Premier Mortgage Group

It is Thanksgiving here, not over there, but given the sudden silence over there you’d think they were the ones on holiday.

Here we got the mild disappointment of 3^rd quarter GDP revised down from 2.5% to 2.0%. Stock market pollyannas are already spinning: since inventories were not re-built in the 3^rd, contributing to the downward revision, the 4^th is going to be hot, hot, hot! Not, not, not. Richmond and Chicago Fed metrics, as nearly every real-time indicator, show slight forward motion but no acceleration.

The failure of the Supercommittee did no particular harm, as markets hold all politicians in contempt and expectations were already near zero.

Now, we’ll talk turkey — technical, central bank turkey. Europe is out of all options except one: the ECB with invented money can buy a couple of trillion euros’ worth of Club Med debt. How would that be different from the Fed’s “quantitative easing”?

QE1 here was announced three years ago this week. The Fed promised to buy $1.7 trillion in MBS and Treasurys (2/3rds the former) to bypass a broken banking system  and inject credit directly into the economy. The focus on mortgages: those rates had risen near 7% in 2008, adding to housing distress jumping out of the Bubble Zones.

Cries of INFLATION!! rang throughout the land. MONEY-PRINTING!!! The same people still screech the same lines, but three years later, no inflation. Credit still contracting, no money reaching the economy, no inflation.

Europe’s bond markets in the last 10 days have begun to fail. They are headed for a day in which markets open but must be closed, and cannot open the next day… or the next or the next. Huge pressure on and expectation from Germany that it will agree to co-sign for wayward Club Med is ridiculous. The combined GDP of Italy, Spain, and France is nearly double Germany’s. All of the invented-financing euro-bailout schemes are dead for the same reason: Dad doesn’t make enough money to co-sign for 14 kids.

All central banks are legal counterfeiters. The ECB could bid for Club Med bonds, and pay banks for them by making credit entries on their accounts at the ECB. Investors would presumably stop dumping, Club Med borrowing costs would fall to a sustainable level, and they could roll over maturing debt.

Why not?

The most popular answer: Germany’s historical-hysterical fear of inflation forbids such money-printing. Another: the euro-creating treaty also forbids the buys.

Wrong and wrong. Here the Fed bought only government guaranteed paper issued by its own nation. The ECB’s first problem would be, whose paper to buy, and how much of each? Very much worse, the ECB knows that the Club Med paper is bad-credit paper. Rising market interest rates has been a symptom, not a cause of the underlying troubles. Club Med has so over-borrowed that it will default, leaving the ECB holding a bag that all of Europe has tried to drop.

The second problem is worse. Germany believes that if austerity is adopted, then markets for Club Med debt will re-open, somehow ignoring the revenue-wrecking that austerity will inflict. And no matter what austerity is adopted, or what the ECB buys, Club Med cannot recover: those nations cannot compete with Germany if bolted to the euro, not if Germany proceeds as a mono-maniacal exporter to Club Med, refuses to import, refuses to goose internal consumption, and insists on clenched monetary policy.

Germany demands austerity and reforms in exchange for nothing. And the ECB knows. Markets know. Even if the ECB comes in, big, it will not restore the status quo 1999-2010 to which Germany feels so entitled.

Last, be careful what you wish for. If the ECB is in, big, the euro would fall from $1.35 to something far lower, which would put China in agony about what to peg, dollar or euro, and with whom to start a currency/trade war. Same for Japan. Same for us.

Despite the short-term chaos, I do hope that Europe will break up this experiment quickly, before more damage is done. It’s the ECB’s call, very soon.

Mortgage interest rates were mostly flat this past week despite generally stronger than expected economic data.  Economic reports stronger than expected included October Retail Sales, the November Empire State Manufacturing Index, October Industrial Production and Capacity Utilization, the NAHB November Housing Market Index, weekly jobless claims, October Housing Starts, October Building Permits, and October Leading Economic Indicators.  Weekly jobless claims fell to 388k claims, its lowest level since April 2^nd, 2011.  Inflation data was mostly in line with expectations.  The sovereign debt crisis inEurope persists. Italy’s interim Prime Minister Mario Monti faces a budget deficit of 4.6% of GDP.  The borrowing costs ofSpain andFrance increased.  The European Central Bank is buying Italian and Spanish bonds to hopefully keep their rates under 7.00%.  Fitch announced that further contagion with European debt issues poses a serious risk to American banks.

