Article from the Denver Post:

The Federal Reserve’s short-term- interest-rate cut of half a point Tuesday should give a boost to local businesses and consumers, including some sectors of the hard-hit housing industry.

Read the full article: The Fed cut interest rates. Now what?

Fed Funds Rate down .5%

WASHINGTON (Reuters) – The U.S. Federal Reserve on Tuesday slashed the benchmark federal funds rate by a half-percentage point in a bold bid to buffer the economy from a housing slump and related financial market turbulence.
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The decision by the central bank’s Federal Open Market Committee took the overnight rate down to 4.75 percent, its lowest level since May of last year. It was the first cut in the interbank rate — the Fed’s main tool to influence the economy — since June 2003 and the first half-point reduction since November 2002.

Financial markets had widely expected the Fed to lower overnight borrowing costs, but were split over whether the move would be a quarter-point or more-aggressive half-point.

In a related move, the Fed also lowered the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.

What does this mean?

According to Marketwatch:

Here’s what consumers can expect:

If a consumer is paying 8.25% interest on a $100,000 loan that is based on the prime rate — such as a home-equity line — a rate reset to 7.75% is likely. That’s the difference of about $500 a year, or roughly $41.66 a month in interest charges.

Resets on some adjustable-rate mortgages will be slightly better. Many ARM interest rates are based on an average of Treasury note yields coupled with a fixed margin, now at about 2.75 percentage points. At Tuesday’s 10-year yield of 4.49%, the rate is 7.24%. In July, it was at 7.77%. That makes the monthly payment on a $200,000 mortgage $1,363, about $73 less than it was in July. But Treasurys could head even lower following the Fed action.

Rates on credit cards, which have taken on a bigger role in consumer financing in recent months, are likely to dip a bit too, lowering minimum monthly payments.

Savings-deposit rates will go down, meaning that your bank balances won’t appreciate at the same rates you’ve seen all year.

Ditto on money market rates, hurting those on fixed incomes — generally the elderly — who rely on cash generated from such safe investments.

Interest rates on new loans for cars will fall, though it won’t have any effect on loans already in place. But Brian Bethune, the U.S. economist with Global Insight, urges consumers to wait until contract negotiations between autoworkers and their bosses are done this month. “They could pull out all the stops,” he said about automakers’ desire to unload inventory. And if the Fed lowers rates again next month, all the better.

Bait and switch is a sales tactic that seems to infiltrate every segment of industry. The words “sorry, that’s no longer available, but we have this ___(fill in the blank) available” could fit the car, computer, electronic, et. al. industries.

When your dealing with your homes financing, the last thing you really want to hear is that your mortgage term and rate are no longer available. However, in today’s mortgage world, the mortgage program that you were offered probably was available yesterday but may not be available today.

Home buyers and owners refinancing mortgages are increasingly finding at the closings that their lender isn’t honoring the deal they thought they had locked up.

Read the full story: Tough words on mortgage fraud

Last December I had a subprime loan not go through underwriting with an approval. It was awkward for me since I pride myself on being thorough. The start reality is that it was the start of the meltdown of subprime mortgage companies.

The Denver Post explores this issue in depth:

Gone are the days of easy loans. Foreclosures and a subprime loan-market meltdown have left buyers scrambling to ante up.

The article is full of stories from buyers, sellers, investors, et.al. who have been impacted by the credit crunch.

Read the full article: BUYERS: Lenders tighten loan standards

The article is fairly accurate

Inman, a leading real estate news outlet, has an article entitled: Mortgage data links higher-priced loans with delinquencies

Blacks and Hispanics were also more likely to be stuck with higher-cost loans than whites. Under HMDA, higher-cost loans are defined as first-lien loans with annual percentage rates that exceed the interest rate on Treasury securities of similar maturities by 3 percent or more. The threshold for junior loans is 5 percent.

These statistics are often misleading. However, Inman does state:

Part of the difference in both denial rates and the incidence of higher-cost loans between ethnic groups can be explained by factors such as property location, income relied on in underwriting, and loan amount, Federal Reserve Board analysts said.

So this really issue isn’t black or white, it’s grey.

Mortgage article from the Rocky Mountain News:

Most apartment markets in Colorado appear to be healthy, with vacancy rates falling and rents rising, officials say.

Read the full story: Rents rising in Colo.

When I discuss retirement with mortgage clients the discussions either go like this….

