Today’s employment report, and the markets reaction to it are a perfect example of the upside down world in which we live.

There are two main numbers in the report:  One, the number of jobs either created or lost; Two, the unemployment rate.

Today’s report had a number of 345,000 jobs lost in the month of May.  The “experts” had expected job loss in excess of 500,000 jobs.  So, this figure was much stronger (in reality less weak) than expected.   It is noteworthy that in January there were in excess of 700,000 jobs lost.  This report puts upwards pressure on rates – the idea being that if job loss is slowing the economy is beginning to recover.

The unemployment rate on the other hand climbed to 9.4%, up from last months 8.9% and below the expectation of 9.2%.  This is the worst report for Jobless rates since 1983.  This report should put downward pressure on rates, because a high rate of unemployment would indicate the economy is NOT recovering.

Somehow due to how they figure things it is possible for the number of jobs lost to come down, and the unemployment rate to go up.  They use a different set of statistics for each calculation is the best explanation I can come up with.

What does this mean to the rate market?

Investors took the first report to heart, taking it to mean that the job loss numbers indicate we are beginning the recovery.

At the same time, they appear to have completely ignored the unemployment rate number, which in my opinion makes no sense, but hey, they didn’t ask me.

Is this another market “head fake” or a new trend you ask?  I just don’t know.  What I do know is that it is the 2nd week in a row where rates have ended the week higher.  The more times that happens, the harder it will be for rates to come down.

Regards,

Doug Smith – Stratis Financial
Your Conventional, Jumbo, and FHA/VA expert since 1993

3625 Del Amo Blvd #220, Torrance CA 90503
Direct 310 697-7033     Cell 310 508-5832     Fax 310 371-7469

Good Morning!

I am sure you have gotten barraged with emails about yesterdays Fed move.  What ALWAYS happens when there is a big move is that in the immediate aftermath, there is total euphoria, and there is all kinds of talk of rates going to 3% for the next 10 years.

What yesterdays move was designed to do was to signal to the markets that the Fed will do whatever is necessary to hold rates down into the current GREAT range they have been hovering around in, the low 5′s.  There had been encouraging economic news coming out, and inflation fears had already begun to surface.  Based on that, the Fed made a decisive move to hold things down, not to drive them down further, as the media will have you believe.

We saw dramatic rate improvements several times in the last year or so:  January, March, and December 2008, and then in January 2009.  All of those rallies took us into the range we hit yesterday, where you could get a conforming fixed rate loan down into the 4′s with no points.  Also, each of those rallies lasted no more than 2 trading days.  They all ended swiftly and surely, where in a 2 to 3 hour period, the improvements vanished.

The psychology behind this is simple.  The move happens, everyone believes that now everything is fixed.  Then after a little time the belief shifts to “wow it is great that happened, because things would have gotten worse without it”, and things settle back down (or up, in terms of rates).  One move won’t shift the market forever overnight.  The recovery is a gradual process and this move was a vital one to keep it moving.

After yesterdays REMARKABLE rally in the mortgage market, today it is trading in a very narrow range, with no major move up or down.  This tells me that the rally has already begun to lose steam.

I am not saying that the party is over, but huge rallies like this almost always wind up retreating at least part way, so I would not say it is prudent for people to wait for that 3.5% rate that they think is coming.

Don’t buy into the hysteria either way.  Bottom line, rates are great, prices are more affordable, it is a great time to make a move.

Regards,

Doug Smith – Stratis Financial

It has been an interesting week.  We have seen some significant rate improvements, especially in the loan amounts below 417k.  You can get below 5% if you are willing to pay some points!

Another major headline that has been causing a great deal of excitement was the announcement that Treasury is now authorized to buy HUGE additional quantities of Mortgage Backed Securities (MBS), with an eye towards driving rates down to a target of 4.5%.

Let’s walk through the logic of this:  The idea is that treasury buys huge amounts of mortgages.  Then, the rest of the market is supposed to respond to this additional demand, and jump in to buy.

A quick sidebar – The more demand there is for MBS, theoretically, the lower rate investors will demand to be willing to buy them.  The safer an investment it is seen to be, the lower rates will go.

Okay, back to our story.  So, the government will buy all these MBS.  Then, the financial markets will get over their fear of MBS and the additional demand will create a world where MBS will be bought at 4.5%.

