Be careful what you wish for -- you just might get it. The national press wanted to knock housing down as king of the hill, and they succeeded, but now the stock market is tumbling down the hill as well. And the recession that's been feared for months will finally come.
Last week's jobs report is the harbinger of a tough winter to weather. Unemployment is now over 5% from 4.5% only a quarter ago. December job growth was the weakest since 2003, according to the Labor Department. That's far worse than forecast by analysts.
How can we have job gains and rising unemployment at the same time? Shouldn't those numbers be in lockstep?
Well, that's where statistics can fall short. Unemployment numbers are worthless without the context of demographics. Our population is growing, but less than half of industry is hiring (48%.)
We're adding one person (net gain) to the U.S. population every 13 seconds. About two/thirds are working age, so we're adding around 2,217 people a day. Times 30 days? That's 66,520 people who need jobs and we only added 18,000 in December.
That means competition for jobs just got harder. If you get to keep your job, you're not likely to get a raise, unless you're the CEO of a public company, and those aren't likely to do that well in 2008 either.
Obviously, our mixed-up values need some serious straightening out. We haven't had a housing bubble, we've had a credit bubble.
We're a capitalistic society, so we've put out as many products and services as we can think of and made them as easy to buy as possible. We've encouraged people to spend, including buying homes when they couldn't afford them. We've encouraged them to refinance and use the money for vacations and college. And now the public is maxing out its credit cards and we're at negative savings, owing more than our disposable income should allow.
We're at the point where we can't make people buy anymore.
But that could be a good thing. Job loss will shake consumers up, and they'll have to be wooed back to the malls and to housing. And the only way to do that is lower prices and cheaper credit.
The Federal Reserve will cut target borrowing rates again, and consumer credit will become even cheaper than it already is.
But smart consumers, especially homebuyers, will do the smart thing when that time comes -- use the lower rates to clean up their credit.
If you know anyone who wants to buy a home, tell them low interest rates are a gift and it won't last.
Published: January 7, 2008
Maybe it's a side effect of having to deal with rough economic times, but there's something unusual going on right now in Washington: Republicans and Democrats, Congress and the White House, seem to be actually working together to solve housing and broader economic problems -- without a lot of the usual partisan backbiting.
The cooperative effort on the multi-billion-dollar economic stimulus package -- with its tax rebates and mortgage relief for home owners sliding toward foreclosure -- is the most public example of cooperation.
But behind the scenes there have been other hints that maybe this election-bound Congress is ready to move ahead on legislation that should ultimately be positive for real estate.
For instance, though many people in the housing and mortgage industries are skeptical that Democrats and Republicans on Capitol Hill will produce a compromise legislative package to modernize the Federal Housing Administration -- raising maximum loan limits in high cost areas and streamlining the mortgage insurance programs -- there are indications that Senate and House leaders are eager to compromise and resolve differences quickly enough to put a package on President Bush's desk in the coming month.
Things could still fall apart and that timetable could slip, but bipartisan reform of FHA is now something the real estate industry can pretty much bank on.
The festering mess in the subprime market is also softening partisan opposition to broadscale improvements to the mortgage system itself. The House passed a bipartisan bill last year that would force lenders and brokers to ensure that future home buyers and borrowers are only put into loan programs that are appropriate to their financial situations, and that they understand.
The Senate Banking Committee, whose chairman, Sen. Chris Dodd, is now back on the job -- having abandoned his quest for the Democratic nomination for President -- is expected to hold hearings on a roughly similar bill in the near future. Meanwhile, Sen. Dodd is pushing for creation of a new $20 billion federal corporation to buy up defaulting loans of home owners, and replace them on a massive scale with more affordable ones.
Who knows? This Congress might actually get some of these things done!