“well social security won’t be there for me and I’m still recovering from the dot com bust and my financial planner is a complete moron and at the rate I’m saving, I’ll never retire”

or like this…

“I plan on retiring at 55-60 depending on what happens with my investments and my home’s value”

Your home’s equity is a solid foundation for retirement according to an article entitled Retiring on Your Home’s Equity

A recent study commissioned by Oakland, Calif.-based Bell Investment Advisors, found that seven out of 10 60-year-olds consider their home part of their retirement plan. Of that group, almost one in five — 24% to be exact — said their home’s equity represents half or more of their total savings.

Also included are the sources where current retirees will be drawing their retirement:

Wealth holdings of a typical household prior to retirement*:

Social security: 42%
Primary house: 21% of total wealth
Defined benefit plan: 16%
Defined-contribution plan: 8%
Financial assets: 7%
Business assets: 2%
Other nonfinancial assets: 4%

* Households headed by individuals aged 55-64. Source: Survey of Consumer Finances 2004.

More importantly, the article continues to discuss two ways to tap your equity when you retire including downsizing into a smaller home and keeping the profits and a reverse mortgage where you get a mortgage that pays you.

This article brings to light the importance of mortgage planning as a key component in your wealth management. Your home is your security blanket since it can be the largest asset in your estate. Your mortgage allows you to manage this asset. Obviously I just scratched the surface of mortgage planning but if you need more information, contact me.

PRIVATE MORTGAGE INSURANCE: If your down payment is less than 20% of the purchase price of the home, mortgage lenders require that you take out Private Mortgage Insurance (PMI). This insurance protects the lender in the event you default on your mortgage. PMI has fallen out of favor in recent years due to the 80/10/10 (80% first mortgage, 10% second mortgage, 10% down payment), 80/15/5 (80% first mortgage, 15% second mortgage, 5% down payment), and 80/20 (80% first mortgage, 20% second mortgage, 0% down payment).

On the heels of the mortgage credit crisis comes word that the two bigger players in the mortgage industry may merge. However, after further deliberation, they decided against a merger.

MGIC drops bid for rival Radian
The mortgage insurers agree to end the deal and focus on how to survive in the industry.
By Emily Fredrix The Associated Press

Milwaukee – Mortgage insurer MGIC Investment Corp. abandoned its $5 billion bid to buy rival Radian Group Inc. on Wednesday, saying it was in each other’s best interest to concentrate on surviving in the faltering mortgage industry.

Radian had vowed to see the deal through when MGIC announced in August it wanted to back out. But chief executive S.A. Ibrahim said Wednesday that Radian didn’t want to fight and instead needed to weather what he called “an industrywide scramble to survive.”

Investors seemed hopeful for both companies after news of the agreement.

Though Radian’s shares tumbled as much as 9 percent after the market opened Wednesday, they closed up 16 cents at $18.27. MGIC shares fell 29 cents to end at $30.05.

MGIC, based in Milwaukee, had agreed in February to pay about $5 billion in stock for Radian, valuing its shares at $60.78. Shares of MGIC closed the day the deal was announced at $70.09.

As problems mounted in the mortgage market, both companies saw their shares tumble and the deal’s value sink.

MGIC said it did not believe it had to complete its purchase of Philadelphia-based Radian because their joint interest in subprime-mortgage investor C-Bass LLC could be worthless.

The decision to end the deal was mutual, both companies said.

Neither party paid the other to get out of the agreement, according to a news release. The original agreement said there would be no breakup fee if a decision was mutual.

Both companies’ shareholders had already approved the deal, which MGIC had said would close in early October.

But woes felt throughout the mortgage industry made the deal difficult to finish, said Michael Zimmerman, MGIC’s vice president of investor relations.

While this is akin to splitting up, it remains to be seen what this means to the borrower. There aren’t too many PMI companies left and when the two biggest PMI companies are more concerned about surviving, especially when in 2007 PMI is tax deductible, this can’t be a good sign.

I usually rely on Andy Rooney Ben Stein to make sense of whatever ails America. His self-effacing wit tends to overshadow his knowledge. He’s like the “very rich and very eccentric” grandfather we wished we had, the one who was wise beyond his years who spoke from the heart. My maternal grandfather fit this profile except there a distinct language barrier as he spoke Tagalog and I didn’t.

Earlier this month Ben Stein wrote a piece called How Speculators Exploit Market Fears. It discusses what hedge fund managers do to create action in the stock market. Rather than take snippets from the article, here’s the full article:

Here’s a fact: The speculators and hedge fund managers who run today’s stock market need market volatility in order to make money.

They can’t make enough money if the market stays flat or moves only a bit, so they like extreme and unexpected price movements. They especially like sudden, surprise movements down, when they can make money off stocks they borrow and sell — or, as they say, “sell short.”

