Premier Mortgage Group

Déjà vu all over again. Another spring, another housing-recovery chorus. Grass turning green, another turning of economic corner. Days longer, oil higher, a new fatal shortage nigh. Vernal equinox, Fed easing must be overdone, bond yields rising, the easing propelling inflation trading and the stock market.

Spring, and the sweet scent of horse manure.

Birds are chirping, leaves and blossoms bursting open, but the economy is still largely where it has been since bouncing off bottom in the spring of 2009. Home sales are not rising, new or used; prices may have flattened, but are not going up; and the distressed housing pig in the python still threatens to depart the pig in alarming mass, volume, and velocity. Oil is fooling around a hundred bucks, but it’s impossible to square a dangerous shortage with substitutable natural gas one-seventh its price at the decade peak ($15.38/MBtu in December 2005; $2.29 this week); US oil imports falling from 60% of consumption to 50%, on the way lower; and global coal un-doing its entire run from 2007-2011, $165/ton to $65. The jump in bond yields began to reverse this week the instant that Perfesser Bernanke said, “It’s far too early to declare victory.”

The biggest deal, of course, is jobs. While waiting for next week’s Good Friday release of March payrolls, consider more from Mr. Bernanke this week:“Importantly, despite the recent improvement, the job market remains far from normal; for example, the number of people working and total hours worked are still significantly below pre-crisis peaks, while the unemployment rate remains well above….”

Alternate to the drivel that passes for economic news on CNBC, Fox, and Bloomberg (and the opinion pieces of WSJ and NYT), please try to read the few pages of the Perfesser’s full speech. It’s in English, and a model for how to suspend your biases and hunches and mull evidence while the hopes of the world depend on your judgment.

All seems normal: pain evident among some friends and many strangers, but cars and trucks move as always, lights come on at night, shoppers and goods in stores, but all a mask covering US government absent as never since the 1920s. Maybe the 1850s. Congress too afraid of constituents to speak truth. This poor man, President, soon may endure Supreme Court overthrow of his sole domestic achievement (no matter at whose hand: it would have collapsed of its own over-complication and expense).

Want a hero? Someone to hold up to your kids as an example? Somebody above and beyond in public service? Selfless? Wishing only to be inconspicuous, but pushed forward by events? Leading as few ever have before? Leading decisively through chaos, but including his opponents, and even encouraging their public disagreement?

Have you given up, that there are such people in public life? Excoriated every day by blimps not half his intellect, not a tenth his understanding, yet treating all with dignified firmness? And in private — his actions always in private — as decisive as any Napoleon, and more aware of the consequences of error than any captain of arms?

Ben S. Bernanke. Annual salary $191,300. Maybe a rich-making book at the end, like his failed predecessor, maybe quiet passage to retirement like Paul Volcker.

Mr. Bernanke blew it as Greenspan’s understudy 2002-2005, and in his first year as Chairman, 2006. He missed the credit bubble, which he knows more deeply and painfully than anyone else alive. He was slow to grasp the extent of emergency in July, 2007, but he got it in the following January and ever since he has carried this nation on his back. He has been the singular effective executive in US government, holding the night at bay, two Treasury Secretaries and two Presidents in over their heads.

The Perfesser knows better than anyone that his utterly experimental measures to stop the greatest bank run of all time risk an inflation disaster. And he knows that no matter how hard and inventively he tries, he may be unable to prevent a re-run of the 1930s, especially with no help from the rest of government.

One man, a quiet academic, embracing disciplined doubt, clear-headed and willing to act. Warm, glowing Spring hiding emergency. Do tell the kids someday.

You’ve done your homework on investment properties available in your area.

Now’s the time to get deep into the details to see if that home will pencil out for you as a rental—will you breakeven or come away with a profit?

Excitement builds, as that profit is looking mighty tasty; but you better ask your agent for a further breakout of expenses from the owner.