The Dow Jones Industrial Average is currently at 11,796, down about 350 points on the week.  Crude oil spot prices are currently trading at just under $98 per barrel, up slightly over $1 per barrel on the week.  The Dollar strengthened versus the Euro and weakened versus the Yen on the week.

Next week look toward Monday’s Existing Home Sales, Tuesday’s second look at Q3 GDP, and Wednesday’s Durable Goods Orders, Personal Income and Outlays, and weekly jobless claims as potential market moving events.

The top story is still Europe, but a bore except for the entertaining incompetence on parade. Dr. Johnson maintained that nothing so concentrates the mind as the prospect of one’s hanging in the morning, but that concept has eluded Europe.

All bond markets there fell apart this week, saved from collapse only by the purchases of the European Central Bank, which said it is forbidden by treaty to do so, won’t do, can’t do, but is doing. All other paths to euro status quo salvation are dead.

Club Med will sooner or later default on a couple of trillion in euro-IOUs. The ECB can buy time, but the hopes that an enormous credit loss can be handed to the ECB — like telling the Maitre d’hôtel to remove an unfortunate plate of fish — would only magnify ultimate danger. And, contrary to hopeful policy-mongers, such an attempted burial of credit loss at the ECB has no parallel to our Fed’s QE.

Here at home the stream of economic data is okay. However, the general run of commentary is now just as excessively positive as it was negative in August into September. Inflation is no threat at all: core producer prices were unchanged in October and CPI rose only .1%. The values including energy and food fell, .3% and .1% respectively, indicating downward pressure in the pipeline. Industrial production (down Sept, up Oct), the NY- and Philly-Fed indexes — just wobbling back and forth across baseline. A bright spot, retail sales up a half-percent in October… careful with that. We should be getting something for $1.3 trillion in deficit spending this year.

Genuine reason for thanks: a lot of media and government people are suddenly speaking to housing. Six years in purgatory may be enough. Even those hostile to the likes of Fannie understand that credit is too tight. However, one debate remains: do we need jobs before housing can recover, or are jobs dependent on housing?

Time out from Europe for research, and the jury is in: housing first. (Sources NBER, NAR, Dept of Labor, and Freddie.)

Recession November ’73 to March ’75: Home sales rose from January 1975 bottom to the pre-recession level by July. Unemployment insurance claims did crest in March ’75, and the rate of unemployment at 9.1%, but that rate was still above 8% in mid-’76, 16 months after the housing turn.

Recession October ’79 to November ’82: The NBER pegs the start in January 1980, and calls two separate recessions in the period, but I was there — it began earlier and was all one crater. Home sales crashed by October ’79 under the weight of Paul Volcker’s jack of mortgage rates to 11.64% (top: 18.45% in ’81, not below 14% until fall ’82). The housing crash: from 3.77 million annualized in ’79 to bottom in May ’82 at 1.86 million, back to 2.57 million by January ’83. Unemployment soared from 5.6% to 11.4%, at its worst simultaneous with that January ’83 housing recovery, and unemployment did not fall below 8% for another 14 months. Pattern there.

Recession July ’90 to March ’91: Existing home sales fell from a 3 million pre-recession pace in to 2.6 million in December 1990, damage done by mortgage rates rising through 10%, sales back above 3 million by May ’91. Pre-recession unemployment was 5.6%; it did not top out at 8.2% until nine months after home-sales recovery, did not fall below 8% for another year, and elevated claims for unemployment insurance did not normalize until another six months after that.

We have had two recessions since, the Mini from March-November 2001, and the Great, December 2007 to officially end (uh-huh) in June 2009. These two are anomalous: in the Mini, housing did fine throughout, supported by record-low rates and sign-here credit. Maybe that’s why it was Mini? Could be? The Great of course was made Great by the collapse of idiot-credit, and not even all-time-record-low rates can overcome today’s credit drought. 4%, but don’t bother to apply.

