Well, believe it or not, we’ve made it through another week. And wow, what a week it’s been. I’m going to try a little bit of a different “scenario” for this week’s Mortgage Market Week in Review. Rather than trying to tell you everything that’s been happening this week (it would be a REALLY long story) I’m going to try to hit the highlights (or low lights if you will) of what’s been happening.
So, here goes:
1. Starting with last Friday afternoon, we found out that IndyMac Bank (in California) was closed by the FDIC. It’s the largest bank or savings institution that has failed and approximately 10,000 of their clients had more funds in IndyMac bank than was covered by FDIC insurance and will therefore lose a lot of money. This started the week on a very negative note as the financial markets started getting a serious case of “Who’s next?” worries about the banking world.
2. Chairman Bernanke of the Federal Reserve and Secretary Paulson of the Treasury testified before Congress on Tuesday and Wednesday. I’m going to give you an extremely abbreviated version (my opinion) of what he said: 1) The economy is not out of the woods, it’s actually not even close to the edge of the forest. 2) Fannie Mae and Freddie Mac are very important to the health of our country’s economy and we are putting these “rescue efforts” in place not because Fannie and Freddie need it now, but strictly because we want the markets to be comfortable that they won’t fail. 3) Right now the risks to the economy from the credit crisis significantly outweigh the risks to the economy due to inflation (meaning rates won’t go up any time soon – at least the rates that they control).
3. The “it’s not so bad” syndrome started taking hold on Wednesday. What’s that? I guess I’d describe it this way. You have a house with a very nice deck and a screened in porch on the back. A storm comes through and a tree gets knocked down and it falls on your deck and screened in porch totally wiping them out. You come out of the house after the worst of the storm goes through and look at things and say, “It’s not so bad!” Wells Fargo, Citibank, and JP Morgan Chase all reported earnings (losses) that were not as bad as the markets had expected. Were they good? Well, JP Morgan actually did make money but if you read the details behind the headlines, their earnings were down by 53% and their credit losses in many areas of consumer financing were growing quite substantially.
4. Oil prices dropped – why haven’t gas prices dropped? Oil prices dropped the last couple of days, mainly for two reasons: 1) Inventory reports came in higher than expected. I’ve always kind of wondered, why are they higher than expected? Did they forget to look in the last warehouse? Or did they forget about a couple of tankers full? 2) After Bernanke’s testimony, the markets are expecting that the weakness in the economy is going to further decrease demand for oil.
5. Economic reports – A number of reports (Consumer sentiment, builder confidence, the Philly Manufacturing index, New Housing starts) came out and guess what, they call came out on the down side (at least once you read behind the headlines that often get spun in a different way).
6. Stock prices – the Stock market had two really good days on Wednesday and Thursday (see item #3 for details on why). This has lead to a pull away from the bond market and into the stock market and has put a LOT of pressure on interest rates in the last few days.
7. Freddie Mac came out with a plan this morning to raise $10 Billion in a stock sale. Let me ask you, would you invest any substantial sums of money in a company who is currently looking at a bailout plan that is working it’s way through Congress? A bailout plan that would essentially leave you with $0 left? Don’t think that’s going to do anything other than muddy the waters.
So where does that leave us?
1. I believe that anyone who is telling you that this is the “bottom” of the financial problems is fooling themselves and attempting to fool you as well. If you spend some time reading a site like Calculated Risk then you can see the story behind the headlines and that story shows that we’re not at the end of this game.
2. Markets don’t go straight up or straight down, but they move in zig zags. My perception of this week is that it was the “Zag” that came from a lot of wishful thinking that maybe things aren’t so bad. I hope they are right, but I don’t believe they are.
3. As the markets continue to keep vibrating, rates have resumed their volatility.
My recommendations at this point:
1. I still believe very firmly that, due mainly to stresses at Fannie Mae and Freddie Mac, rates are going to be heading up eventually. However, with Secretary Paulson saying that “nothing needs to be done right now,” I think that some of the immediate pressure is of doing something “today” is at least temporarily delayed. However that could change again by Monday. Therefore it remains critical for anyone who is thinking about buying, selling or refinancing to keep in touch and keep up with what’s going on in the markets.
