Archive for March, 2008
Another 75! Markets Move Higher
March 19th, 2008 Categories: Mortgage News
Our relentless Mortgage expert Doug Fujikawa brings us up to date on the newest news on the Fed’s recent three quarter point rate cut…
In dramatic fashion the Federal Reserve lowered short term interest rates 75 basis points. This puts the Fed Funds rate at 2.25% and the Discount Rate to 2.50%, levels we have not seen since 2004!
The stock market reacted favorably to news and the Dow finished up 420 points to 12,392.66. Positive earnings from Goldman Sachs and Lehman Brothers also helped to propel the market higher.
With constant inflation pressures like the release of today’s Producer Price Index, the Feds have to be very careful with how they handle this slowdown. The Fed’s main concern appears to be to reinstate stability and confidence in the credit and financial markets and to avoid a potential recession.
That being said, inflation is not the number one concern for the Feds. The Federal Reserve released this statement…“Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.” With investor confidence at an all time low and fear at an all time high, this proactive position that the Federal Reserve has taken is sure to offer some relief.
On the interest rate landscape, we continue to see greater spreads between conforming and jumbo financing. In years past there has been a historical spread of .50% between the conforming and jumbo rates. During the boom years of 2003 to 2005 the spread narrowed to as little as .125% between conforming and jumbo rates. Currently, the interest rate spread is over 1.75% between conforming and jumbo rates. What it means is that if conforming 30 year fixed rates are at 5.75%, then jumbo 30 year fixed rates sit around 7.50%!
This is a sign of a non-liquid market, something the Feds are trying to fix. By making credit more readily available and less expensive, you in theory provide more liquidity and therefore a more efficient market for mortgage backed securities to trade in. Meaning, easier or cheaper lending rates encourage borrowing and therefore increase the number of able buyers for a certain commodity; in this case mortgages.
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Mortgages…Will They Ever Be The Same Again?
March 15th, 2008 Categories: Mortgage News
Out here in San Diego we are approximately 30 months into the housing correction and 6 months into the “credit crunch.” We have seen housing prices correct downward in some areas as much as 20% to 25%. With all the doom and gloom out there in the real estate world, I thought I would interject my two cents into this
whole mortgage crisis.
We all heard the stories of landscapers to grocery clerks buying $800,000 homes! Buyers with 580 credit scores buying a home with no money down.!We all did it… mostly because we were allowed to. Credit became so easy to get it was ridiculous! Gone were the days of “common sense” lending. We were living Greenspan’s famous words… “Irrational exuberance“, but this time it was housing. Housing here in Southern California climbed so high at such a rapid pace, there was a time when we all thought it would never end. And then it did! First the condos, then the new construction, at last we see the foreclosures.
This is a healthy correction, one that is needed if we are to survive as an industry and if we want continued healthy growth in housing. As we shift into a familiar but different approach to lending, we are sure to experience some shrinkage in our industry. No more of these 100% option arm loans, 95% financing without a job, or any of these other silly financing packages.
Sure the jumbo market is a little tight right now, but it will eventually ease. 100% financing will come back, but this time it will really have to make sense. We will all be better off from this necessary but unpleasant cleansing of bad loans. With the raising of the FHA and conforming loan limits this year, it’s a step in the right direction. The modernization of the FHA loan program is sure to prevent something like this from happening again anytime soon.
Sub prime loans as we have known it before is rapidly changing and they themselves are experiencing radical changes in their segment of the industry. This is a business model that was under heavy scrutiny and much to blame for the high default rates. If this segment of our industry is to survive, the sub prime lenders will need to lengthen the introductory rate from 2 years to possibly 5 years, raise credit score minimums, remove or at least lighten up on the prepayment penalties, and exercise better judgment in the underwriting process when approving buyers into these type of loans.
It is natural for us to have selective memories but we have learned a few lessons along the way. What we have again learned is that real estate does not always go up in a straight line without risk and that 5 years is NOT that long of a time away.
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