My Thoughts: I think it is sad when Congress has to step in and force lenders and brokers to only put borrower's into a loan that fits their needs. Lenders and Brokers that are seasoned professionals have always done this anyway but people got so greedy when the market was doing well, that lenders along with borrowers, were overextending themselves financially and too lenient on the guidelines. There were also too many people in this industry that knew nothing except sales so they didn't care if the loan was beneficial or not. When I was an Underwriter back in 2005, I saw borrowers continuously taking cash out of their homes and it was obvious that they were living off of their equity because most of the time the income was stated (not documented). Even if I declined a file, my Senior Underwriter would get it approved by the Branch Manager if someone squawked about it. Back then, I predicted this situation we are in now would happen but everyone laughed at me. They aren't laughing now. The good news is, a lot of the greedy people that were in this industry are gone now and moved on so lets hope something is learned from this mess.
Another mortgage-refinancing boom is under way. But this time around, many homeowners will be watching from the sidelines.
For the first time since 2005, mortgage rates have slipped well below 6%, ending last week at about 5.87%, according to mortgage tracker HSH Associates. Some lenders are offering even lower deals. At these levels, about 37% of homeowners could refinance their mortgages and save money on their monthly payment, estimates investment bank Bear Stearns Cos. As rates drop further -- and some expect that to happen if the economy continues to weaken -- increasing numbers of consumers will find refinancing their existing mortgage worthwhile.
But here's the catch, and it's a big one: Many homeowners won't benefit, either because their mortgage is too big or their credit score is too low. In other cases, falling home prices will make it tough for them to refinance. As the subprime-lending crisis continues to roil the housing and financial markets, rates for so-called jumbo mortgages -- those above $417,000 -- are now uncharacteristically priced so far above conventional mortgages that refinancing generally makes no sense for homeowners who hold them. At the same time, conventional borrowers who have lower credit scores -- or relatively little equity in their houses -- are finding that they generally don't qualify for the best rates, often negating any expected benefits to the pocketbook.
The result: The big winners will be conventional borrowers with so-called conforming loans -- those eligible for purchase by Fannie Mae and Freddie Mac, the two government-sponsored entities that rule the mortgage market. In particular, borrowers with high credit scores or a large amount of equity already in their home, or some combination of both, stand to benefit, says Dale Westhoff, who heads Bear Stearns's mortgage research. In the past, when rates have dived below 6%, "you'd normally see subprime and Alt-A and jumbo borrowers" in the market, Mr. Westhoff says. "But they're really not going to be participants in this refi wave".
Fiona Furlong of South Glastonbury, Conn., is one borrower who has been able to refinance her home. She originally sought to refinance her conventional mortgage in December 2005, but missed the last of the sub-6% rates by a few weeks. She told her mortgage broker to keep her in mind if rates ever slipped below 6% again.
"When he called recently, I had sort of forgotten about this," Ms. Furlong says. "I was surprised to hear rates have dropped so significantly." She locked in a rate of 5.75%, reducing her current rate from above 6%, a move that will shrink her monthly payment by about $100. "My house just got reappraised and I'll be paying more in taxes, so that savings will help," she says.
Ms. Furlong's broker, Michael Menatian, president of Sanborn Mortgage Corp., in West Hartford, Conn., says his refinancing business is "surging" these days among those who qualify. "It's going nuts, because we've had such a dramatic drop in rates in such a short time."
At Regions Financial Corp., a Birmingham, Ala., regional bank, refinancing business is up between 40% and 45% since October. "This market will be very different than previous markets, and that's a function of the credit constraints and the jumbo-rate issues," says Todd Chamberlain, Regions's head of mortgage banking.
Ron Hermance is more blunt. The chairman and CEO of New Jersey's Hudson City Bancorp Inc. says many consumers "will be left out in the cold this time because underwriting is back in vogue," and many homeowners will find that during the previous housing boom "they originally got credit they weren't entitled to." In the first two weeks of this year, refinancings accounted for 56% of Hudson City's mortgage volume, compared with 42% for all of last year.