I do try to write without saying something unpleasant about the President. However, in light of historical evidence his focus on shovel-in-the-mail jobs programs and utter, total absence of housing policy seem a bit odd.

In numbing detail, this fine academic work proves that the sun does, in fact, rise in the east. If anybody STILL wants to argue about housing as the central US economic problem, send ‘em this. Teasing aside, it is very well done, and casket-shut conclusive. http://faculty.chicagobooth.edu/amir.sufi/MianRaoSufi_EconomicSlump_Nov2011.pdf

This week Bill Dudley, NY Fed Prez and certified White Hat, delivered the best speech on the economy, housing-heavy, since the Great Recession began. You may correctly assume that the Fed is exhausted with a White House, Treasury, and Congress that simply will not pay attention, and are void of imagination. Dudley’s remarks are non-technical, refreshing to any real estate professional, and reassuring to any civilian feeling abandoned. The cavalry will come one day. http://www.newyorkfed.org/newsevents/speeches/2011/dud111118.html

One of the things I most love about my work is helping homebuyers understand the complicated process of applying for a mortgage loan. For this week’s post, I thought I’d share the most common questions I am asked when people apply for a loan.

1. If I lock my rate, and rates keep going down, can I unlock my rate, and get the lower rate?
   Alas, no. When we promise you a rate by “locking” it, we are making that same commitment to the secondary market, to deliver your loan with that rate.  If we did not honor our commitments to the secondary market, we would be out of business overnight.  Mortgage rates are dynamic like any other market-driven security.  Rates change every day, all day.  If we could change the lock every time rates changed, then it would not be a lock.
2. Should I lock now, or are rates going down further?
   This is the single most common question I get from clients, and while I appreciate their faith in my ability to predict the future, the truth is that I can’t.  If I could, it’s likely I’d be sitting on my yacht in the Caribbean, and enjoying unlimited wealth.  My best advice on this question is to lock a rate when you see one that works for your situation, because no one can predict rates, and it could hurt a lot more to have rates climb because you didn’t lock, as opposed to having locked and seeing rates drop a bit.
3. There’s so much documentation! Why do you require my tax returns, paystubs, and bank account statements in the loan process?
   Thanks to the sub-prime mortgage crisis, the days of reduced documentation loans and lowered lending standards are gone, and loan approval currently depends on documenting everything to the nth degree.  The pendulum may swing back to less rigorous credit standards eventually, but right now momentum is on the side of more, not less documentation.
4. I just want to refinance my principle balance.  I don’t want to increase my loan size with this refinance.  So why do I have to bring $7,000 to the closing?  Every penny of cash involved in a refinance falls into one of four buckets: Origination Fees, Closing Costs, Escrows,  Interest. For for a detailed explanation of how it works, see my earlier post on Settlement Charges in a Refinance.
5. I haven’t sold my old house yet and I’d like to I purchase a new one. So, I plan on turning my old house into a rental, and have my mom move in. She’ll even sign a lease. That’s okay, right?
   Turning your existing home into a rental so you can get a mortgage loan to purchase a new home has become very complicated these days, partly because of a type of mortgage fraud called “buy and bail.”  Before you consider this, you will need to establish how much equity you have in the old home (minimum of 30% for conventional loans, 25% for FHA) as determined by a current appraisal. The list of requirements continues, but that is where most attempts fall apart.  A signed lease, records of deposits of the rent and security deposit and more, make this a very cumbersome solution, and one that few homeowners pursue.
6. My tax return shows negative income, but I have ten million dollars in the bank, I have great credit, and I only want to borrow $400,000.  Why can’t I get approved for a mortgage?
   In the days before 2008, such a borrower could get a ”reduced documentation”  loan that would not require proof of income.  Now, all borrowers must prove their income with pay stubs, W-2s, and/or tax returns in order to qualify for a mortgage. The only exception to these rules is that if a borrower has established regular qualifying distributions from a retirement account, and those distributions (minus negative income from the tax return, if any) equal income sufficient to qualify for the loan.
7. I realize I started the loan application three weeks ago, but right now I’m super busy. I’ll get my loan application documents back to you just as soon as I can.  What difference does it matter, anyway?
   When we locked the rate, we locked it for a particular time period.  The lock expires after 30, 45 or 60 days, and the loan must be closed and funded within that time frame or the interest rate on the loan reverts to whatever the current market rate is. We can extend the lock, but it is VERY expensive.
8. I’m getting quotes from a number of lenders, and I’m planning to make loan application with three of them.  Whoever gives me the best deal, and gets the loan approved first, gets my business.  So let’s get started, right?  
   Premier Mortgage Group has been a trusted home loan advisor for more than 25 years. Our mission is to develop lifetime relationships with our customers, our partners and our team members. Because of this, we do not work on a mortgage loan file where the client has not committed to work with us exclusively.  For rate shoppers, my recommendation is to do your shopping first, and once you agree to make loan application with us, you are making a good-faith agreement to close the deal with us, just as we are committed to provide you with that rate (assuming your loan is approved.)