2. Knowledge is even more important now than it has ever been. Those who have a good sense of what’s going on in the market, what’s working, what’s not working are the ones who can make wise decisions and work through this market cycle.
3. Remain firm in the belief that the world is not coming to an end. This is a market cycle, a downturn (a very steep one) but it’s a market cycle. Those who adjust will make it through, maybe not necessarily in the same place they were, but they’ll make it through.
I’ll continue to keep you informed, please call or e-mail any time I can be of help.
Thanks!
Tom Vanderwell
Office (616) 653-5375
Cell (616) 292-7559
Fax (616) 825-6085
For some common sense talk about the mortgage world, check out www.straighttalkaboutmortgages.com
Quote of the week: Mr. Dimon of JP Morgan, via Housing Wire: “Prime [mortgage book] looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say.” 7-17-2008
David Shafer says:
Hey Tom,
Nicely written article. Good job. Perceptions are important and one thing I always keep in mind (other than never ever ever make near term predictions), is that the difference between good and bad is only in your mind. For example, this might just be a great time to be finding investments (including real estate). So it could be the best of times and probably is for folks like Warren Buffett and Donald Trump (see the price he got for his house!). Also, how much of your competition for loans has left the business? I bet quite a bit! This might be setting you up for the greatest business opportunity of your life!
Here is a question for you, when are the underwriters going to come back to their senses and start accepting some risk again? There are only so many people who fit the perfect borrower profile out there. [20% down, 750 FICO, large reserves, single family personal residence, employed for the last million years with the same company, etc.]:-)
July 18, 2008 — 10:40 am
Bawldguy Talking says:
And previously owned everything free and clear. 🙂
July 18, 2008 — 11:20 am
Vance Shutes says:
Tom,
A clear voice of wisdom in the foggy seas we navigate. Many thanks for the succinct summary, and for sending us out of the week on a good note.
July 18, 2008 — 11:49 am
sean carr says:
Good Commentary Tom. Also, thanks for the tip on “Calculated Risk”, A very interesting site indeed.
July 18, 2008 — 1:41 pm
Tom Vanderwell says:
Thanks for the kind words. A couple of thoughts:
Dave and Jeff – Idon’t see a loosening of underwriting standards coming untilthis mess is over and all of the bad debt is realized. My guess? 2012.
Dave, you are absolutely correct in saying that now is the time for those who know their stuff, know this market and can speak eloquently to their clients needs (and even bawldguy is eloquent in my book!) are going to find this an opportunity to increase market share and help more clients.
Vance – it is foggy and remember that fog isn’t consistent, some times it’s heavier than others.
Sean – Icouldn’t tell you how much I’ve learned from CR. But unlike here, the comments are quite often too “far out” to be enlightening.
Have a good weekend and let me know if I can be of help.
Tom
July 18, 2008 — 8:24 pm
Bawldguy Talking says:
Tom — You said, Idon’t see a loosening of underwriting standards coming untilthis mess is over and all of the bad debt is realized. My guess? 2012.
It’ll happen way before New Year’s Eve 2009 — IMHO.
Lenders lend. They’ll be Jonesin’ before you can say, ‘Let me check today’s rates.’
July 18, 2008 — 8:45 pm
Tom Vanderwell says:
Hey Jeff,
“It’ll happen way before New Year’s Eve 2009 — IMHO.”
Here’s my “estimated timeline.”
By the end of 2008, the crisis with Fannie and Freddie will be over and they will be adequately capitalized.
By the end of 2009, all of the banks will have worked through the majority of their credit issues, the mergers will be lined up (if not actually done) and the end will be in sight in terms of the major losses in mortgages and all of the related debt.
Throughout that time, restrictions via credit scores, income/debt ratios, loan to values etc. will continue to be adjusted as losses are analyzed (I got another memo yesterday about tightening guidelines on jumbo loans).
By the end of 2010, the banks are going to start to have a better feel for “gee, this loan pipeline is actually going to work” and will start to feel comfortable with things. By the end of 2011, there will start to be some discussions about loosening the credit requirements (with a higher risk quotient).
Voila, that brings us to 2012 before they start getting aggressive about actually lowering standards and going after the marginal deals.