Overall, the Mortgage Bankers Association reports that for the week ended Jan. 11, weekly mortgage applications surged to a level not seen since spring 2004. Refinancings accounted for nearly two-thirds of the application volume, the group says. Still, those are just applications, and many are being rejected these days as lenders adopt tighter standards.
For jumbo borrowers, though, higher standards aren't the biggest problem: Rates on those loans averaged 6.8% at the end of last week, according to HSH, meaning the spread between conventional and jumbo rates is nearly a full percentage point -- four times the typical gap.
Jumbo rates, lenders say, aren't coming down alongside conventional rates because buyers of those mortgages in the secondary market remain skittish. As such, today's jumbo rates are well above the existing rates many homeowners currently have on their mortgage, meaning "there's no reason to refinance," says Jay Steren, CEO at Mortgage Capital Associates, a Los Angeles mortgage banker.
In the conventional-mortgage market, Fannie Mae and Freddie Mac are moving to risk-based pricing, which has the effect of tightening lending standards across the country. The upshot: Homeowners with weak credit scores or little equity in their home will pay for the risk associated with underwriting their mortgage through higher interest rates and added fees -- which has the effect of dimming, if not eliminating, the benefits of refinancing.
To get the best rates under the new risk-based guidelines, homeowners "need a credit score over 679, or equity of greater than 30%," says Sanborn Mortgages' Mr. Menatian. But as home prices fall in many markets, homeowners' equity sinks alongside it -- making it tough to get more-attractive rates.
The risk-based guidelines impose so-called delivery fees that range between 0.75% and 2% of the mortgage value for consumers with credit scores below 680. The highest fees are charged to those with credit scores below 620.
Mr. Menatian says buyers with credit scores in the 620 to 639 range, and who have less than 30% equity, are getting mortgage rates these days of about 6.375%, while the best borrowers are getting 5.75%.
Holders of jumbo mortgages, meanwhile, are running into other problems. Rodney Rideout, of Darien, Conn., has an adjustable-rate mortgage of about $500,000 scheduled to reset in March, meaning his interest rate will rise to more than 6%. That will bump up his monthly payments by about $460. He wants to refinance, but because of the jumbo market, he's unable to find an affordable fixed-rate mortgage.
"Everything is up near 7%, so it makes no sense," says Mr. Rideout. "I was thinking 'jumbo' meant something up near $1 million; I didn't think it would apply to my loan."
Indeed, the definition of jumbo could actually be changing soon. For months, Congress has been debating the idea of raising the limit on jumbo mortgages, possibly to $600,000 or more. If so, that would allow a larger number of borrowers to refinance at lower rates. But just what will happen, and when, remains uncertain.
In the meantime, rates on jumbo mortgages can vary significantly. While the average jumbo rate is about 6.8%, Hudson City Bancorp -- which operates in New Jersey, New York and Connecticut -- is offering jumbo mortgages at 6.25%, for example.
"You need to do some legwork, scour the market, to find the best rates," says Keith Gumbinger, vice-president of HSH. He suggests starting with lenders who often keep on their books the mortgages they underwrite, such as local banks, thrifts and credit unions. "They can easily be a half-percent lower than the averages," he says.
All of this is affecting the home-buying market, particularly for expensive homes. Buyers are increasingly aware of the high jumbo-mortgage rates and the impact on their monthly payment. Thus, sellers these days are adjusting their sales price or offering other incentives in order to trim a buyer's mortgage below the jumbo limit.
Neil Saunders, president of Greenwich Mortgage Corp. in Providence, R.I., is selling a 4,400-square-foot house in East Greenwich, R.I., priced at $998,000. To entice buyers, he's willing to offer an interest-free loan for a year or two on the cash needed above the $417,000 cutoff. Mr. Saunders expects Congress will raise the ceiling on jumbo mortgages and the buyer will then be able to refinance into a lower-rate, conventional mortgage.
Other sellers, says Ron Phipps, president of Phipps Realty and Relocation in Warwick, R.I., are buying down the interest rate for buyers, often for just a year or two, to make it more comparable to a conventional rate.