There is one flaw in this theory.  YOU CANNOT LEGISLATE MARKETS.  The government can try to keep the money moving, but rates will only come down when the financial markets get over their fear of mortgages as an investment.    In my mind, it is the same as the government saying “we are going to make GM design and build cars that people want”.  GM might figure that out on their own, but the government can’t force it.  Might rates come down over time?  Perhaps, but bear in mind that a rate of 4.5% is well into uncharted territory, so there will be some resistance to that kind of improvement.  All I am saying is things are never quite that simple.

What does this mean to people who are trying to decide if they should buy now?  Well, if they buy now, they are getting a great price, and a great rate.  If the governments plan doesn’t work, then they still got a great price and a great rate.  If it does work, and rates plunge, that will create a huge amount of buying demand, and home prices will bounce upward.  Then, those that bought low will have enough equity tor refinance into an even better rate.

To that point, in late day trading today, we have seen rates run back up just a tiny bit.  The rally that started late last week into this week has lost some steam, at least temporarily.  It may pick back up next week, but when you are out meeting folks this weekend it is good to let them know that rates are not in a total free fall.

It is hard to feel like too much of a bonehead taking a fixed rate loan around 5%!

Regards,

Doug Smith – Stratis Financial
Your Conventional, Jumbo, and FHA/VA expert since 1993

3625 Del Amo Blvd #220, Torrance CA 90503
Direct 310 697-7033     Cell 310 508-5832     Fax 310 371-7469

Hi All,

I like to keep my comments short and sweet, so this one is a little long, but it is a GREAT explanation of the latest government action to prop up the credit markets.

From Larry Baer at Market Alert www.mktalert.net here is the explanation:

Commentary: Like trauma room doctors – Treasury Secretary Paulson, Fed Chairman Bernanke together with support from most members of Congress are scrambling to revive the critically ill global financial system.
It looks like one of the treatment regimes being considered will strongly resemble a critical care technique from a bygone era.  Treasury Secretary Paulson is finding growing support for the development of a government entity similar to the Resolution Trust Corporation (RTC) which proved useful in helping resolve the savings and loans crisis of the 1980s.  Rather than hold and sell the assets of failed banks as the RTC did, the new entity would purchase toxic loans at a steep discount from solvent financial institutions — and then eventually sell back those repackaged loans into the market through an auction.
This is not an all bad idea – especially if the majority of these loans are collateralized by an asset such as a single-family residence.  Here’s a look at the general idea.  Because the original loan from the bank to borrower was not paid back – the bank must write the loan off as a complete loss – at least until the underlying collateral is sold and the true dimension of the loss can be calculated.    For instance, a $100,000 loan secured by the “sticks-and-bricks” of a single family home goes bad – and the bank is forced to take a gross $100,000 ding to its balance sheet.  Just because the bank took the write-down it certainly doesn’t mean the value of the home has fallen to zero.  If someone would simply buy the foreclosed home from the bank at $100,000 – the bank would generally be out nothing more than legal and administrative fees.  No big deal.
The proverbial “rub” here is that many lenders have suffered more losses in their loan portfolio than their cash position can support – rendering many lenders insolvent and leaving many more hanging on the edge of financial disaster.  The quick sale of the collateral (the homes) is too slow to stave off possible collapse and the short-term credit markets have frozen-up – cutting off any opportunity these institutions might have to borrow themselves out of trouble.
Treasury Secretary Paulson is proposing the government create a new entity, funded with hundreds of billions of dollars of taxpayer money, which will buy these troubled loans from still solvent institutions at a discounted price, and then eventually sell them back into the market through an auction process.  The lenders off-load bad loans from their balance sheets for cash, immediately improving their financial viability.  If the bank sells a $100,000 loan to the government for, say — $45,000 – the lender’s actual loss on the original transaction is now only $55,000.
The new government entity will ultimately auction bundles of these troubled loans they bought from the banks and other institutions.  In this example, the government stands a good chance of getting its money-back under this structure – especially if  auction participants (investors) believe the value of the underlying collateral- the residential properties themselves – are undervalued in terms of their then current fair-market value.
The strong rally in the stock market is a solid indication that capital market participants around the world believe this plan has a good chance of sharply diminishing — if not resolving — the massive credit crunch that has held the global banking system hostage over the past 18 months.
This structure will take time to develop, and it will require a mammoth bi-partisan effort on the part of Congress to enact.  In the interim, mortgage interest rates will likely continue to swing wildly as all of the resources of the government are focused on stopping the seizures in the global banking systems –before focusing specifically on the current level of mortgage interest rates.
Looking ahead to next week, headline news events and trading action in the stock market will exert far more influence over the direction of mortgage interest rates than will the upcoming release of the August Existing Home Sales (Wednesday, 9/24) and August New Home Sales (Thursday, 9/25) sales figures.
Be patient . be disciplined . and play it by the numbers.