Mortgage interest rates increased slightly this past week as Europe’s sovereign debt crisis persists and now includesItaly.  Former European Central Banker Lucas Papademos agreed to become the new Prime Minister of Greece.  InItaly, the yield on its 10 year bond surpassed 7.0%. Italy’s Prime Minister Silvio Berlusconi agreed to resign after the parliament approves the country’s austerity plans. Italyhas $2.6 trillion of sovereign debt, the world’s fourth largest amount of sovereign debt and more than that ofGreece,Spain,Portugal, andIrelandcombined.  Also,Italy’s sovereign debt is 120% of gross domestic product.  In Europe, onlyGreece’s sovereign debt as a percentage of GDP is higher.  Economic news in theU.S.was light this past week.  Of note, weekly jobless claims fell to 390k claims, its lowest level in seven months.  The Treasury Department auctioned $72 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which was met with somewhat weak demand.

The Dow Jones Industrial Average is currently at 12,168, up almost 200 points on the week.  Crude oil spot prices are currently at $98.18 per barrel, up almost $4 per barrel on the week.  The Dollar strengthened versus the Euro and weakened versus the Yen on the week.

Next week look toward Tuesday’s Retail Sales and Producer Price Index (PPI), Wednesday’s Industrial Production and Consumer Price Index (CPI), and Thursday’s Housing Starts, jobless claims, and Philadelphia Fed Survey as potential market moving events.

Events this week are more Ripley’s Believe It or Not, or Saturday Night Live, than financial market proceedings.

Italian bond yields (10s) screamed from mid-sixes to 7.48% on Wednesday, collapsing US-Europe stocks. Then somebody bought a lot of those bonds to put out the fire, or gave orders to banks to stop selling, yield back to 6.89%. The European Central Bank says it is forbidden to buy sovereign debt bail out nations, but the ECB is the last hope to buy significant time. And, on a continent in which everyone says one thing and does another… buying time, is all.

Italy sold some one-year notes at auction this week, yield 6.09% versus 3.57% last month. Not a good trend. We pay 0.10% for one year.

French banks hold a France-killing $560 billion in Italian IOUs. As the Italian contagion grew this week, rumors flew that S&P would cut France’s AAA rating, which among other things would collapse the European Financial Stabilization Facility. S&P denied the rumor, but did not explain upon what basis it has rated France AAA.

The EFSF is a self-bailout fund guaranteed by all 17 euro-currency nations. Those who need to be bailed are also guarantors. The guarantees are not “joint and several,” each guarantor liable for the entire amount; instead the guarantees are pro-rata to GDP. If some guarantees turn out to be worthless, creditors may not look to the surviving strong to pick up the trash left by the failed.

The EFSF is to sell its own IOUs to raise cash to execute the bailout promises to Ireland, Portugal and Greece, themselves EFSF co-guarantors. If this sounds like a Series 2005 Subprime CDO, you have been paying attention.

The EFSF has been trying for ten days to sell $4 billion of its IOUs, and for several days could not; it finally moved them at a 1.77% premium to German bunds, up from 0.51% spread in June. Marvelous. You are drowning, and you are tossed a life-line by another swimmer nearby, also drowning.