Money Lust Satisfied

That’s what’s been happening the past couple of weeks. But it’s not interesting to say that the speculators are whipping the market around to satisfy their money lust. So the speculators themselves make up reasons for why the market is fluctuating, flog those reasons to the media, and then profit if some other speculators believe the jive reasons and jump in the way the manipulators want them to.

Supposedly, the market is “correcting” because of worries about the housing slowdown, and also because of fears that the debt markets that support mergers and acquisitions is drying up.

These are interesting theories, and people who don’t know a lot about the stock market or the economy might find them beguiling. What follows are a few truths that show how shallow these “reasons” for the stock market moves are.

Housing a Theory

Yes, the housing market has slowed from a spectacular bubble level to a simply pretty good level. Housing sales and starts are now about what they were in 2002, and no one thought we were in a housing depression then.

In any event, housing is only about 5 percent of the economy. If it falls by 15 percent, that would represent a fall-off of about .75 percent. That’s not trivial, but it’s also not the stuff of which recessions are made.

The fact is that there is no recession. The economy is suffering from a labor shortage, not a surplus of unemployment. The Fed is worried about excess demand, not slack demand.

Corporate profits set new records every day. Whatever’s happening in residential sales and building is simply not slowing down the economy. Why should a Boeing or a Merck or a Pfizer have any reaction to housing at all? Because the speculators sell everything they can when nervousness sets in — and for no other reason.

A Minor Major Mess

Subprime is a mess. But it’s a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That’s 4 percent of mortgages.

Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market — a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it’s nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

There’s simply no connection between subprime and developed or developing nations’ stocks. This by itself shows the thin context of the selling wave late last month.

Money’s Still Cheap

What about the supposed drying up of loans for mergers and acquisitions by private equity firms? Well, here’s a good, simple test of just how valid that explanation is for stock market moves: The majority of private equity takeovers are financed with junk debt.

If there really were a major shortage of funds for these deals, the interest rate on the junk would skyrocket. Instead, while the rate has risen by about 150 basis points in the past month, the spread between junk and investment grade is now about 290 basis points, according to leading junk analyst Martin Fridson.

This is a lot lower than the year-end average of the spread from 2002 to 2006, and far below the almost 800 basis point spread during a true interest-rate crunch like the one after the tech meltdown in 2000-2002.

So that’s phony, too. Interest rates have risen, but not anything like what they’ve done in real crises. And besides, the Dow fell by about 550 points the week before last, yet not one of the Dow stocks is involved as either acquiror or acquiree in a private equity deal.

In short, money is no longer virtually free the way it was for private equity deals in the past year. But it’s not expensive by historical standards, either.

Spreading the Fear

In other words, it’s all the speculators trying to panic us so their sell programs will make money. And they’ll make money as long as they can spread their panic. When they can’t do that any longer, they’ll work the long side — and make up reasons for that, too.

In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don’t sell. With all the shrieking about the market, it only fell to what it was about five weeks ago — and we didn’t think we were poor then.

So let the speculators shout “fire.” As of right now, they’re not blowing anything but smoke.

Two quick points:

131+ mortgage companies have shut down. If you’re a consumer chances are you’ve never heard of these companies. If you’re in the mortgage business, you’ve probably heard of a fraction (i’d say 25%) of these companies. For the most part, those that bet on high risk loans (subprime, alt-a, non-owners, etc.) lost. The ones that bet on low risk loans (conforming) are still open for business.

However, one quick look at Google Trends and you’ll notice that countrywide, mortgage, credit, or liquidity don’t show up as “hot searches” in Google.

Sometimes you need Ben Stein to make sense of a nonsensical world.

Growing up in NY teaches you a nice lesson that each can of soda equals 5 pennies. You horde those cans then one day you haul a big frickin bag full of soda cans down to Waldbaums and get PAID. You were recycling and getting paid all at the same time. There’s one catch. You pay those five cents up front so a 6 pack of soda would really cost you an additional 30 cents.

As I’ve gotten older I hardly drink soda yet somehow the lesson of not throwing cans into the garbage has stuck. Ever since I moved to Denver, I received a big purple bin. It was picked up once a week by the city’s recycling service. Once a week all the cans, bottles, plastic, and newspapers I collected were hauled away. I’m probably paying for the service but I don’t seem to mind. If it can be reused, why not make the effort.

Apparently I’m part of a miniscule minority in Colorado:

U.S. recycling rate: 28.5%

Colorado recycling rate: 12.5%

That’s pathetic!

If you’re shocked, here’s the Denver Post article where I get these numbers.

Live in Denver? Recycle Now