Living on Euler's Line

Wall Street's role in Housing, Mortgage and Credit Crises

In the previous post Politicians Pointing the Finger, you can see the Pyramid of Greed shares some blame on our current crises with Wall Street and Investors.  60 minutes did a piece trying to break down their role and I think they did a good job describing the mess (based on comments, the derivatives guys are a little upset someone is pointing at them).  Sounds like the next in line to share the blame - Mathematician's and Physicists (2:45 into story).  12 minutes long but well worth it if you want to have a better understanding of the big boys involvement in this complex situation. 

Watch CBS Videos Online

Hat tip to Outer Banks Blogger Bill Holt, author of OBX Neighborhood for the link. 

Politicians pointing the finger for the Mortgage Meltdown

I along with millions of others watched the VP debate last week to see which foot Governor Palin would put in her mouth or if Senator Joe Biden would hit on her.  Palin did better than expected by many - especially after the Katie Couric interviews and Biden kept his hands to himself.  Normally I quietly sit on the sidelines and let Monty and Bob duke it out over the political scene, but this time the fire was a little too close to home to ignore.

The question - who is at fault for the subprime mortgage meltdown?  According to Palin - it was the greedy lenders. 

Greedy Mortgage Lenders caused this???  I can't believe the Republican Party is taking this stance.  Politicians at this level are supposed to have advisers that understand the complex issues and help the candidates put them into words the public can understand.  But instead of spreading the blame to the parties responsible - they decide to take the low road and blame the dirty mortgage lenders.

Who do I think is to blame?  All of us.  We all share some of the blame.  I saw a great post on Blown Mortgage titled Pyramid of Greed. 

This is the most accurate description I have seen to date of who really is to blame for this mess.  Great job Morgan. 

I wish there was a candidate that would tell it like it is and not what some focus group thinks the public wants to hear.  I wish the candidates would just answer the questions and not divert attention to something they want to discuss.  We are now only four weeks away from the election and I have yet to see that candidate. 

Feds meet today - will they lower rates?

The Federal Reserve will meet today and around 2:15 p.m. EDT, we will all know what steps they will take to calm the turbulent waters.  My wild guess - they will probably make a cut in the rate especially since core inflation came in as expected this morning.  Update 2:15 - wrong again.  The fed keeps rate at 2% (prime is now at 5% for most banks).

I thought the mortgage industry was in for a long cold winter, but I didn't think it would start in September.  Fannie and Freddie being taken over by the government is such a huge pill to swallow.  Why aren't more people screaming for the government to appoint an independent council to look into the fall?  Maybe it has something to do with the political connections (both Democrats and Republicans have dirty hands in this one).  I think most outside of the industry really don't understand fannie and freddie so it does not make it a big deal.  The difference between this fiasco and Enron - everyone understood their 401k and how much that loss cost them.  The public might not understand fannie and freddie - but we will pay for their mistakes for a very long time.

Three little boxes that can get you in a lot of trouble - Appraisals 101

So you want to buy Outer Banks Real Estate.  Good idea - the property values have dropped significantly since their peak in August of 2005.  One thing many buyers don't consider - the appraisal. 

The appraisal compares your property to like properties that have sold in the last six months.

There are three boxes on the first page of the appraisal that can have a significant impact on the borrower -One Unit Housing Trends.  Here is an example of this small but important portion of the appraisal.

The box above shows the value in an acceptable range for lenders - Values are stable, Demand and Supply are in balance and Marketing Time is between 3-6 months.  If the checks were leaning towards the left - the lenders would be happier but you would not see a break in rates.  But the three boxes on the right makes everyone nervous.

If the lenders get nervous - it is going to cost someone (the buyer) money.  Bottom line - each box on the right checked can increase the down payment minimums by 5%.  Some lenders can also classify a County or Region as a slow market - so regardless of what the appraisal states, your down payment requirements can be higher. 

Bottom line - your lender should explain this information to you up front - nobody likes a surprise at the last minute.  If you have any questions, please feel free to contact me. 

Will Bernanke and crew cut the Fed Rate today?

