Sept. 17 (Bloomberg) -- Democratic presidential candidate Barack Obama likened the fallout from defaults on subprime mortgages to the collapses of Enron Corp. and WorldCom Inc., saying it could lead to a ``crisis of confidence'' in the markets.
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[Source: Yahoo! News Search Results for mortgages]
Tuesday, September 18, 2007
Question Du Jour: .25 or .5 - what are your rate cut predictions?
Everyone is buzzing about tomorrow’s Fed meeting. The question seems to be will there be a .25% or .5% cut to the Fed funds rate (currently at 5.25%)? Most are weighing in at .25% but some are predicting Bernanke goes big with a .5% cut. Personally I question the effectiveness of any rate cut in smoothing out problems in the credit markets. And I’m not alone. While most Wall Street firms are calling for at least a .25% reduction (wonder why with the CDO meltdown?) some cooler-headed folks question the help it will provide to the market:
The odd man out is Scott Anderson, senior economist at Wells Fargo Economics.
Anderson argues that the Fed should not lower the Fed funds rate, but said they will just for the “psychological effects it could have on financial markets.”
“A Fed Funds cut will not bring back the U.S. housing market. A Fed Funds cut will not bring back the commercial paper market,” Anderson said.
If the housing market remains depressed, the markets “will ask for another rate cut, and another, and another, and another…and then what?” he asked.
Well put.
According to John over at Shadow Government Statistics the effective Fed Funds rate is already around 4.75% reinforcing the idea that any cut will be more for show.
From one of the bazillion Market Watch articles on the conjecture:
Most economists think the central bank will cut by a quarter-percentage point to 5.0%, but some are attracted to the somewhat strong move of a half-percentage point.
“While the arguments favoring a bold move are compelling, we believe the chances of a 25 basis point cut carry a higher probability,” said Michael Moran, chief economist at Daiwa Securities America Inc., in a note to clients.
Moran gives three reasons for a smaller move. First is concern about the appearance of the Fed being too quick to protect lenders and investors; second are doubts that the economy will weaken sharply and last is nervousness about inflation.
So my call would be that we are going to see a quarter-point reduction to 5.0% but question its ability to help anything, and wonder aloud what greater risks it may flirt with. What are your thoughts?
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[Source: Blown Mortgage]
What are Interest Only Loans?
An interest only mortgage is a relatively new way to finance your home that has been gaining strong momentum lately. When you originally take out a mortgage your payment consists of two parts: interest and the principal. The principal is how much your house actually costs and the interest is how much extra you pay on top of the cost of your house to take out the loan, which is based on the interest rate you receive. The interest is basically the price of taking out a mortgage. You will pay both the interest and the principal based on an amortization schedule in which at the beginning most of your payment will be interest and towards the end most of your payment will be principal.
Interest Only?
An interest only mortgage takes out your premium payments for certain length of the loan. This usually happens at the beginning and lasts about five years. The first five years of your mortgage you will only pay the interest on your mortgage. Once those five years are up your mortgage will be re-amortized to include the principal on your mortgage. What is the point of this? For the first five years of your mortgage your monthly payment will be much less then it would be with a normal mortgage. Once those five years are up your monthly payment will be higher for the remainder of your mortgage. This is a good option for people who dont have a lot of money now but could see themselves getting more money via raise or investments in the future.
A Gamble?
Deciding on an interest only mortgage can be gamble because if you do not receive a raise in income like you expected after a few years then you could be stuck looking at high monthly mortgage payments after your initial few years of interest only payments has come up. Hopefully the money you saved during your interest only payments was managed wisely and you wont have this problem. An interest only mortgage basically comes down to whether or not you want to save some money at the outset of your mortgage.
Additional Resources
amortization schedule, Interest, interest only mortgage, interest rate, Mortgage Payments, Mortgage Planning, Mortgage Rates, mortgages, mortgage payments, UncategorizedRead More...
[Source: Mortgage Blog]
Do you think Chinas gonna forget?