GETTING TO ‘CASH FLOW ‘

You scrutinize the rental’s ‘profit and loss’ (P&L) statement. Some of the basic categories may look something like this:

Operating Revenue: Your monthly rental receipts

Vacancy Rate: Usually figured as a percentage deduct the dollar amount from Operating Revenue

Operating Expenses:  Usually made up of fixed or variable costs, and not limited to:

Property Taxes

Property Insurance

Offsite Property Management Fee

Repairs and Maintenance

Water, Sewer, Trash

Advertising

Lawn and Grounds Keeping

Accounting and Legal

Net (Loss) Income from Operation: All the totals from above will bring you to your Net Operating Income (NOI) 

…BUT WHERE DO I ENTER THE MORTGAGE PAYMENT?

Up until now, maybe that rental prospect is looking like the proverbial cash cow. But you still need to factor in your mortgage payment.

So where do you enter it? Believe it or not, the mortgage payment (Debt Service) is not listed as an operating expense: Enter it separately after the NOI.

THE ‘OL CASH FLOW…

Here’s a very simplified look at that property’s P&L:

• Annual Rental Income:             $24,000
• Less Annual Vacancy Rate:      $1,400 (est. 6%)
• Annual Operating Expenses:    $9,000
• Less Annual Debt Service:           $8,500
• Net Operating Income:                  $5,100
• Cash Flow:                                 $  2,000

If you’ve done your research, checked with your accountant, and understand the makings of a basic P&L, you’re may be well on the road to successful real estate investing.

Please contact us to learn more about purchasing investment property. We want to become your trusted adviser when it comes to find the right mortgage for you.

A group of colleagues asked me two weeks ago what interest rates were going to do. I answered in an authoritative voice, “They’ve been in the same place for seven months — it’ll take an earthquake to move them.”

Ahem. The opinion was correct, but I was clueless about the proximity of the quake. An “F” for that. In one week the Fed announced no MBS-buying QE3, US economic data improved, and Europe re-re-floated Greece. Until one or more of those three things change, technical analysis is the usual guide, looking for chart-pattern “support.” There is none of that, either. The 10-year T-note fell from 3.00% last August to 2.00% in a single, straight-line month, and spent very little time north of 2.15% in the next seven months. Having now blown up near 2.40%, 10s are in Never Never Land, likely to wander in a wide range until something happens, mortgages 4.25% or more.

So, while waiting, explore what is really happening in Europe, and why it will remain defiant of solution. The real problem is not profligacy by Club Med, or tax evasion, or even too much debt. The real problem is trade imbalance among nations locked in the equivalent of a gold standard.

All civilians’ eyes glaze at technical descriptions of currency movements, and the interlocked European thicket. But we have a new single-nation example — Brazil — to use for a non-technical explanation.

Brazil has enjoyed a red-hot economy for two reasons: resource exports to China, and manufacturing highly stimulated by government-induced credit. By part of government. To prevent red-hot growth from turning into inflation, Brazil’s central bank by last summer raised its interest rate to 12.5%, the highest among modern nations.

With an interest rate so high — Brazil’s 9-year government bonds pay 11.40% — investment money has poured into Brazil to take advantage. Which in turn pushed the real to stratospheric levels versus the low-interest-rate rest of the world.

As the real rose, it began to harm Brazil’s exports, especially its new and booming manufacturing. So Brazil’s leadership has tried to limit the flood of cash into Brazil, two years ago installing capital controls to reduce the in-flow, foreign cash to earn less (net of fees and penalties) than domestic cash. Money came anyway, the interest-rate differential overwhelming.

Brazil’s economy has begun to slow — almost to zero — under the weight of rates set to stop inflation, and the sky-high real. The central bank has cut its rate to 9.75%, but cash is still pouring in. So, last week Brazil announced new measures, every one a violation of some trade agreement or another, to weaken the real while leaving high rates, exports, and manufacturing in place. The basic method: print a mountain of real and see if it can get foreigners to take them, but do no domestic harm.

Right. One nation, trying alone to manage inflation, exports, manufacturing, and economic growth, in a world in which all emerging players (and some emerged: Japan) are trying to get an edge on the others via the same manipulations.

