• McCaulay CulkinYou guys may notice a new logo at the top of this newsletter.  Your friendly local mortgage     professional has decided to hang his hat at a new brokerage, opening up access to almost twice as many lenders and, most notably, FHA financing.  The government’s working for ME now.  Take THAT, Uncle Sam.  Aside form that, practically nothing has changed.Now to the fun stuff.  Volatility continues to riot in the markets.  The Dow Jones Industrial aver­age is at it’s lowest level in 18 months.  200-300 point daily swings in the stock market is not un­common.  Crude oil prices have reached an inflation-adjusted all-time high, over $105/barrel.  Inflation is ticking upwards with a startling regularity across every measure.  The job market shrank for the 2nd month in a row, raising more recession fears.  Jobless claims are at the levels they were at immediately following the Hurricane Katrina disaster.  The dollar’s value in interna­tional markets is falling at a quickening pace.  30 year fixed mortgage rates at the exact same level that they were before ANY of the rate cuts happened.

    But Greg, I thought that the Fed’s rate cuts dropped mortgage rates!  You mean to tell us they haven’t helped things at all?

    Aggregately speaking, that is absolutely right.

    You see, back in the day investors viewed mortgage backed securities as a safe place to park money when the stock market showed problems.  So, when stocks tanked, you could pretty accu­rately guess that mortgage-backed securities would do well (because everyone moved their money to the more stable investments) and consequently mortgage rates would go down.  Well, ever since the subprime collapse, investors no longer deem mortgage-related investments as harbors of safety.  As a result, we’ve watched both mortgage rates and the stock market suffer in tandem. 

    This phenomenon combined with rising inflation (which erodes the value of fixed income instru­ments like mortgage-backed securities) has stopped those governmental rate cuts from hitting mainstream mortgage rates.

    What the decision-makers are doing isn’t working to help us little guys.  Not one bit.

    Fed governors are starting to give conflicting speeches, one saying that recession is the biggest worry and another citing inflation growth as our central problem.  Already they have started to openly discuss a “rapid reversal of monetary policy” once the economy starts picking up a bit more momentum.  Translation: the moment we are able to hike rates without being crucified in the process, we are planning on it.  The money supply is still illiquid, and even credit-worthy borrow­ers are running into cascades of red-tape and new regulations when trying to secure loans.

    I recently had a friend purchase a home that I was helping finance.  This person was watching the markets and trying to time out his mortgage rate lock to the most opportune time so he could se­cure the lowest rate.  I saw mortgage-backed securities (the financial instruments that ultimately define where mortgage rates will be) starting to deteriorate and I recommended he lock at 5.75%.  He was disappointed in this but deferred to my judgment and locked.  Just for fun, I checked where his rate would have been 5 business days later.  6.25% for the same program.  Five days would have changed his rate by half a point to the worse.  That is ridiculous.  This is one of many examples of how rapidly markets are moving and how valuable educated advice is in this day and age.

    Bottom line: If inflation DOES moderate and the subprime write-offs get finished, we will see investors turn back to mortgage-backed securities in droves and mortgage rates will benefit in a big way.  If inflation DOESN’T moderate, we will see the Fed increase their benchmark rates just as quickly as they dropped them and we will experience a very long and painful standstill in the financing industry.  Big change either way we go.  I’ll keep you guys updated play-by-play on inflation’s movement.  Sorry about the gloom and doom this week, but things are getting rough.

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