"Everyone is very sensitive to this situation right now," Mr. Phipps says. "This is still a correcting market."
My thoughts:
Now is the time for everyone to pull together and not depend on the Government to bail us out. Most people nowadays are living way beyond their means and are in debt up to their eyeballs. Us Americans need to payoff our debts and rebuild our assets so that we can enjoy financial freedom and peace of mind. Unfortunately, our Government does not set a good example for us on how to manage money.
I wish everyone success and happiness in 2008 and the years to come. Please visit my website at http://www.FDIRep.com/loanpronan and we can setup a system that will help you manage your finances and improve your credit.
Thank you.
more photos
January is traditionally a big month for credit card applications, but before you put another piece of plastic in your wallet, see if you can reduce the interest rate you are paying on the cards you already have.
A colleague recently did that. She got her bank to drop the rate on her Visa card from 15.9 percent to 12 percent. “I was amazed because I thought I’d have to fight to get it,” she says. “All I did was to tell them I wanted a lower rate, and they did it.”
Clearly, that won’t happen in every case. “If you’ve made late payments or exceeded your credit limit and are paying a penalty rate, they’re probably going to laugh in your face and tell you to take a hike,” says Greg McBride, senior financial analyst for bankrate.com.
But if you have a decent credit record, it’s worth a try. Gerri Detweiler, consumer advisor for credit.com, tells me about half the people who request a lower rate get one.
It’s helpful if you have some leverage, such as credit card applications from other lenders. This lets you play one company off another by telling your current credit card company what the competition is offering.
“They don’t want to lose your business,” notes Bill Hardekopf at lowcards.com. “It costs them a significant amount of money to get a new customer. If they can keep you, that’s worth the money to them.”
The balance transfer optionIn some cases, it makes sense to transfer your balance to a new card with a lower interest rate. You have probably seen ads for zero percent interest on balance transfers. They are very appealing, but you need to know the full terms of the deal.
What is the charge? In most cases, expect to pay a 3 percent fee on the entire balance you transfer. How long does that zero percent rate last? It could be as little as three months.
I just received an offer from my bank to apply for a MasterCard with "Zero percent fixed APR for 6 months on purchases and balances transferred NOW!*" That little asterisk is there because after six months, the interest rate is variable. Right now, it's 9.99 percent, but read the terms and conditions and you will see it can go as high as 19.99 percent depending on your credit profile.
Remember, the low transfer rate only applies to the money moved over from another card. Any new transactions you put on that card — purchases and cash advances — get charged a much higher interest rate. Find out what that rate is; it could be more than what you are currently paying.
And there’s one more catch to balance transfers: Credit card companies apply your monthly payments to the part of your account with the lowest interest rate first. That means you should not put any new charges on that card. If you do, the low interest rate balance transfer will be paid off first, while you pay the higher rate on your new purchases.
It’s also critical to make your payments on time, every time. “If you are one hour late with a payment, your interest rate will jump dramatically, warns credit.com’s Gerri Detweiler. “I’ve seen an interest rate go from 3.99 percent to 30 percent overnight.”
Shopping for a new cardYou can probably find a card that has a lower interest rate, but don’t jump at the first offer you get in the mail. You need to comparison shop and find the card that is right for you. Try bankrate.com, cardweb.com, and lowcard.com.
“Credit card issuers are fantastic marketers and they can make any card look appealing,” advises Bill Hardekopf of lowcards.com. “Go to the terms and conditions section because that’s where the issuer has to lay out everything that applies to that card.”
You will also find out if that low advertised rate really applies to you. Generally, it is only for someone with good credit, a FICO score of 760 or higher. If your FICO score is less than 680, you can expect a much higher interest rate.
Don’t apply for multiple cards at one time. “Creditors get very wary of multiple applications,” Hardekopf says. “It can affect your credit score. If it does, your interest rate will go higher.”
