that any part of the $8,000 that is not needed to pay lender fees or third-party fees can be used to pay points that reduce the borrower's interest rate. If the excess isn't used to buy down the rate, it probably will end up in the pocket of the loan officer or mortgage broker. Where it will not end up is back with you.

It is common practice for home sellers to pay all or part of a buyer's mortgage settlement costs. Paying $308,000 for a house with the seller committed to paying $8,000 in settlement costs is better for a cash-short buyer than paying $300,000 without the commitment because it permits a larger loan and therefore requires less cash.

For example, assume the borrower is putting 10 percent down and settlement costs are $8,000. If the price is $300,000, the buyer needs cash equal to 10 percent of $300,000, which is $30,000, plus $8,000 in costs, which adds up to $38,000. When the price is $308,000, the buyer needs only 10 percent of $308,000, or $30,800.

For this to work, the appraiser must report that the house is worth $308,000, and the seller's contribution must fall within the lender's guidelines. Lenders restrict contributions based on how much the buyer is putting down. The common limit with 10 percent down is 3 percent of the price, so in my example the contribution would be an acceptable 2.6 percent.

I sometimes run into larger contributions that don't fall within lender guidelines, where the payment by the seller is made outside of closing so it can be concealed from the lender. Don't let anyone talk you into doing that; it is a fraud.

A seller should view a sale price of $308,000 combined with a commitment to pay up to $8,000 in costs as the equivalent of a price of $300,000. In states with transaction taxes, such as Pennsylvania, the tax would be a little larger on the higher price, but that is too small to worry about.

There is only one reason for a seller to select the higher price combined with a commitment to pay settlement costs, and that is to make the transaction feasible for a willing but cash-constrained borrower. If the buyer in my example can come up with $30,800 but not $38,000, the seller can make the deal work by raising the price and paying the costs.

The cash-constrained buyer who agrees to pay $308,000 to receive an $8,000 contribution should aim to use the $8,000 to pay lender fees and third-party charges, and use whatever is left to buy down the interest rate by paying points. For example, if fixed-dollar lender fees are $800 and third-party charges $2,200, the $5,000 remaining should buy down the rate on a 30-year fixed-rate mortgage of $277,200 (90 percent of $308,000) by about 0.75 percent.

But an avaricious loan provider can easily thwart this strategy unless the buyer knows how to protect himself. If the buyer is dealing with a mortgage broker, the $5,000 may end up in the broker's pocket as extra compensation. The buyer can protect himself against this by negotiating the broker's fee from all sources in advance, and putting it in writing. Upfront Mortgage Brokers (UMBs) do this as a matter of course. The broker will have no incentive not to pass through the lowest possible rate, and will also prevent any escalation of lender fees.

If the buyer is dealing with an avaricious loan officer (LO) employed by a lender, the $5,000 likely will be used to pay points, but the interest rate may not be any lower than it would have been without the payment. The LO might tell the buyer that the $5,000 bought down the rate from 6.25 percent to 5.5 percent, but 5.5 percent might be the correct rate without the payment!

If the LO is the sole custodian of price data, the buyer is at a severe disadvantage. Generic market price data, such as that published by Freddie Mac or Bankrate.com, is some help but not much. The buyer needs to know the price on his deal, and he needs to be able to monitor it until his own price is locked. The only way to do this is to access online sites that provide transaction-specific prices. The best of these are the sites of Upfront Mortgage Lenders, which are listed on my Web site.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com .

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Fire sale should knock down bailout resistance

John Ford — Sat, 08 Mar 2008 02:50:31 +0000

Lou Barnes basically says, get the government involved to stop the credit problem. Also, inflation is not a problem. (Perhaps, true – beyond gas prices, what else has gone up?)

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Commentary: Low point a signal that it’s time to recover

By Lou Barnes, Inman News

Mortgage rates spiked to 6.75 percent on Wednesday, only today sliding back into the 6.5 percent range (these rates with no loan fees). There is good reason to expect rates to fall back, and maybe a long way, but only in the context of effective intervention by federal authorities.

There is no sign of such intervention at the moment. However, developments soon ahead will attract the attention of officials preoccupied with market solutions, ordinary monetary operations, opposition to any form of “bailout,” wishful thinking, denial, or the view from any of several ivory towers.

This week marked the transition from a relatively orderly seven-month repricing of credit and reduction of leverage to fire sale — just plain panicked dumping. The Fed’s number one responsibility is orderly markets. Beyond inflation or economic growth or any other objective, orderly markets come first: Prevent at any cost a disorderly liquidation that leads to chain-reaction systemic failure.

The Fed has failed. As have the Treasury, Congress and the White House.

The spread between government-guaranteed (or effectively so) mortgage-backed securities and 10-year Treasurys reached an all-time, utterly non-economic 3 percent. The spread between AAA-rated municipal bonds and Treasurys is out of line by 2 percent. These and other credit markets this week for the most part ceased to function, the capital in the banking system effectively exhausted. Scott Simon of bond-giant Pimco, a calm sort whose remarks are usually limited to time and temperature, said, “Everything is telling you that the financial system is broken.”

The good news: I have believed since August that we would get to this place, and then obvious danger would overcome bailout resistance in both parties and the public. A financial accident would wake us up before grave damage would be done to the economy. We have all the tools crafted in the Depression, and in banking crises large and small since. These tools will work, and fast. A fire sale is a collapse of confidence, nothing-to-fear-but-fear-itself; confidence can be restored as fast as it left.

So what kind of accident will do the wake-up trick? The onset of credit-market fire sale is too technical for civilians, but they do get the stock market. The S&P 500 yesterday broke crucial support at 1,320; made a half-hearted rally this morning after job-market news that was awful but not disastrous; fell short; and has little “technical” support for about a thousand points. A meltdown like that will get the attention even of the stock market ya-yas so oblivious to this crisis since August.

The obvious onset of recession should have opened the door to federal action by now, but dissemblers have muddied the moment. Nothing like an honest-to-goodness stock-market crash to clarify the mind, with the S&P now at 1,283 and the Dow down 205. Even better: a morning when they ring the NYSE bell, but can’t open the market.

The top Pimco investment officer, Mohamed El-Erian, who was raided from Pimco by Harvard to run its gazillion-dollar endowment, then raided back by Pimco (the guy is hot), said: “A decision is going to have to be made to cross two lines in the sand: to use the government’s balance sheet, and to breach rights of property and contracts.” The only way to stop a credit fire sale is by government guarantee and outright purchase of illiquid assets; the contracts are mortgages to be reworked (I’m opposed to that foreclosure solution, but you can’t have everything.)

More good news: Everybody needs something not to worry about: Inflation is NOT a problem. Wage growth in the last year has been 3.7 percent, a half-point below inflation. Huge increases in energy and food costs are compressing spending on everything else, which is deflationary for everything else. Drop a brick with my name on it on the nearest stagflationist: You cannot have sustained inflation without a wage-price spiral.

And another thing: Stop worrying about the dollar. Europe is following us into recession, and as global demand falls, we’ll see whose currency is safe.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.