The Dow Jones had its best week since February 19 rising 2.8% to rest at 10211 at the end of Friday trading. The Wall Street Journal was quick to point out that while the Dow rose on Friday, it did so on the lightest trading day in two months. What could possibly have made trading so light? The very thing that has delayed this publication by a day; the World Cup. Normally, I spend my Saturday collecting my thoughts and my notes from the week for this update. However, the weight of US v. England was just too much for me to multi-task my way to the keyboard.
Financial markets for the first time in several weeks seemed to forget about the European debt crisis and focus more nationally. The market even ignored Japan and their claim that they too could be heading towards a Greek crisis. It seems rather fashionable today that a new administration must make the announcement that the previous administrators had allowed the finances to get so far out of control that tattling must be their first act of leadership. Hungary caused markets to swoon; Japan’s edict on Friday had no reaction possibly due to the World Cup. (Actually, the Japanese people hold their nation’s debt unlike Greece, Spain, and Portugal as an example which contains the panic.)
Ignoring the realities in the euro-zone allowed the US markets to ignore the realities here in the states and focus on hope. A disappointing retail sales report on Friday was cast aside in favor of a better than expected University of Michigan Consumer Sentiment Index (the 12 month outlook weakened and went unnoticed). Thursday, markets latched on to a better than expected weekly jobless claims report as well as data out of China that showed huge increases in their trading business for May. China’s largest trading partner is the 27 nation European Union which makes the financial markets surmise that all is well.
But all is not well. Federal Reserve chairman Ben Bernanke says unemployment will remain high throughout the recovery. How can a nation, who’s economy relies on consumer spending, recover with high unemployment? The answer thus far has been the $787 billion stimulus package along with others like the Home Buyer Tax Credit, bank debt guarantees, TARP funds, $1.25 Trillion in Mortgage Backed Security purchases, bond purchases, Fannie and Freddie credit lines and on and on. In short, it’s been a Herculean effort of the government printing press to push GPD north of zero rather than the consumer. It is also important to note that most of these stimulus packages are recently ended or due to end.
When you look at the entire picture of stimulus ending, the oil spill, the European debt crisis, state budget problems, jobs picture, and consumer’s personal debt issues, it is really hard to see how the US economy will have growth. This is why I have said in previous updates to watch what government officials do rather than what they say. For instance, the Federal Reserve keeps talking about recovery yet keep interest rates below 1%. As a result, I see mortgage rates remaining low and possibly even going lower as soon as the last of the stimulus funds run its course. I do, however, expect a choppy ride as equity markets look for any reason to rise which will cause volatility.
MORTGAGES
On Tuesday I sat through 90 grueling minutes on a conference call with Fannie Mae as they explained their Loan Quality Initiative. During that time, I heard the ominous word “repurchase” several times throughout. Granted, the fine representatives of these wards of the state were quite nice as they dropped this word at just the right intervals to prevent any mortgage banker listening to fully relax and enjoy the presentation. But their message was clear like crystal and here it is in my own words: We are going to do anything possible to make, you the lender, responsible for any loan that goes bad. If you do anything to step out of line with our vague guidelines, then you will repurchase mortgages.
Now for those of you who don’t know, repurchase means that a lender will have to buy-back any loan that Fannie Mae requires at a price equal to the outstanding principal loan balance plus any fees. This is not a pleasant image for anybody in mortgage finance. Additionally, Fannie may ask lenders to repurchase mortgages that aren’t even delinquent. But, if a loan goes delinquent, then you can bet your last dollar that they will do whatever is humanly or governmentally possible to shift the toxic asset on to the offending originator’s balance sheet.
What this means to you is that the mortgage loan process with any governmental agency is going to get much more difficult. And yes, I consider Fannie and Freddie governmental agencies who are fast becoming a very hot political potato.
Expect tighter verification of income as well as increased worry over borrower identity verification and appraisal. If you read last week’s update, I outlined the most critical piece of this program which is the fear over increased or undisclosed debt. It may be common that lenders will pull a new credit report right before closing to ensure the borrower did not obtain more credit. I hope you can appreciate the slew of issues that can arise from this procedure. One such issue that could spell absolute disaster if your lender is not on the ball is new credit scores. If the lender obtains new scores and they are lower it could mean added fees for a borrower. For instance, a credit score drop of just 2 points from 681 to 679 could cost a borrower one additional point at closing on a conventional 20% down mortgage. Then after that shock, you will have to deal with the onslaught of new disclosures and a painful mandatory waiting period. I would advise everyone to make sure they work with a lender who can understand and work with these changes.
As I stated earlier, I expect rates to hover near unchanged but are subject to market volatility. Longer term I see lower rates. I’ll keep you updated of course. Have a great week.