Talk about a busy day in the Outer Banks Mortgage business...  There is quite a bit of activity which is nice (good news).  We have a corporate trainer visiting the Outer Banks today (another good thing - education is key in these crazy changing times) and the economic calendar is loaded today.  Seven major reports are due out today - the first at 8:15 and culminating with the Fed announcement on potential rate cuts at 2:15 this afternoon.

Vegas odds (a joke but not that far from the truth) has the rate cut at 1/4% which would bring prime down to 5%.  Many expect this to be the last cut for some time - mainly because of increased inflation fears.  I am not so sure if this will be it - most of the inflation is in the food and energy sectors and these are usually not given as much weight.  I am leaning towards 1/4% cut today and maybe one more before the summer heats up. 

Fed Rate drop - How will it affect the Outer Banks Real Estate Market Conditions?

Will Bernanke throw down like Chuck Norris?  It is a stretch but stay with me for just a moment.  We all know Chuck Norris to be the proverbial tough guy.  The question is - will Ben follow in Chuck's footsteps?  The Feds will be releasing their minutes on Tuesday afternoon and potentially announcing their cuts in the Fed Rate in hopes of stimulating the economy. 

The big question is - do they pull a 1/2% drop in rate (Pee Wee Hermann style) or do they go for the full Chuck and cut the rate by 1%.  Inflation numbers for February were lower than expected so it leaves the door open for more aggressive tactics. 

What does this mean for the Outer Banks Real Estate and Mortgage market?  The phones will ring - many will think the rate on all mortgages will drop along with the fed rate. Typically we see the opposite - the fed rate drops followed by a short term increase in mortgage rates.  The last time the fed dropped the rate by .75% - we had three hours of glory (lower rates) followed by two weeks of worsening prices. 

My guess is we will see a 1% drop on Tuesday - I know it is on the high side of current estimates but why not swing for the fence.

Update - Feds dropped both discount (overnight lending rate) and Fed Rate by .75%.  Home Equity lines of credit should be adjusted down in the morning.   The Fed implied there might be additional fed rate cuts in the future.

New Outer Banks Conforming Loan Limits

The long wait is over - we finally know the new conforming loan limits on the Outer Banks.  Here is what we know.

HUD (FHA Loans) and OFHEO (Fannie and Freddie loans) have published their new loan limits for the remainder of 2008. 

• Dare County - both limits were raised to $ 460,000.  This only applies for primary residences.  Sorry but no help for that vacation home or investment property.
• Currituck County - both limits were raised to $ 428,750. 
• The shocker to say the least was Elizabeth City - raised to $ 729,750.  Someone was asleep at the wheel.  Don't look for that number to stick.

No other counties for Fannie and Freddie were affected in North Carolina. 

So what does this all mean - not much.  Conforming limits have been at $ 417,000 for some time and now they have slightly increased (except for Elizabeth City) through the end of 2008.  The good news - there are only 5 properties today in Elizabeth City listed over $ 729,500 - the world is your oyster.  My guess is it will take at least sixty days for lenders to program their systems once the dust settles.

Update:  I have been reading some differing opinions on second home and investment property eligibility.  Looks like details will be released on or before the 17th of this month. 

Update 2:  I did a little more research and found the truth according to Fannie.  Second Homes and Investment Properties are allowed with the new conforming loan limits.  The changes will not help those that want to pull some of the equity out of their home.  If you read the guidelines and summary, the loan only allows a 60% loan to value ratio.  That means you can only borrow 60% of the value of your home.  More updates to follow.

Outer Banks Stimulus Program - will loan limits change on the Outer Banks in 2008?

I had a comment on my post about the governments stimulus program signed by the President last week.

So what exactly IS the limit on loans that are not considered jumbo for the Outer Banks now? Is it still $417,000?

Good question Key - first what we know.  Conforming loan limits on the Outer Banks are currently set at $ 417,000.  Why does this matter so much - it is because conforming rates are anywhere between 1.25% and 1.5% less expensive than Jumbo Rates.

HUD has 30 days from the day the President signed the package into law to identify the impacted MSAs (Metropolitan Statistical Areas) – meaning sometime in mid-March, all mortgage lenders will simultaneously receive the official notification.  The current Dare County MSA is listed at $ 349,600.  Currituck County stands at $ 313,500. 

