Danny Salas

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Chico, CA Interest Rates Market Report – Economic Influences – Sept 16th, 2008

The New Trend:  Lower Rates

Rates have significantly subsided with the Government take over of FannieMae and FreddieMac.  With the price of oil continuing to come down and the guarantee of Mortgage-backed securities in place, we may continue to see rates trading at lower levels for quite some time.

Initial Jobless Claims for the week were 445,000.  Remember when we were terribly concerned with 360,000?  Well the 445,000 new claims were in line with expectations, so it didn’t move markets.  Wow…445,000 in line with expectations so it didn’t move markets…funny!

Import prices dropped for the first time since December by 3.7%.  This is also from oil prices lowering so much which helps inflationary concerns and interest rates.

Lower Rates In The 5%-Range For About 9 Months

I keep talking about how you need to have a finger on the lock button.  Here’s a good reason why.  Even with great inflation news coming in from poor Retail Sales, lower stock values, Producer Price Index dropping 0.9% (a two year declining benchmark), oil prices moving well below their 200-Day moving average to near $100 a barrel; the market felt as though we had reached  a point where bonds were at their highest levels.  This created a sell-off of bonds and rates moved down about a quarter-point in cost.  Look at this type of trend to continue…more volatility with rates moving up and down but at better pricing than the 6.0% to 6.375% range of the past to 5.5% to 6.0% perhaps over the next nine months.

After 158 Years…Lehman Brothers is…History

So, Monday morning we awoke to Lehman Brothers closing their doors and confirming the Sunday hints that they would file for Chapter 11 bankruptcy.  After 158 years in the business, they closed their doors.  That’s how awful this Mortgage Credit Crises has been on not only the Untied States, but the world.  Also, Merrill Lynch was acquired by Bank of America.  AIG is on the ropes trying to raise capital so that their doors don’t close.  It hasn’t been easy for institutions to raise cash, so keep an eye out on this one, too.  They have $1 Trillion in assets…yes, that’s with a “T.”  If their claims can’t get paid, it will be scary to think of the repercussions of that.

A New Safe-Haven In Treasuries

So…I’m back to my old cries of, “it’s an excellent time to buy!”  Values are down, rates are down, sellers are willing to pay for costs to move their homes, and it should stay this way for quite some time.  Look at it this way.  Investors would put their money in stocks and bonds.  Treasury Bonds had a nice safe guarantee, but paid a lower yield to investors.  Mortgage-backed securities offered a higher yield, but at a much higher risk to investors.  However:  with the government guarantees, now, on mortgage-backed securities…where do you think investors will put their money?

We got a surprise that the Fed decided to leave the overnight rate unchanged.  This wasn’t good for interest rates.  The market expected at lease a .25% cut.  But, for the long run, we should see the market realize that not changing the rate is helpful to inflation, and rates should subside after the initial movement.  With my finger on the lock button, it’s an excellent time to buy!  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – Sept 9th, 2008

HOLY … #&*@!

HOLY…Toledo!  Treasury Secretary Henry Paulson announced that the Federal Government would have to take over control of Guaranteed Service Enterprises (GSE) Fannie Mae and Freddie Mac.  HOLY Mollie!  Holy guacamole!

First of all, what does this mean and why did it happen?  To put it bluntly, Fannie Mae and Freddie Mac just got too big!  They got to do whatever they wanted, pumped tens of millions of dollars into the lobbyists that asked congress and the senate to look the other way when it came to making decisions on determining a consumer’s ability to make mortgage payments.  Things are good, why change a good thing?  And then the mortgage credit crisis hit…and things started to change.

Surprise Takeover?

The takeover is not too much of a surprise.  We’ve already seen some intervention when the Federal Reserve stepped in to bail out Bear Stearns.  But this is the largest expansion of government in the history of the United States.  This is big!  This is HUGE!  Hence the “holy guacamole” quote from the first paragraph.

Last Wednesday, we saw the Dow Jones Industrial Average plummet 300 points.  Also, we heard from portfolio manager Paul McCulley of the single largest purchaser of mortgage backed securities PIMCO come out and say that they were finished buying any more bonds.  Also, Friday, governments from around the globe mimicked McCulley and the stage was set.

Rescuing An Industry

Anyone remember the Savings and Loan Crisis of ‘89 and ‘90?  Again, the government had to step in and create the Resolution Trust Corporation to monitor the assets of failed banks, put $300 – $400 Billion tax payer dollars into a wrecked system, but later re-coupled about $225 Billion of those funds…but it rescued an industry.

That’s what’s happening here, folks.  The government had to step in and rescue an industry that would have collapsed…period!  If the GSE’s could not have sold their bonds (or mortgage backed securities) than they would have continued to lose capital until they had nothing left.  Now, conforming loan amounts (loans with values of $417,000 and lower) will stay liquid, as PIMCO announced on Monday that they’ve been, “buying all weekend.”

All Is Good…But What About Long Term Effects?

So, for the short-term, this is great.  It helps free up funds for banks to operate, but we cannot forget that we’re still dealing with tighter credit standards for loans, a slowing economy, people can’t qualify for loans to buy homes, etc.  So this isn’t a quick fix…it’s just the ability to enable us to continue to operate.  We still exist as opposed to the collapse of an entity.  Fannie/Freddie created the ability for conforming loans to have an open ended line of credit ($200 Billion) that would guarantee to investors a place to be able to place their loans and get a return on their investment.  If we need more; than it will just take an act of Congress to approve more.

Hard Lesson Learned

Frankly, I think this is what government is for.  Some would argue that it gives too much power to the government.  Maybe it does.  But put in the hands of greedy CEO’s and stockholder’s of banks and savings and loans…hard lesson learned.  Hard lesson learned!