It’s amazing what a few beers and a trip to New York City can get you these days. In a recent conversation with an unnamed employee of an unnamed big NYC firm that is huge in the mortgage backed securities game I got a feel of just how bad it is on Wall Street. This person worked on the front lines - packaging and selling CDOs (collateralized debt obligations) to big-time investors. How big you ask? How about China, Austria, and a ton of other countries as regular customers?
His take seems to me to be right on. When asked if the housing market is going to “come back” he frankly said, “never.” The reason? “Do you think China’s gonna forget [how screwed they got]?” As he tells the story he could get anything he wanted rated AAA by the agencies with just a bit of alchemy and some statistics. Take a pile of subprime mortgage debt and slice and dice and voila - an AAA rated CDO. His firm would turn around and sell millions and billions of dollars worth of AAA-rated CDOs that turned in to 10 cents on the dollar, almost overnight. China, a huge buyer of our mortgage debt is holding paper that is worth no more than 10 cents on the dollar; and they hold a ton of it.
If you think lead-tainted toys are a big deal, how about being conned in to a bunch of bad subprime mortgage debt reformulated to look innocuous by the wizards (nay, snake oil salesmen) of Wall Street? The housing market will never return because China will never forget how screwed they got in this whole deal. Do you really think in 3 to 5 years China is going to take another blind plunge in to mortgage debt? Do you think other countries are going to come rushing back saying give us more crap? Not a chance.
Consumer sentiment doesn’t matter, lower rates don’t matter, these countries got burned by the billions and they won’t forget any time soon. The fuel for the American housing market run-up is not coming back. The question is now - how closed off is America and Wall Street to funding from these countries? Will they believe the ratings agencies and Wall Street houses when they tout their latest offering as AAA rated? What else will suffer as these countries keep their money on the sidelines, out of markets that have proved lucrative for US firms hawking their wares?
He said at least you mortgage guys can keep writing refis, but the CDO market is dried up. People [investor customers of the Wall Street firms] are really, really unhappy. And one last thought? You ain’t seen nothing yet.
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[Source: Blown Mortgage]
E-Trade Exits Wholesale Mortgage, Revises 2007 Guidance
E-Trade Financial announced today that it was exiting wholesale mortgage as part of its move to return to “core businesses” that benefit its retail customers. The company is also upping its amount of loan loss reserves as a result of “charge-offs expected as a result of the disturbance in the credit markets.” The aggregate loss reserve provision is $245 million. From the release:
With this additional reserve, allowance for loan losses as a percentage of non-performing loans is expected to increase to 75 percent based on assumptions for the second half of the year, up from 45 percent on June 30, 2007. Within home equity loans, where the Company and the marketplace have seen the most significant stress, the coverage will be approximately 100 percent, up from 51 percent as of June 30, 2007.
As a result of the actions outlined above, the Company is revising its earnings outlook for 2007 to account for 1) higher provision for loan losses; 2) potential securities impairments; 3) slower balance sheet growth and composition expectations; and 4) exit and other restructuring charges. For the full year 2007, E*TRADE FINANCIAL expects GAAP net income of between $450 million and $500 million, and earnings per share of between $1.05 and $1.15 per share. This is down from its previous range of $1.53 to $1.67.
No word on the number of jobs affected; but I imagine it is significant. Just another sign of the times, and certainly not the last notice like this. If you think of all of the companies like E-Trade, AIG, H&R Block that got in to mortgage as an adjunct to their core business models there is still a decent list left of those that will probably make the move out of the sector to preserve liquidity and earnings in other, more profitable business units.
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[Source: Blown Mortgage]
Monday, September 17, 2007
Countrywide Layoffs Gear Up
My sources just informed me that the entire Anaheim subprime wholesale production office was given 60-day notices as the Countrywide layoffs announced last week apparently get underway in earnest. I am not sure of the size of the Anaheim production office but it was a sizeable division.
Please email me if you have more information about the sure-to-be ongoing Countrywide layoffs.
PS. I’m still on vacation but finally have high-speed internet - finally!
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[Source: Blown Mortgage]
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