News Channel Mortgage

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Thus far, all indications seem to lead us to believe that the Federal Reserve can solve economic problems by throwing massive amounts of money at it. From lowering interest rates from 1 percent from 4.25 percent this year, to putting billions of dollars into the commercial paper markets in order to stimulating lending, to the $700 billion financial bailout that’s constantly shifted from a package aimed squarely at aiding struggling financial institutions to helping out consumer debt firms as well. With all of this money being tossed around and historic, unprecedented actions taken place, is there anything at all left that the Federal Reserve can do to stop us from going into a recession? According to Kansas City Federal Reserve President Thomas Hoenig, no, no there is not.

“The Fed has done about as much as it can do, we might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively.” If Hoenig is right on the mark with that statement, and the recession continues to worsen, then there isn’t much more that the Fed can do to help us out of it. If and when it comes to it, we’re just going to have to suck it up and continue to tighten the belt.

Unfortunately that certainly isn’t the answer that automakers in the U.S. want to hear. Talks between congressional Democrats and the Bush administration seemed to be bottoming out recently. Democrats in the Senate insisted that they’ll try and allocate a portion of the bailout to pay for loans to the industry, but talks have been ground out to a stalemate, and they don’t have the votes to do so without that support. Republicans, for their part, believe that the $25 billion loan should actually come from a loan program previously approved to help them develop more fuel-efficient vehicles.

That could change when Obama takes office, however. The Bush administration recently told top lawmakers that half of the $700 billion bailout fund will not go anywhere before Obama takes office. Treasury Secretary Henry Paulson will leave $350 billion left over for when Obama takes office and his administration will be able to decide how the rest of it should be spent. You can be sure that this could change the state of negotiations to have that portion of the bailout.

With the second largest economy in the world heading into an official recession as well, it’s probably best to start preparing yourself now. If things continue to get worse, there won’t be much that the Fed, or anyone, will be able to do to stop it from running it’s course.

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One of the terms that veterans of the stock market often use to describe buying patterns is ‘smart money.’ Smart money refers to buyers who are informed, intuitive, and quick enough to anticipate market trends before they actually occur. Conversely, the term ‘dumb’ money is the money from buyers who rush in after the boom occurs, and get stuck holding assets that are worth less than they paid for them in the first place. The relationship between smart money and dumb money is a natural part of any speculative market, and is as old as time. Ironically, a smart investor can easily become dumb money when the market turns against him.

Nowhere was this more evident than in the housing market. The problem with the housing market is that while it was a speculative market for many, a large amount of buyers simply regarded it in the same way that they would regard a car. The mindset of these buyers was that housing, like food and clothing, was a fundamental need. As a result, many of these people assumed that whatever price they were able to negotiate and afford for their house must have been a reasonable one. They planned on living in their houses for an extended period of time, perhaps even the life of the loan. Sure, they might occasionally withdraw equity from the house, but only in cases of need and importance: things like college tuition, home improvement, or paying down other debt. All of these seemed reasonable, since home values would always go up in the long run, right?

But even though the paradigm of rising home values is still intact over the long-term, no one had considered the possibility of a severe short-term decline in home values. Unfortunately, that is precisely what has happened over the last year and a half. Suddenly, a huge swath of people suddenly seemed like dumb money. What separates dumb money from smart money, of course, is the ability to react constructively and profitably to a negative situation.

So I spoke with a veteran real estate agent (of 30 years, no less!) last week, to get her opinion on what be smart money might be doing in these market conditions. In no uncertain terms, she said both herself and her colleagues believe that the market is not anywhere near its trough. A true rebound, she said, would only occur when prices dropped far enough that credit-worthy first-time buyers would feel comfortable making purchases. These would be the buyers who fit into the profile I mentioned above, who regard housing first as a necessity, and second as a long-term investment.

These people weren’t quite the same as the smart money I had in mind, so I clarified my line of questioning.

“The people with money to spend, who know how to spend it…what are they doing right now? Are they just waiting on the sidelines, or have they started to brave the waters again?”

With that definition, she immediately knew who I was referring to. She pointed me to a few recent statistics, conveniently located on a website she frequents.

“You’ll see that it shows a [5.5%] rise in existing-home sales, but an 11.5% drop in new-home sales,” she commented. “Now think about it…does that seem rational?”

Of course, those numbers, indicating a huge spread, do not seem reasonable in the least. I told her so.

She explained the discrepancy by saying that “What it means is you have banks who are just beyond desperate to get rid of these, and are willing to do so in any way they can.”

As she said this, I realized that I had my answer. “So smart money could be hedging the values on their own properties by swooping in on foreclosures and short sales.” Yes, I said it more as a statement than as a question.