Europe. 17 nations each with one form or another of Brazil disease (or success), but ONE currency. Those with trade deficits cannot print euros to make their exports cheap; those with trade surpluses think it is so because of their special genius, not because the euro is under-valued for them. All have the same central bank, rates and money too high and tight for the weak, too low and loose for the strong.

The only “give” in Europe is wages. The strong feel rich, and are, wages rising in real, non-inflationary terms, economies at risk of asset bubbles. The weak… to make their exports competitive, their wages must fall — throughout Club Med by 30% or more. Cut wages like that, and workers cannot pay debts and taxes.

One could ask why Brazil does not just drop all the shenanigans, play it straight and let the real find an appropriate level. In Europe, the weak have this one choice: become good Germans, no matter what the price. Debt is a sideshow; trade and currencies are the real deal. And I still think Club Med will tire of taking orders from the North.

Mortgage interest rates increased this past week on the Fed’s FOMC Policy Statement, positive economic data, and the subsiding of the European debt crisis.  Many in the markets were expecting the Fed to announce another quantitative easing program at the conclusion of its FOMC meeting.  No such program was mentioned, though, which led to higher rates.  Economic data was generally stronger than expected.  Reports stronger than expected included February Retail Sales, January Business Inventories, the March New York Empire State Manufacturing Index, and weekly jobless claims.  The March Philadelphia Fed Business Index was in line with expectations.  Inflation data measured by the Producer Price Index and Consumer Price Index was in line with expectations.  The European debt crisis subsided slightly as Greece received its bailout package which has caused money to move out of safer Treasury securities.

The Dow Jones Industrial Average is currently at 13,254, up over 300 points on the week.  Crude oil spot prices are currently at just under $106 per barrel, down over $1 per barrel on the week.  The Dollar has weakened versus the Euro and has strengthened versus the Yen on the week.

Next week look toward Tuesday’s Housing Starts, Wednesday’s Existing Home Sales, Thursday’s jobless claims, and Friday’s New Home Sales as potential market moving events.

Long-term Treasurys and mortgage rates at last broke out of a half-year-long trading range centered on 2.00% for the 10-year T-note, and 4.00% for mortgages.

Upward: 10s to 2.33% today, lowest-fee mortgages pushing 4.25%. Verdict first, then evidence: this move is not the start of a bigger one, and is likely to reverse.

Silly things have pushed this rate run to extreme: markets oooo’ed and ahhhh’ed at successful stress tests of 15 of 19 too-big-to-fail banks (the failure of four would crater our system, again); and inflation knee-jerks flipped at today’s 0.4% February CPI reading (the core at 0.1% is fine, gas prices compressing other spending and prices).

10-year Ts had for six months stayed tight to 2.00% because the Fed began to buy long Treasurys in Operation Twist, because Europe was on the edge of its own Lehman moment, and last fall the US appeared near new recession. Twist is still underway (and you can bet the Fed hates this mortgage rate rise), but a European banking collapse and new US recession are off the table.

One year ago the 10-year paid 3.75%, and mortgages cost just over 5.00%. The magnitude of European futility and risk came clear last August, 10s in one swell foop to 2.00%. We will have to wait for memoirs, but in early December the European banking system was only days away from failure, intercepted by the ECB’s December 8 Long Term Refinancing Operation, then insurance taken by LTRO2 last month.

Those last fall predicting US recession, the respected ECRI, especially, were dead wrong. But, have we now entered the even-longer-predicted self-sustaining recovery? No, but closer. There is a Churchill quote for every occasion, this in November 1942 after Britain’s first victory of WW II, El Alamein: “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Several signals say that we are not yet in self-sustenance, the most important at the Fed. Many over-read a word in Wednesday’s post-meeting minutes: the substitution of “moderate” for “modest” as the modifier for economic growth. The replacement is accurate, but… modest. More important, the Fed stuck verbatim to its commitment to “exceptionally low levels for the federal funds rate at least through late 2014.”

Another marker: the small-business surveyor, NFIB, found another small improvement in its index of optimism. Although rising to the second-best level since 2007, it is no better than one year ago, and still below the bottom of every business downturn since 1982. The NFIB did confirm some small-biz participation in hiring.