The 17 euro currency zone GDPs are as follows, in (billions). The three official wrecks: Greece ($305), Portugal ($228), and Ireland ($203), total $736 billion. The nine mini-members (Malta ($8), Cyprus ($25), Estonia ($19), Slovenia ($48), Luxembourg ($55), Slovakia ($90), Finland ($239), Austria ($376), and Belgium ($468), total $1,328 billion. Most of the minis are in good shape, except the biggest: Belgium has no functioning government, and Austria, whose banks made a lot of loans to Eastern Europe in Swiss Francs which will not be repaid.

The remaining six nations in the euro-zone break into three groups. The healthy, Germany ($3,310) and Holland ($783). The sick, Italy ($2,050) and Spain ($1,410). And the hopelessly exposed to contagion via shot-to-hell banks: France ($2,560).

The grand total is a big operation, $12,517 GDP. However… the three officially insolvent plus Italy and Spain (total $4,196) are to be bailed out by Holland and Germany ($4,093) and the minis (?), while hoping that France can huff, puff, and bluff its way for a decade? Ain’t gonna happen. Just arithmetic. Nothing personal.

A lot of really smart people are trying to figure out the breaking point. Can’t be done. Like watching an inevitable car accident with a closing speed of an inch per day.

Markets via bank run may step on the accelerator at any time. Or these boobs may stay on the Merkel Plan and let austerity run its course, which means recession throughout Europe, collapsing credit and then bank collapse. Unlike the US, Europe has understood for more than a century that banks are public utilities, but they forget that there are limits to capacity at the sewer plant. Once you have a sewer plant in trouble, be veeerrry careful with the valves.

Mercifully, since the world buys so little from us, we’ll be less-impacted by global recession than anyone. No inflation, low or lower interest rates, Fed free to QE3, easy to sell Treasurys.

Born lucky.

The past couple of years have been an interesting  time in the housing market.  Falling home prices nationally, high unemployment, gloom and doom on the economic front.  Consumers have been hunkered down, waiting for the storm clouds to pass, not making any radical moves like buying a house.

Now, there are signs that a few rays of sunshine are peeking through the clouds.  The Wall Street Journal reported this week that the economy grew at a 2.5% pace in the third quarter of 2011, up from 0.4% in the first quarter and 1.4% in the second.  Nationally, new home sales ticked up 5.7% in September, the first increase in 5 months.

In the Boulder/Denver area, home sales remain steady, even strong in certain market niches.  Kelly Campbell, realtor with Staufer Team Real Estate in Louisville, Colorado, reports that “Boulder County is a very healthy market, with limited rental capacity, which is making folks think about buying rather than renting. Showings are up, and Louisville in particular has seen strong buying interest since Money Magazine ranked it as the top small town in America for the second year in a row.”

Another huge factor that has been weighing on the markets and consumer confidence has been the Eurozone crisis.  This week the Europeans finally seem to have cobbled together a plan to deal with their banking and debt issues, and our markets are responding favorably. In today’s interconnected world with instant news and analysis, uncertainty creates paralysis when it comes to making large decisions like buying a home.  So for the moment, that is one huge cloud that has cleared away.

Interest rates, while off their absolute lows, are still at levels that marked the previous bottom of the rate cycle a year ago.

Bottom Line:  A stabilizing real estate market, extremely low interest rates, a distinctly up-trending economy, a lessening of global financial uncertainty, and even a (brief) lull in the bickering in Washington – all may well be signaling a bottom for the local housing market.  And that’s when you want to buy.

Mortgage interest rates improved this past week as uncertainty surrounding the European sovereign debt crisis persists. Greece’s Prime Minister announced that he would put the austerity measures set out by EU officials to a vote.  If the voters rejected the austerity measures,Greecewould likely default on its sovereign debt and lose its membership in the EU. Greece’s Prime Minister has since backed off putting the austerity measures to a vote but still faces a confidence vote from parliament today.  Due to the high uncertainty surrounding the European sovereign debt bailout plan, money has moved back into Treasuries in a flight to safety move.  Economic data was generally weaker than expected.  Reports weaker than expected included the October Chicago Purchasing Managers Index, the October ISM Manufacturing Index, the ISM Services Sector Index, and the October Non-Farm Jobs report.  The unemployment rate, though, for October fell to 9.0%.