She responded with a characteristically Midwestern aphorism (she is originally from Nebraska, I discovered). “I can’t say for sure, but I’m pretty sure. So take that and two dollars, and buy yourself a cup of coffee.” I took her advice, and took a walk to my neighborhood Starbucks that evening.

The next day I discovered during a meeting at my office that my manager was considering making a hedge play on her own real estate property. She lives in a three-bedroom condo about twenty minutes from Los Angeles (by my estimation, probably worth around $600,000), but shared with us that she was strongly considering buying either a house or a condo in San Diego.

Sometimes the difference between smart money and dumb money can simply be the ability to sense opportunity. As I said above, the long-term paradigm for home-ownership has not changed. Unlike tulips and tech-stocks, people will always need homes, and it logically follows that home values will always appreciate over the life of a mortgage. So when banks start accepting short-sales (as in low-ball) offers on homes, smart money sees a potential profit at a very low risk. It’s worth noting that these are not the flippers, who so famously created artificial levels of demand in the housing market that contributed to the bust we are all suffering through. These are shrewd individuals with high credit scores, who see a significant opportunity to improve their net worth over a long period of time.

It doesn’t mean that we’re in for a quick recovery. But that is logic you can’t argue with.

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Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

Economies worldwide are in recession and it’s getting worse. The momentum on the downside is too strong and the losses too pervasive to expect bailouts or interest-rate cuts to have more than a temporary effect. At best, government can slow down the rate of decline or perhaps delay a crash, but at a great future cost.

In the US, what started out as a housing problem in a few states has now become a full-fledged recession, with a majority of states (30) now in or dangerously close (19) to recession. The single exception is Alaska, according to Moody’s Economy.com.

Just in case you thought there might be a way out by moving to a state where prospects are better, it won’t work this time. Mark Zandi, chief economist at Economy.com told ABC News recently. “One of the unique features of this downturn is how broad-based it is regionally.”

Jobs

According to ADP’s National Employment Report released November 5, “Nonfarm private employment decreased by 157,000 jobs from September to October 2008 on a seasonally adjusted basis.” Keep in mind that the economy must create 150,000 jobs per month to absorb new entrants in the workforce. Friday’s official figures are expected to show unemployment at 6.1%.

October’s employment loss was driven by the goods-producing sector, which declined by 126,000 jobs, a 23rd consecutive monthly decline. The manufacturing sector lost another 85,000 jobs. These losses were compounded by a loss of service-related jobs, which fell by 31,000, the first loss in the service-providing sector since November 2002, according to ADP.

The estimated change in employment from August to September 2008 was revised down to a decrease of 26,000 from a decrease of 8,000. Not only is that quite the revision, but it’s an indication of what to expect when October’s figures are revised.

Service Sector

The Institute for Supply Management, a trade group of purchasing executives, said today its service-sector index suffered a sharper-than-expected drop to 44.4 in October from 50.2 in September. Consensus was 47.5; a reading below 50 signals contraction.

Auto Industry

GM, Chrysler and Ford—near bankruptcy due to a combination of poor management, slowing global growth and problems in credit markets, according to analysts—are looking for a government bailout.

However, problems aren’t confined to the US. Toyota slashed its profit forecast today, warning the global auto industry faces an “unprecedented” crisis. Other auto companies that have issued recent profit warnings are BMW, Nissan and Honda.

Construction

In October, construction employment dropped 45,000 jobs. This was its 23rd consecutive monthly decline, and brings the total loss of construction jobs to 455,000, off the peak in August 2006.

Consumer Sentiment

Rising unemployment, increases on food and fuel prices and falling property values have brought an end to the longest expansion in spending on record. In October, the Index of Consumer Sentiment was 57.6, a record 12.7 points below September’s 70.3 and 23.3 points below last October’s 80.9.
This month’s result was the largest monthly decline in consumer confidence in the history of the surveys. By mid-2008, consumer confidence had already declined more than in any prior recession and the steep October loss indicates that accelerated cutbacks in spending can be expected during the months ahead, according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers.

Start formulating Plan B, if you haven’t already.

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10 Days In October

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

The markets continues to stagger around like a drunk after last call and with every bit as much connection to reality. As I write this, a half hour before the final bell, the Dow is up 11%, nearly 900 points for the day. The NASDAQ and S&P 500 are both up around 10%. All this despite reports of consumer confidence and home prices dropping faster than President Bush’s approval ratings.

Wall Street’s Queens of Denial were apparently responding to talk that the Fed will cut the prime rate by at least half a percent. This is just one more measure of how the markets are now a faith-based initiative. It doesn’t matter how low the rate is when there is no money to borrow. The system is still facing a liquidity crisis and even if it wasn’t we’d still be tanking. For better and mostly for worse consumers still drive the economy. Those of them fortunate enough not to be losing their houses are losing equity at an astounding clip.

These trends aren’t going to change any time soon.