Now for what we don't know.

Although several mortgage lenders have promoted lists of what they believe the new limits will be, these are only estimates because HUD has yet to determine the higher loan limits. We know that HUD will determine the new loan limits based on the median area sales prices. But, we do not know what timeframe will be considered … will it be the:

·         previously published prices from the third quarter of 2007?

·         yet-to-be announced prices from the fourth quarter of 2007?

·         yet-to-be announced prices for the entire 2007 sales year?

Because of the changes in the mortgage industry, the median area sales prices may be dramatically different throughout the year. So the timeframe used by HUD to determine the higher loan limits is key. 

We expect the impacted areas to be announced in mid-March and remain in effect until Dec. 31.

At this point - the Outer Banks is not considered a high cost area.  We could see conforming loan limits remain at $ 417,000 for Dare and Currituck Counties.  We could see FHA limits increase but that would just help those looking to purchase primary residences.  Second and Vacation homes would be out of the picture.  For now - we will all have to wait and see what happens. 

Mortgage Bonds dropping like a not so secret spy satellite

So you might have heard there is this super secret satellite dropping from the sky.  How does this relate to mortgage rates you ask?  They don't really - except the mortgage bond chart looks very similar to the degradation of the orbit of USA 193.

The chart on the left shows the orbital height of USA 193 - the chart on the right shows the mortgage bonds at the close of business today.  The chart shows bonds going down which means rates are going up.

We had a late afternoon rate increase today (represented by the really long red bar on the right  side of the chart).  It caused conforming rates to go up by 1/8% today (loans under $ 417,000).  Jumbo rates took one in the face again with already high rates jumping 3/8% from earlier pricing. 

Back to the satellite - the US government has decided to try to shoot down USA 193 tomorrow around 9:30pm EST.  If it works as planned - the satellite will fall harmlessly in the Pacific Ocean.  We might be in for a treat tomorrow night if some of the debris burns up overhead while the lunar eclipse is going on. 

Should be a busy day for the mortgage bonds tomorrow.  The biggie - Core Inflation is scheduled to be released at 8:30am.  Core inflation is the measurement of inflation minus fuel and food.  Mortgage bonds really don't like inflation - if the number is higher than expected - we could see some significant worsening in rates.  If the number comes in as expected or even lower - we might see a welcome lowering of rates. 

Fed lowers prime again - good news for Outer Banks Real Estate

Here we go again.  The Federal Reserve cut the Fed Rate by 1/2% today and now stands at 3%.  Most major banks followed suit this evening and lowered their prime rate to match the Fed.  Prime rate is typically 3% above the Fed Rate and is what many Home Equity Lines of Credit are based on. 

Typically when the Fed lowers the rate - we see a jump in primary mortgage rates.  It didn't happen today but the still have a few days to go with some very important economic news on the horizon.  Jobs numbers are due on Friday and if they are not close to the target, we could see some rate fluctuations.  The stock market briefly surged on the news but ended up down today.  Based on the report - we might be in for some additional cuts to prime at the next Federal Reserve meeting in March or even sooner.

For those really having trouble sleeping - you can read the entire Fed Statement.  A couple of key excerpts and my two cents: 

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

This is what could cut the party short - inflation.  If the rate of inflation starts to rise - so will the Prime Rate. 

Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

They hope to reduce or eliminate the potential recession.  Good news - they will act in a timely manner as needed.  This is the verbiage that leads you to believe additional cuts will be made quickly if needed. 

The tough part about the market today is that things are changing so quickly.  My goal has always been to be a trusted adviser to my clients.  Provide the customer with solid and credible information and everyone wins.   

And I should probably stop trying to guess this crazy market.  Last week I had a gut feeling that the Feds would not move today - I think it was just the Taco Salad I had for lunch. 

The good news is the Outer Banks Real Estate Market has had some increased activity lately.  Many Realtors I speak with have noted increased interest and showings of homes.  Not sure if the record low rates are causing it or that people are now thinking about their summer vacation and the desire to buy a home at early 2004 prices.  If I can be of any assistance, please feel free to contact me.