Regards,

Doug Smith – Stratis Financial
Your Conventional, Jumbo, and FHA/VA expert since 1993

3625 Del Amo Blvd #220, Torrance CA 90503
Direct 310 697-7033     Cell 310 508-5832     Fax 310 371-7469

Hi All,

I am sure you have received about 482 emails talking about the government’s taking over Fannie and Freddie.  However, in an effort to make it easy to understand for you and your clients I will give you my take on it:

What has happened?

The Regulatory agency that oversees FNMA and FhLMC has assumed operational controlof both organizations.  Also, the government has pledged funds to enable both to continue their role as the largest purchasers of Mortgage Backed Securities.  This means that government money  will be available to “keep the wheels turning” within the conventional mortgage market by making money available for both to keep buying funded loans.  This is a very big statement of “we believe in the quality of mortgages as an investment, and so should the rest of the market” by the government.

What does this mean?

In the short term, the move has restored confidence in US financial markets.  Both the stock market and the bond market have experieinced a nice rally today.  As of now, confidence in mortgages as an investment has been bolstered.  If they are percieved as a safer investment, the folks buying mortgages will accept a lower rate of return (the interest rate).

What does the future hold?

We won’t really know until the full cost of this intervention gets figured out.  As we discover what the cost will be, the financial markets will take their long term cues from that.  The more it is estimated to cost, the more rates will be pressured to go up.  If the long term cost stays within initial estimations, this could be just the ticket to help the economy continue to recover without too much upward pressure on rates.

So , right now, it is providing buyers with a nice little dip in their cost of borrowing.  How long that will hold true remains to be seen.

I have never seen as volatile a market as the one we are currently in, so it seems like a great time to take advantage of the dip in rates.  Today’s euphoria is often followed by tomorrows paranoia.

This is an email I received from Doug Smith of Stratis Financial. He is an amazing Mortgage Professional and a great person! I asked to explain what is going with the “stimulus package/increase in conforming loan rates”.

There has been a great deal of buzz in the media about the governments Stimulus Package, and in particular the increase to conforming loan limits. When the increase in loan limit to approximately 729k in Los Angeles County was made legal, the hope was that this would make it much easier for people to obtain financing on homes in the 600k to 900k price range. “Jumbo” loan programs have experienced an increase in rates, and more restrictive lending guidelines.

What may not have been thought all the way through is what would need to happen for these loan amounts to get carried out into actual loans. For this to happen, the loans need to have rates, guidelines, and credit standards that makes investors comfortable enough to buy them. Banks make loans, but they can’t stay in business if they can’t turn around and sell them. If this doesn’t happen, the increase in limit becomes somewhat moot. The best product in the world is no good if no one will buy it.

Thursday March 6th, Fannie Mae issued their first formal policy statement on this matter. It was an 8 page festival of numbers, so I will try to boil it down.

In a huge reach of creativity they are calling loans from 417k to 729k “Jumbo Conforming”, going into effect April 1. The big question has been what loan programs, what guidelines, and what rates they will offer:

Programs:

15 and 30 year fixed loans (no interest only), and a 5 Year fixed to ARM with interest only available.

Guidelines:

In Los Angeles County, it looks as though a minimum down payment of 15% is going to be required.

This is in stark contrast to existing Conforming loans below 417k, where a down payment of only 5% is required. In effect, these guidelines are at least as conservative as the guidelines for “regular” jumbo loans, so this part isn’t looking too “stimulating”.

The down payment, and other guidelines pertaining to credit, income, etc are almost exactly the same as the jumbo loan programs this program was supposed to supplement.

Rates:

They have not issued rate structures specific to these loans as yet, and are stating that they will do so in April. It is safe to assume that the rates on these loans will be somewhere between current conforming and jumbo rates.

What does this mean to us?

I know the media is barraging us with reports that it is here, and it is going to save the world, but unfortunately, it is not quite that simple. The credit markets will need to get used to this for us to be able to put it to any use saving money.

Right now the restrictions on loan-to-value, and the lack of clarity in rates are holding us back from making any moves.

I am continuing to watch these developments very closely for my best clients, and will let you know if I see something that will benefit you. I am not saying it won’t do anything for us, I am saying it can’t do so just yet. It is continuing to unfold.

Regards,

Doug Smith
www.StratisFinancial.com
Office (310) 370-9929