And Europe is anything but over. Its banks protected, it has become a slow-roller, waiting to see what Club Med depressions do to local political stability and overall unity. The best long-term hope: an orderly demise of the euro, then short global recession.

As many readers know, Greg Smith resigned from Goldman this week, and the NYT printed his resignation — a condemnation for the ages. A prior chief of Goldman, the legendary Johnny Whitehead in 1970 issued these 10 points as a guide to the firm:

1. Don’t waste your time going after business you don’t really want.
2. The boss usually decides — not the assistant treasurer. Do you know the boss?
3. It is just as easy to get a first-rate piece of business as a second-rate one.
4. You never learn anything when you’re talking.
5. The client’s objective is more important than yours.
6. The respect of one person is worth more than an acquaintance with 100 people.
7. When there’s business to be found, go out and get it!
8. Important people like to deal with other important people. Are you one?
9. There’s nothing worse than an unhappy client.
10. If you get the business, it’s up to you to see that it’s well-handled.

Some on today’s Wall Street regard this guide as quaint. The tragedy, hardly limited to Goldman people: the vastly larger Street mob in Armani who have no conceptual framework with which to comprehend Whitehead’s thinking at all.

10-year Treasurys…

Better, but follow-through?

Maybe as an answer to the recent FHA announcement of higher premiums, some private mortgage insurance companies have stepped up and reduced their premiums!  The scenario below shows how competitively priced conventional loans can be.

Scenario: $250,000 purchase, 95% LTV

Of course there are many other factors to consider, so contact your Loan Officer today to learn about your opportunities in today’s market.

If you have an FHA loan that was endorsed on or before May 31, 2009 and plan to streamline refinance, the upfront mortgage insurance premium (UFMIP) is decreasing from 1.0% to 0.01% of the base loan amount, and the annual premium will be 55bps regardless of loan amount. This change is effective for case numbers assigned on or after June 11, 2012.

Mortgage interest rates increased slightly as economic data was generally stronger than expected.  Today’s employment report for February showed a 227k increase in non-farm jobs on expectations of an increase of 207k jobs.  Private jobs increased by 233k jobs on expectations that 220k jobs would be created.  The January and December jobs reports were revised to show 61k additional jobs created.  The February unemployment rate remained unchanged at 8.3%.  Other economic data stronger than expected included the February ISM Services Sector Index and January Consumer Credit.  Revolving credit, though, fell for the first time since last August.  January Factory Orders had its largest decline since October of 2010.  Other news of note included a report showing that the 17 nation Euro area economy shrank by 0.3% in the last three months of 2011.  Also, it appears that Greece was successful in negotiating a write down of 53% of its debt with bond holders.

The Dow Jones Industrial Average is currently at 12,951, down about 25 points on the week.  Crude oil spot prices are currently at $106.37 per barrel, down slightly on the week.  The Dollar strengthened versus both the Euro and Yen again this past week.

Next week look toward Tuesday’s Retail Sales and FOMC Meeting Announcement, Thursday’s jobless claims, Producer Price Index, and Philadelphia Fed Survey, and Friday’s Consumer Price Index and Industrial Production as potential market moving events.

This week brought a lot of new economic information. Raw data is always spun by analysis, sometimes for reasons of advantage in driving clients to buy or sell things, sometimes to further theories, and often for politics, Lord knows.

But this time is exceptional, cubed. Global economies have never been in situations like these, and thus neither have central bankers, economist/analysts; and reporters cannot tell when sources are spinning, straight, or bent. I vacillate between the anger of a citizen done wrong by political leadership, exasperation with dumbed-down media, and homicidal rage at the amorality of colleagues in markets, utterly dependent on market health but undermining them for the slightest advantage.

Today… compassion, even for those unfortunate branches of humanity.