The Dow Jones Industrial Average is currently at 11,890, down almost 400 points on the week.  Crude oil spot prices are currently trading at just under $94 per barrel, up slightly on the week.  The Dollar strengthened versus both the Yen and Euro on the week.

Next week look toward Thursday’s International Trade and weekly jobless claims as potential market moving events.  Also, next Friday the bond market is closed in observance of Veteran’s Day.

US markets have begun to fibrillate, pumping wildly and pointlessly, unable to measure prospects for slow-slide recession here, and Europe confounding everyone. In the last five weeks, the S&P 500 has traded from 1097 to 1292, caving to 1244 now; the 10-year T-note in that time 1.75% to 2.37%, today back to 2.04%. The mortgage centerline is 4.25%, a huge spread to 10s which may soon draw the Fed’s attention.

The ISM surveys (old “purchasing managers”) arrived at 50.8 for manufacturing in October, teetering at breakeven and down from 52.1; the service sector 52.9 unchanged. Rather more ominous, the European equivalent dumped to 43, clear recession, and China is now below 50. August and September US payroll gains were revised up by about half, but far below levels necessary to absorb the unemployed. October’s 80,000 gain is statistically undetectable.

Europe. No blue-sky, just the facts, Jacque. Try not to get lost in individual-nation details (Greece is a sideshow). Hopes of external salvation are done, and even if Germany were willing, it alone does not have the strength for a pan-European fix. The euro zone now has three options. One: to stop a run in progress, the European Central Bank begins a massive and sustained buy of Italian, Spanish, and French debt. Two: Club Med plus France embark on brutal IMF-enforced Teutonic transformation. Three: give it up, back to francs, lira, and pesetas.

Option One is a can-kick, Lucy holding for Charlie. Might buy some time, but Germany will not stand for it, and there is no way to allocate whose bonds get bought and how much. Option Two might make it down the field a ways, months, but the enforced austerity will leave these economies in worse budget shape than now.

These Europeans do not merely distrust each other, they do not like each other; not just the leaders, but the peoples. Sarkozy refers to Merkel as “la Boche,” and last week told UK PM Cameron that he had “missed an opportunity to shut up.” Berlusconi uses unprintable terms to describe the Merkel physique. The Germans and French regard the Greeks as subhuman (in the last go-round, “untermenschen”). This grotesque, inept show reads like the 1930s, or 1905-14, mercifully now just about money.

And right there lies link and lesson here. Not about financial foolishness, but about the social contract.

The link: Jon Corzine, late chairman of Goldman, United States Senator, Governor of New Jersey, fabulously wealthy, has in one year destroyed a 200-year-old commodity trading house, MF Global, by betting on leverage 40:1 that Europe would not allow sovereign debt to default. He will soon be the arch-villain exemplar of corporate excess, disgusting compensation, and runaway inequality in American income and outcome. The perfect 1% man to burn in effigy at Occupy demonstrations.

Yet… our greatest risk as a nation is to hear that music and rise to bi-lateral class anger. There was a time here, not long ago, when the 1% (or 10% or 20%) oppressed the rest, held them down: brutal Rockefeller, Gould, Carnegie… Robber Barons. Eighty years ago soldiers still turned out to shoot union strikers. Here. In this country.

Today, frustrated and fearful people accuse corporations of hoarding cash and refusing to hire here, unable to understand that they made the money elsewhere, not here, a couple of billion people in only 20 years willing to do the same work as Americans for less pay. The wounded feel justified to take the fruits of the successful, those who can compete in a global economy, but these are not “oppressors.”

The Left offers infrastructure work, telling college grads, “Your shovel is in the mail.” The Right like Germany thinks only to guard its own, telling all others to reform themselves, tell those without jobs to be more productive.

The deadly hazard here is not financial excess. The danger is fracturing into self-justified groups like Europe. Cross that line, and the others’ bad behavior and suspicious motive frees us from responsibility for our own. The desire to get even and to punish, slathered with contempt, excuses us from thought for the whole.

Thanks to www.calculatedriskblog.com, best chart of our predicament anywhere.