Apr 23 2008

How Many People are Really Walking Away From Mortgages? Looking for the Invisible Group.

I’ve been reading many articles talking about those that are currently “walking away” from their homes. It is now common knowledge that some people are intentionally walking away from their mortgage commitments. When we talk about walking away, we are talking about a very specific group that can pay but is choosing not to do so. Of course choosing to pay can be an argument in itself; are we talking about someone who just had their rate reset and is going to pay 80 percent of their net income to their housing payment or are we talking about a speculator who realizes he cannot sell his home and is now simply letting the mortgage go into foreclosure?

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Apr 20 2008

Mortgage Lending: Past vs Present Diagram. Where it went wrong.

Someone sent me an e-mail with a graph of the difference between past and current mortgage lending. I decided to spruce up the diagram to give you a better idea of how many additional layers have been added to the current mortgage lending process. What you’ll notice is the detachment from the actual real estate asset in the new model. In the old model, banks had a major incentive to make sure you did not default on your loan. In the current scheme of things, independent rating agencies and appraisers supposedly were the buffer to all this yet they of course had no actual money in the game. That is, they were paid by the banks and investment firms to meet their expectations or face being out of a job. Hence the new allegations that are now coming out where appraisers inflated real estate prices at the behest of banks and investment firms essentially had rating agencies over the fire in terms of rating whatever they brought to the table AAA.

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Apr 17 2008

Retire Extremely Early: Dollar Cost Averaging and Maintaining a Positive Attitude in Tough Economic Times.

During trying times I think it is very easy for many to get pessimistic with all the negative news and let their ultimate goals slip away. Simple rules to live by include keeping debt to the lowest level possible and having clear cut goals of where you want to be in 5, 10, and even 20 years. Wherever you are in life it is never too early or too late to decide what you want out of your life. Money should be a method of achieving your goals and not the ultimate purpose. Unfortunately many Americans live their entire life waiting for that far off day in retirement only to realize that life has passed them by. Why not enjoy life right now as well? As you may already know, I am pretty conservative in my investing style and the current state of our economy has only highlighted the worst in investing habits for the public. We collectively as a nation have become a debtor nation and that is a sure way not to reach your goals.

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Apr 14 2008

California Median Home Price, $373,000: Maximum federal government loan limit of $729,500. Does that Make Sense?

One of the flip sides of the major reversal in housing fortune is how quickly the market deteriorated. As many of you know, the new federal government loan limit enacted in March of this year raising loan caps to a new $729,500 ceiling was designed to help jolt the market in higher priced areas including California. The problem with this strategy is that it did not take into account the rapid decline in the market. The speed in which the market reversed is astounding. The argument for raising caps was also to allow homeowners in bad mortgages to refinance into a more typical government loan. The caveat of course is that people have positive equity in their home and now that California is down statewide 21 percent from peaks reached not too long ago, many of these mortgages no longer qualify for refinancing options.

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Apr 11 2008

California Mortgage Rates Still High: Examining Actual Mortgage Products in Today’s Market and the Family Budget Impact.

As the housing market continues to slump forward, there are many unintended consequences cropping up all over the country. For one, the intent of the Federal Reserve to inject liquidity into the markets was to bring back confidence in an environment that is cautious about credit. As we are approaching another 1 percent interest rate policy ala Alan Greenspan, the only difference this time is that mortgage rates are not responding like they did during the earlier easing during the Greenspan tenure. There is a couple of reasons for this including the secondary market which was buying up all kinds of new and creative mortgage products that have now turned on the market. Yet your bread and butter 30 year fixed products are still high priced even after the Fed is attempting to induce lenders to be more willing to lend.

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Apr 6 2008

Money Markets, CDs, 401ks, and Savings Accounts that Lose Against Inflation: A Society that Punishes Savers.

One of the unintended consequences of this housing market is the punishment conservative savers are taking. Last month we had the rather astonishing release of data from the Bureau of Labor and Statistics telling us for the month, that inflation was at 0 percent. As disconnected as this is from reality, there is a reason the Federal Reserve is chopping rates even further and it is the opposite of what they are telling you. Behind closed doors, they are hoping that you go out and spend and go into further debt. In fact, they are setting up a system where savers are actually punished for not spending. This game and charade of course can only go on for so long. First, let us take a look at the current inflation rate and adjust it to an annual basis:


click to enlarge

The first thing I want to point out is the CPI. You’ll notice that last month, the reported inflation rate was 0 percent even though oil touched about $110 a barrel and has remained at those levels for sometime. Let us first calculate the current annual inflation rate based on the above numbers:

If we add up the previous five months of data, we get 2. Since this is five months of data we’ll have to adjust this for a 12 month calendar:

(2/5)=(x/12) gives us X as being 4.8 percent

So currently the annual inflation rate is at 4.8 percent. You will also notice that we have lost jobs in the previous three months to the tune of 76,000, 76,000, and 80,000. Keep in mind that during the previous three recessions, job losses during peak times reached over 300,000 a month even during the minor recession earlier in the decade. This can be looked at a couple of ways. Much of the data from the BLS lags the actual market. That is why people were predicting a recession in the middle of 2007 even while jobs were still being added. Keep in mind the way these things are calculated they leave out much of what the majority of Americans are facing on a daily basis. For one, the CPI does not calculate mortgage payments and taxes but owners equivalent of rent which understates the current burden of housing prices on many homeowners. Also, energy is blunted in the data so the rise in fuel cost isn’t reflected either. Then, you also get complicated uses of hedonics for healthcare, food, and education which again understate the true nature of consumer inflation.