The Standard & Poor’s/Case-Shiller index showed August home prices tumbled by the sharpest annual rate ever. You’d have to be insane – or work on Wall St. – to think September’s numbers will be any better. Further, the Conference Board Consumer Confidence Index fell to 38 this month, down from September’s 61.4. This was the third-steepest in the history of the index and left it at a record low.

The spending hatches have been most certainly – and wisely – battened. The smart investors, if there are any, are fleeing to those goods which consumers absolutely cannot do without – which is good news for Procter & Gamble, et al. (Say how about P&G taking over GM? At least that way they’d get competent leadership.) Wall Street, which at the best of times is a lousy indicator of economic conditions, has wandered off into a land of make believe on a journey that we can only we all survive.

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Even with the cheerleaders trying to put a sunny face on the credit crisis we’re still not out of the woods yet. We’ve had another bank failure and we’re still looking at billions in write downs. But feel free to sing “the sun will come out tomorrow” if it makes you feel warm and fuzzy inside.

Some of the dour news of the day - just to make sure the message isn’t being lost on everyone.

From Market Watch:

U.S. stocks dropped on Monday, retreating from the last session’s strong gains, as oil remained near $115 a barrel and as concerns about mortgage giants Fannie Mae and Freddie Mac continued to weigh on investor sentiment.

“Financial stresses are still permeating global financial systems, despite massive accommodation from the Fed,” said analysts at Action Economics.

And Bloomberg:

AIG, the world’s largest insurer, tumbled 5 percent after Credit Suisse Group said the company may lose $2.41 billion this quarter on mortgage-related writedowns. Huntington Bancshares Inc. and KeyCorp each dropped more than 3 percent after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year.

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related writedowns and the global economic slowdown will curb profits at technology and industrial companies.

“Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to very optimistic consensus expectations,” Abhijit Chakrabortti wrote in a note to clients dated yesterday.

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I’m on the road training folks as part of my job, so unfortunately I wasn’t able to cover much of the news today - that primarily being Washington Mutual tanking and respected, former White House economist Nouriel Roubini estimating that it will take $1 trillion to get us out of the housing/mortgage mess.

Here’s the links to the stuff I wish I could have written about had time permitted - maybe your schedule is currently more flexible

WaMu’s $3.3 billion loss for the quarter (Bloomberg)

Washington Mutual Inc., the biggest U.S. savings and loan, reported a $3.3 billion second-quarter loss on uncollectible loans as a record number of borrowers were unable to keep up with mortgage payments.

The loss of $6.58 a share compared with net income of $830 million, or 92 cents a share, a year earlier, Seattle-based Washington Mutual said today in a statement. The company said mortgage-related losses through 2011 will be at the high end of its previous forecast of $12 billion to $19 billion.

George Bush says Wall Street got “drunk” (WSJ.com) — yes “W” they were the only ones…

“Wall Street got drunk — that’s one of the reasons I asked you to turn off the TV cameras — it got drunk and now it’s got a hangover,” Bush said Friday, according to a video obtained by Houston’s ABC affiliate KTRK. “The question is how long will it sober up and not try to do all these fancy financial instruments.”

Roubini’s $1 trillion call (C/R)

Mortgage rates reach year high (WSJ.com)

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Small banks may be exposed to nearly $300 billion in bad construction loans granted to local builders and developers according to a new report by the Wall Street Journal.  The report estimates that more than 150 local banks could fail under the weight of the defaults.

Construction loans are dicey propositions in the crashing housing market as builders who bet on repaying loans with sold properties may be unable to repay the debt obligations on the existing projects.  Some projects are probably already abandoned and others will sell for pennies on the dollar leaving developers insolvent.

Further, because banks often allow developers to hold off on interest payments during construction the true ability of the developer to repay is often not known until it is too late.

More on the small bank crisis from Market Watch:

Small banks have some $280 billion of outstanding construction loans and analysts have predicted that as many as 150 smaller banks could fail in coming years after betting heavily on construction loans, The Wall Street Journal reported.

The practice of allowing real estate developers to delay paying construction-loan interest has raised alarms with regulators concerned that smaller banks are masking potential problem loans, the paper said.

Increasingly popular during the building boom of the last decade, many of these loans allowed banks to calculate the interest that would be paid on the loan overall and then set aside that amount in “interest reserves,” essentially allowing the banks to pay themselves until the property becomes profitable or the loan is paid off.

The loan can then be marked as a performing loan even if the project if it is financing is failing, a practice that concerns regulators, the report said.

But the tanking housing market means many of these projects may not be built — or even financed — leaving banks, and their investors, holding the bag.

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LONDON (AP) — Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government’s stimulus plan to prevent a recession. U.S. markets were closed for Martin Luther King Jr. Day, but the downbeat mood from last week’s market declines there circled through Europe, Asia and the Americas. Read more…