The biggest news: 227,000 net-jobs created in February, and a 61,000 positive revision to the Dec-Jan sum. That’s good news, and crowing by the party in power is justfied. However, all is relative. The good jobs numbers in the last three months are likely to have been boosted by good weather. The February numbers include a negilgible gain in wages, 0.1% equal to three cents per hour, and no acceleration in hours worked. Unemployment remained 8.3%, and inclusive of “involuntary part-time” improved slightly to 14.9% — both understated by discouraged workers leaving the workforce. You ain’t unemployed if you ain’t lookin’.

Nothing matters more than jobs, because we must have tax revenue before we embark on austerity, and austerity is coming, ready or not.

The ISM reported sustained growth in the service sector, to 57.3 in February from 56.0 (a 50 level is breakeven, 60 is pink-of-health). Econo-political discourse is now polluted by advocacy for manufacturing jobs. Do I hope my 17-year-old son will stand in a production line, competing head-to-head with Asian sweatshops and superbly conceived German mini-lines? Or a career in what Peter Drucker described 50 years ago as “knowledge work,” perhaps at Google, or programming manufacturing robots, or any number of ventures in which his brain might be paid better than his hands?

My friend, who writes Calculatedriskblog says, “…Housing has made its bottom turn.” No it has not — not with prices still falling and distressed inventory unchanged.

Loud hozannahs greeted the Fed’s report of an 8.6% surge in consumer credit: banks are easing, consumers in action! No. Just… not. Credit card debt actually contracted at a 4.4% pace, knocking balances back to November levels. Non-revolving credit roared ahead at a 14.7% pace. Partly good: auto loans — credit is easier (cars are easier to repossess than houses), and the damned things do wear out, and high-mileage new beats the old gas-blazer.

Partly awful: the fastest growth in credit is student loans, now nearly equal to the nation’s total outstanding 2nd mortgages and Helocs, loaded onto the backs of kids to pay the higer-ed racketeers. In this whole Great Recession, the only sectors of the economy to raise prices at a multiple of inflation: the health-care Corleones, and higher ed. A shameful and destructive reversal of GI Bill wisdom.

Overseas: officials say the new Greek deal marks the end of European crisis. Uh-huh. New Greek bond yields already predict certain default. Banks propped, the Euro-story is now the actual economies. Spain: unemployment 22% and rising, 45% among youth; budget out of balance 8.3% of GDP. German-forced austerity the plan. For now.

Back here, bizarre bad-good-bad-good news. In a panic, the Administration and silent, bi-partisan co-dependents in Congress have jacked FHA fees to fill a loss hole which will require bailout after the election. The jack is so high, driving new applicants away, that FHA net revenue may fall instead. The good news: nouveau private mortgage insurers can fill most of the credit gap. The bad news: the highest-quality applicants will bolt FHA, leaving it with net-increased risk and losses.

Election year. Nothing to do but watch the data stream by. The best view: unfiltered original sources. Take gin straight in a Martini. Don’t monkey with it.

Two different price sources from www.calculatedriskblog.com (the lower chart from www.lpsvcs.com), different methodologies, same picture.

EFFECTIVE APRIL 1:
MAJOR FHA CHANGES TO INCREASE BORROWER’S COST
(plus a little good news)

This week several major changes were announced at HUD that will have a direct impact on FHA borrowing costs.

If you or someone you know is on the fence read this and share this information. These changes go into effect on all new FHA case numbers generated on or after 4/1/12. You can read the formal press relesase from HUD here.

CHANGE #1
Annual mortgage insurance premium (MIP) is increasing by 0.10%.
For loans over $625,500, effective June 1st the increase is 0.35%.

CHANGE #2
Upfront premium (UFMIP) is increasing by 0.75%.
HUD will continue to allow this to be financed.

Here is a scenario to show you the effect the April 1st changes will have on borrower costs. I assumed a purchase price of $250,000 with 3.5% down.

BUT THERE IS GOOD NEWS TOO!
In addition to this, HUD also just announced it would be reducing premiums for FHA loans endorsed on or before May 31, 2009. This decrease in MI will make streamline refinances more easily available.

UPDATED 3/12/12: Read more details here about the reduced FHA premiums.