I’ve told people time and time again, banks are not charity organizations. We want our money back.
I don’t think it’s going to be 2012 before the markets turn around, I just believe that it’s going to be 2012 before we see any sort of “creeping” back into the standards that were in place in 2005. Does that make sense?
Oh, and yes, lenders lend. I make my living by writing loans and I plan on writing a lot of loans over the next 4 years while things settle out. But the marginal borrowers are going to remain margined out for a while.
Call or e-mail me if you want to discuss it further.
Tom
July 19, 2008 — 8:45 am
Bawldguy Talking says:
Tom — Your scenario is eminently reasonable. If it turns out correct, I won’t be shocked — surprised, but not shocked. I still think it doesn’t take into account the lender psyche, for lack of a better word.
When I say lenders lend, I mean more than just what the words convey.
There are two things here than demonstrate why you and I see things differently.
First, it won’t take long for lenders to see their foreheads in the mirror, and notice the ginormous letters spelling LENDER. That leads to remembering if they’re not lending they might as well close their doors. Next thing you know, their looking at ways to actually become lenders again.
Second, the battleground will, IMHO, be fought around the definition of what constitutes a ‘marginal borrower’. We agree 100% on what’s NOT marginal. It’s not a middle school teacher claiming a salary of $200K annually. It’s that kinda loan that got us here in the first place. However, the borrower currently considered marginal is a joke. We can both agree on that.
It will not take anywhere near 3½ years for that definition to be relaxed. Before you know it, a handful of lenders, usually started by just one brave institution, will not be able to resist all that gold being left on the table, day in and day out.
Next thing you know, the Smiths will get a loan to buy a home, even though by today’s standards they’re easily slammed into the marginal category. What passes as marginal today is fear based and totally understandable. I’ve seen this movie before.
Lenders’ DNA will simply not allow them to let all that gold on the table gather dust for long. It’ll make ’em crazy. It always has, and it always will.
The only behavior more predictable than lenders is that of teenaged boys around teenaged girls. 🙂
Though I’m surely more confident in the behavior of teenaged boys than lenders, it’s my firm belief they’ll crack long before 2012.
July 19, 2008 — 10:32 am
Sean Purcell says:
Tom,
Great recap to the week. I really appreciate reading your thoughts and analysis. We may disagree on some issues (or at least the degree of some issues) such as the fate of Fannie & Freddie, but you are always informative and though provoking.
On the subject of the latter, I wanted to jump in on a couple of ideas in this thread:
and even bawldguy is eloquent in my book
I just love this. Jeff is way too unassuming to comment, but maybe we can agree that he is eloquent without the modifier. Or maybe your standards are so low that bawldguy makes it over the bar? I’m just glad he qualifies. Hey, everyone, even Tom can recognize a wise man when he reads one (sorry Tom, but I’ve been on a “word” kick lately and I couldn’t resist 🙂 )
More importantly, I wanted to dig in and respectfully disagree on your timeline, although not at all with the steps of the timeline. I think we will all find that markets continue to move faster, assimilate new ideas and trends more quickly and over-all adapt to the current “crisis” at a rate that may surprise us. But then Jeff wrote his comment and I realize that anything I have to say would be redundant. (Hey look, even Sean can get a clue sometimes…)
Great post Tom.
July 19, 2008 — 1:03 pm
Tom Vanderwell says:
Jeff,
“I still think it doesn’t take into account the lender psyche, for lack of a better word.”
I’ve been thinking a lot about what you wrote since it came across on my crackberry. I think the biggest difference between your view and mine is the length of the timeline and that is directly linked to our “exposure” to the system:
1. You spend most of your time dealing with lenders – i.e. the front line people who want to write loans and that’s what they do. (People like me!)
2. I, while working for a “super regional” bank get exposed to a lot more of the internal workings of the banking world. The banking world is not run by lenders, it’s run by CEOs, CFO’s, and boards who are focused on one thing – return to shareholders. If they can make more money by writing less loans and doing it only to “top drawer” people, then that’s what they are going to do.
I sincerely hope that you are right and I’m wrong and that it’s all over by the middle of 2009, but I don’t believe it’s going to happen that soon. I think that once the worst is over, the banking world is going to tip toe back into marginal lending and do so in a way that allows them time to see how the loans perform.