Rates have benefited from this and may continue to do so in the short term.  Government will eventually release more management to the GSE’s as time goes on and the Private Sector will benefit from this also.  So…until next week!

Chico, CA Interest Rates Market Report – Economic Influences – August 5th, 2008

Big Changes On The Horizon

This week I’m going to be extremely brief with my comments on the economic reports and educate you a little about major changes in the real estate lending market.  So, let’s rock and roll!

First, the government lifeline extended to FannieMae and FreddieMac was signed into law by President Bush.  I’ll be addressing that in forthcoming issues.  Second, 2nd Quarter GDP come in at 1.9% while expecting 2.3%.  Previous quarters’ numbers were also revised lower.  Third, initial jobless claims shot up to 448,000.  This is a huge number, however, is somewhat misleading, as the government has laid out a new federal benefits program that will manipulate this number for about a month…interesting…Fourth, a better than expected jobs report showed we only lost 51,000 jobs.  WooHoo!  Unemployment moved to 5.7% so the better than expected jobs numbers, that’s right a loss of 51,000 is better than expected!  Fifth, I told you I’d report on the Fed’s favorite inflation gauge, the Personal Consumption Expenditure Index.  Core PCE moved to 2.3%.  This is outside the governments comfort zone of 1.0 – 2.0%.  Last, the Fed left the overnight rate unchanged at 2.0%.  They did indicate that they felt like inflation pressures should start easing toward the end of this year, however.

BIG Changes in Mortgage Insurance

The changes that have occurred, as of August 1 of this year, is in regard to mortgage insurance.  Years ago, you couldn’t buy a home unless you had twenty percent down.  Mortgage Insurance (MI) companies got involved and said if you let someone put five or ten percent down, they would insure a percentage of the loan amount.  This enabled more people to buy homes because they didn’t have to wait longer to save twenty percent.  This past week four of the seven major mortgage insurance companies changed their guidelines.  Basically, if you do not have a credit risk score of 620 or higher, you’re not getting a FannieMae or FreddieMac loan unless you put twenty percent down and avoid mortgage insurance all together.

FHA Will Return As “King Of The Loans”

Only one MI company left enables you to put five percent down.  All others are requiring ten percent down.  So, if you know of people that only have five percent down, make sure they continue to call other lenders if their lender is telling them that they HAVE to put ten percent down.  And there are a lot of major banks that are not approved or not contracted with this one, MI Company!   Refinances on investment properties will have to have twenty percent equity in the subject property.  Also, if more than 55% of your income is going toward all of your monthly obligations, than you can not qualify for a loan with mortgage insurance.

Monthly Guideline Changes

Now, these changes are changes to July’s changes.  We are seeing guideline changes on at least a monthly basis, sometime weekly.  Make sure you’re working with an expert in the field that follows these changes closely.  Also, make sure you have an option to work with an FHA expert!  FHA has new guidelines taking effect on January 1, whereby the buyer would have to put 3.5% down as opposed to the current 3%, but they have more flexibility regarding their qualifications than MI companies.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – June 3rd, 2008

Who’s Bummed?  Looks Like Everyone…

Consumer Confidence came in at its lowest levels in sixteen years.  Not surprising, huh?  Consumer inflation expectations are high.  This points to the fact that consumers are genuinely concerned about where inflation is going and how that will affect their future income and expenses.

Last week I cautioned, “Since we’ve broken through these three levels of support and the 200-day moving average is still below current levels, it would be prudent to lock.”  That advice was critical!  As the very next day we lost thirty-eight basis points, followed by a fifty-six point loss which was below the 200-day moving average.  There is no floor of support below the 200-day moving average, so let’s get into what happened this week and see if we recovered.

Where’s Interest…in Bonds, that is…

We continue to see global inflation concerns coupled with relentless energy prices.  These influences, coupled with a very pour auction of 2-Year Notes and 5-Year Notes from the Treasury Department, truly hurt interest rates.  Remember that I’ve mentioned before that foreign interest in our Bonds drive interest rates down.  If there is no foreign interest, then plain and simply, interest rates increase.  If we don’t see a nice reversal of economic information that could spur an interest in bonds, things could get ugly.

The Gross Domestic Product (GDP) was revised to 0.9% from the previously reported 0.6% and Weekly Jobless Claims came in at 372,000.  The four-week moving average moved downward to 370,500.  But remember; anything above 362,000 is recessionary.

My Favorite Index…the Core (PCE)

Then it happened!  A nice reversal of economic information that spurred an interest in bonds!  The Commerce Department reported that the Core Personal Consumption Expenditure Index (the Fed’s favorite gauge on inflation) was reported at 2.1% on a year-over-year basis.  That’s just out of the Fed’s desire to have inflationary reports be between 1.0% and 2.0%.  What’s interesting about this is that the Core PCE takes out the volatile energy and food aspects of the equation.  So, when those are factored in, inflation is at 3.2%.  Kinda scary when we’re all paying $4.0 per gallon and then some for gasoline…Hmmm?

Is Wachovia History?

Wachovia Corporation’s CEO, Kennedy Thompson, was forced out of his position by Wachovia’s Board of Directors due to the fact that they have lost more than half of their stock value this past year.  Interestingly, Bank stocks in the United Kingdom are starting to sell off due to profit warnings.  This caused stocks in the U.S. to decline, giving mortgage-backed securities a nice boost, and therefore lower rates.

So you can see that volatility is still the word of the week.  We ended up just above the 200-day moving average this week and hope to remain there.  We even started to head back up toward the 25, 50, and 100-day moving averages, but plunged below late in the day.  Bernanke did indicate that a further lowering of the overnight rate is doubtful, so we’ll have to see how that weighs on inflation and the market.  Now get out there and buy, buy, buy!  Until next week…