Smart way to pay down credit card debitYou won’t get anywhere if you just make the minimum payment. Let's assume you added $1,000 of credit card debt during the last few months. And let’s assume you have a 15 percent interest rate on that card. If you just make the minimum payment it's going to take you more than 12 years to pay off that debt .But if you make a payment of $100 every month, you'll pay off the balance by December.
If you have multiple credit cards, which most of us do, it gets pretty overwhelming to get out of debt. So you need a plan.
“You’re going to save the most money and get out of debt the fastest if you focus on the card with the highest interest rate,” suggests Gerri Detweiler. “Just make the minimum payments on everything else, don’t sweat it, and put every penny you can toward that first card.” When it’s paid off, you move on to the card with the next highest interest rate and so on.
Are you in serious credit trouble? Talk to a reputable credit counselor before you do something drastic, such as file for bankruptcy. Find a certified counselor working at a non-profit agency.
Contact Nancy Parente at 949-940-8957 or email info@loanpronan.com for more information.
SAN FRANCISCO (MarketWatch) -- It looks like the Federal Reserve might finally get it: the risks of a recession outweigh the risks of inflation.
The Fed has seemed peculiarly reluctant to reach this conclusion, although it was glaringly obvious to many economists on Wall Street and in the ivory towers of academia -- and even among regular Joes in the coffee shops and malls of Main Street America.
Although the Fed has now cut interest rates by 1 percentage point over three straight meetings, bringing the federal funds rate down to the 4.25%, the cuts seemed pretty scrooge-like. And after each of the three cuts, the central bankers have sent financial markets the clear impression that their hearts were not in it.
"They were fighting it," said Steve Stanley, chief economist at RBS Greenwich Capital. Each rate cut included the sentiment that "hopefully this was going to be last one," he said.
But the speech on Thursday by Fed chief Ben Bernanke represents something of a sea-change at the central bank.
In unusually blunt language for a central banker, Bernanke said the Fed is ready to take "substantive additional" rate cuts to support growth and insure against the risks of a sharp downturn.
Bernanke said the FOMC must be prepared to act "in a decisive and timely manner." Read full story.
Economists said this speech suggested the FOMC is likely to cut rates by a half a percentage point to 3.75% at their meeting at the end of the month, and even opened the door for a rate cut before the formal meeting on Jan 29-30.
Not just a market problem
"It is a dramatic shift in tone," said Stanley. Prior to the speech by Bernanke, the Fed seemed to be following the lessons it learned from the collapse of the hedge fund Long-Term Capital Management in the summer of 1998, he said.
In that episode, the Fed quickly cut rates three times, and the economy roared back.
The Fed should be forgiven for reaching the conclusion that, as in 1998, quick action would restore confidence in the markets. Stanley said the main risk to the economy has traditionally been financial market conditions, which are notoriously volatile.
But financial markets have been practically begging the Fed to see that it should not be fighting the last war, and it seems like the central bank is ready to listen.
The sharp jump in the unemployment rate in December and the weak reading about the factory sector from the Institute for Supply Management released within days of the start of the year appears to have keyed the rethinking.
John Lonski, chief economist at Moody's Investor Services said "at long last, the equity market did not sell off sharply following speech of Ben Bernanke."
"The tone of Bernanke's speech was more dovish and he highlighted mounting signs of economic distress," Lonski said.
Lonski said the market was encouraged that Bernanke acknowledged the financial market turmoil was slowing business and consumer loans and having a real impact on the economy.
Still on the inflation watch
Not every Fed watcher is convinced.
Robert Brusca, chief economist at FAO Economics, agreed the Fed is likely to cut rates by an aggressive half point at their January meeting but said he was not so sure this automatically meant further aggressive moves at the following FOMC meetings in March and April.
Other Fed speakers this week made it clear that they still have a lot of concern about inflation, he noted. The high inflation rate remains "the fly in the ointment," he said, and as a result, the Fed will remain in a "reactive" mode.
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