So with that said, for someone to simply preserve their wealth in the current market they will need to achieve a return of 4.8 percent after taxes. Keep in mind that interest earned in CDs, savings, or money market accounts is taxed so a par rate of return is still not keeping up. But let us take a look of a few major institutions to show you how any saver in the current market is being punished:

Emigrant Direct

The first one we’ll look at is Emigrant Direct. They have offered very competitive rates on their savings accounts and currently they are offering a 2.75% rate of return. You may think this is low but as we’ll show further, this is actually competitive for savings in the current market. The next place we’ll look at is ING Direct:

ING Direct

The current Orange Savings Account from ING is offering a rate of 3%. You notice that their CD offers a higher rate of return but let us look at what is required of this:


In order to achieve a yield of over 3%, you will need to deposit at least $50,000 or more. This isn’t even calculating the after tax amount you’ll be getting. We are simply looking at the current rates going for safe investments. When I say safe investments, I mean accounts that are protected by the FDIC which insurers individual accounts up to $100,000. The next place is your typical brick and mortar place that is also offering an online product like Emigrant Direct and ING. Washington Mutual is offering an online savings rate of 3.25% so long as you have a checking account with them:


You’re probably starting to notice a pattern here. The savings rate for many of these places hovers from 2.75% to 3.25%. Let us look at a different kind of account with Bank of American and their Money Market Savings Account:


Here, you’ll notice that the rates up to $10,000 will only yield you .35 percent. You will need $10,000 or more to get a rate above 1.24%. Bottom line is that if you stick your money into these accounts and let it sit, your money is actually eroding simply because the rate of inflation will eat it away. And this isn’t to say anything about a dollar that is also going down as well:

US Dollar

During the past two years, the US Dollar Index has decline by 21.7 percent. Given that many of the items Americans consume are imported, that means your purchasing power has declined by an incredible pace. If you have any doubts about this just take a trip to Europe or anywhere in the world for that matter.

There may not be a direct correlation from the Federal Funds Rates and the actual payments you make on mortgages simply because market risk is so high at the moment. But the funds rate does have a direct impact on the above savings rate on conservative accounts. What the Fed is telling you is that if you plan on saving your money in guaranteed accounts, you will in fact be losing money. Then you may be saying, what about playing the stock market. Let us look at the performance of the three major indexes:


Looking at these three even after the recent rallies and major intervention actions by the Federal Reserve they are still down on a year to date basis by:

DOW: -4.94%

S&P 500: -6.67%

NASDAQ: -10.60%

Clearly, the market is making it more difficult for people to protect their wealth. The places that have done well are in foreign currencies and commodities. Why are these doing well? Because they are simply reflecting the true devaluation of the dollar and the real rate of inflation that most Americans are feeling. Let us look at a few currencies:


The Japanese Yen is up 9.91% for the year against the dollar. This has a lot to do with the carry trade unwinding and also the extremely low central bank rates over in Japan. If you think we have low rates here, you just need to take a look over there. But there is more to this than just easy rates. In fact, the Euro is holding up strongly as well too because the ECB has held steady with their rates:


The Euro is up 7.68% for the year against the dollar. Now given that Europe may also be facing a credit bubble as big as our own by the reflection of recent writedowns on mortgage backed debt, their currency is perceived at least by foreign exchange markets as more valuable than the dollar.

The irony is that most Americans do not even have a tiny amount of money in commodities or foreign currencies to hedge their bets. Given that we are in a recession short of the technical definition, if the Fed cuts rates again expect the yield on the already inflation lagging savings accounts to go down even further and expect foreign currencies to go up and also, commodities. In this market, it is important simply to preserve wealth as many that are now seeing their equity evaporate in their homes are realizing. Even the stimulus checks that are coming out next month are not touted as savings checks but a way for you to spend even further. If anything, take those rebate checks and put them in a savings account or foreign currency. The Fed wants you to spend and be in debt since that is the last straw of our economy. Yet this is not good for you on a personal level. No wonder why Americans now have a negative savings rate. Conventional buy and hold investing styles are going to be proven extremely wrong in 2008 and if you want any more proof, just look at these scary charts. Be wise and don’t follow the advice of the Fed.

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Apr 2 2008

$231 Billion in Writedowns and Credit Losses: The List of Mortgage Players Grows Larger.

Yesterday UBS AG said it would write down a staggering $19 billion on assets connected to mortgage assets. The figure is staggering yet the market rallied nearly 400 points on this news. Have we reached a turning point where writedowns simply do not matter? This figure was the largest since the writedowns started last year. Writedowns occur when investment banks mark their assets to market and the value has declined. Commercial banks on the other hand take credit losses or charge offs when the same occurs with their assets should they default or decline in value. It is amazing that we have now reached $231 billion in writedowns and we still have more sub-prime mortgages that will default this year and the battle of the Alt-A and Option ARM mortgages are nowhere on the radar screen. If there was any other proof that investment banks need more regulation let us look at the entire list of writedowns (all numbers below in billions): Read More

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