It’s going to be interesting to see and this has been a great discussion!
Tom
July 19, 2008 — 7:53 pm
Tom Vanderwell says:
Sean,
I just love this. Jeff is way too unassuming to comment, but maybe we can agree that he is eloquent without the modifier. Or maybe your standards are so low that bawldguy makes it over the bar? I’m just glad he qualifies. Hey, everyone, even Tom can recognize a wise man when he reads one (sorry Tom, but I’ve been on a “word” kick lately and I couldn’t resist 🙂 )
You crack me up. That was great! The reason that I put the “in my book” modifier in there was because, if one compared him to say a Yves Smith over at Naked Capitalism or Dr. Roubini, he isn’t in the same league as they are on the eloquent scale. However, he does a very eloquent job at getting his point across and I sincerely hope that the bawldguy never stops telling it like he sees it.
I think that Bawldguy was the one who said something that reminded me of a commencement speech that Winston Churchill gave shortly after WWII. He traveled all the way to the states (by boat) and gave the commencement speech at one of the Ivy League schools. His speech?
“Never, Never, Never Give Up.”
That was it.
Now, what did Jeff say that reminded me of that? (oh and for the record, I wasn’t around for that speech that Winston Churchill gave)
Thanks!
Tom
July 19, 2008 — 7:59 pm
Sean Purcell says:
Tom,
I wonder if the bank CEOs, CFOs and boards are what drive the lending industry. I spend most of my time watching the securities and bond markets. They are driven by profits and they are creative. I think that is where the new ideas will come from and banks can join in or not. They may not. After some of the C level decisions we saw recently (Wachovia comes to mind) it’s hard to imagine them leading any innovative loan parades as you point out.
If we see loosening from the plain vanilla ice cream that is going to be served for the next year or so, I believe it will come from somewhere other than the conservative banking system. (For a preview of what bankers think of lending, let’s watch what happens to Countrywide over the next 4 quarters or so 🙂 )
July 19, 2008 — 8:07 pm
Jeff Brown says:
Tom — eloquent isn’t a league from which I’ve consistently been recruited. 🙂
Your point about the lenders I use vs CEO’s would’ve been used by you the last dozen times some version of this happened in the past, right? It didn’t have legs then either. Lenders haven’t, aren’t now, and never will ACTUALLY lend until and unless their CEO’s give the wink and the nod.
Unless of course, you don’t think the last time this happened the CEO’s weren’t in charge. 🙂
July 19, 2008 — 8:14 pm
Sean Purcell says:
Winston Churchill and Jeff Brown: now that is a great comparison. Both people giving “real world” advice, straight laced and with a touch of humor.
I think we might be able to apply another Churchill aphorism to the “crisis” in the lending industry:
This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
July 19, 2008 — 8:16 pm
Jeff Brown says:
Winston Churchill?! It’s times like this I hate that I still really like my ex-wife. If I didn’t want the mother of my kids to die laughing, I’d send this thread directly to her.
July 19, 2008 — 8:25 pm
Tom Vanderwell says:
Sean,
(For a preview of what bankers think of lending, let’s watch what happens to Countrywide over the next 4 quarters or so 🙂 )
Well said. I couldn’t agree more.
Jeff –
Lenders haven’t, aren’t now, and never will ACTUALLY lend until and unless their CEO’s give the wink and the nod.
Good point – I guess we’ll have to wait and see whether or when the CEO’s feel it’s more important to write loans. Would you believe that some departments at my bank are actually instituting compensation plans that benefit the employees if their customers take certain loans elsewhere?
Winston Churchill – “Never, Never Never Give Up.”
Jeff Brown – “Do the Right Thing No Matter What.”
Case closed. Have a good day!
Tom
July 19, 2008 — 8:35 pm
Hunter says:
That’s about right–we (as Americans) have become complacent and used to our luxuries. When will we learn that these “get rich quick” schemes and short term high yield investments–particularly in real estate– won’t solve our problems at the end of the day?
July 20, 2008 — 5:38 pm
Tom Vanderwell says:
Hunter,
2010?
Tom
July 20, 2008 — 8:44 pm