Uncertainty begets opportunity

It's been said that markets disdain uncertainty. Unfortunately, we're saddled with a lot of uncertainty these days, according to the newly launched Economic Security Index, which examines three key security variables: income loss, medical expenses, and debt. The inaugural edition shows that insecurity has risen to its highest level in 25 years.
Because the index is new, it hasn't been officially critiqued, so we can't say if it imparts any meaningful information or is just another compilation of alarmist gobbledygook. We don't think the index is telling us anything we don't already know. Through our own observations, we see heightened uncertainty, mostly due to implemented and proposed changes in regulation, taxes, business mandates, and fiscal policy.
But there's a silver lining to this cloudy perception: opportunity. When everything is jumbled, like it is today, the best opportunities avail themselves, because so few people are willing to seize the movement. Things eventually get worked out and recoveries always occur (though we don't always recognize them). In fact, recoveries are often marked by an influx of negative news and misery indicators, such as the aforementioned Economic Security Index, which, when we think about it, could be a contrary measure, portending more glee than gloom. www.sumnerhomemortgage.com

Economy needs to take more risks

The Wall Street Journal recently published a cautionary tale on the putative rise of risky lending (“Signs of Risky Lending Emerge”). We only hope the tale is true, because a rise in risky lending reflects a rise in risk taking, and more risk-taking is what this economy needs to pull itself out of its doldrums.

Many people will reflexively respond “Wasn't it risky lending that got us into this predicament in the first place?” Actually, it wasn't. It was the mispricing of risky lending that got us into this predicament. If a loan is correctly priced – through interest rates, fees, or collateral – then, theoretically, all loans would be expected to generate the same return to investors. The problem wasn't the risky loan, per se; it was the pricing of the loan, which failed to fully account for risk.

Once the mispricing problem was realized, lenders tended to go the other way, shutting out borrowers with lower FICO scores and only lending to those with the highest scores. It was a case of throwing out the baby with the bath water. Obviously, we all want the borrower with the 800 FICO score, the 20 percent down payment, and the steady job, but we also want the less pristine borrower as well.

If the Journal is right, and more lenders are warming up to more risky borrowers (we find that's the case), that bodes well for the economy, because it means more risk taking, more housing-market activity, and more money to lend.

www.sumnerhomemortgage.com

When a house is not a home

Last Sunday the Washington Post ran a story titled “Finding Gold in Them Thar Foreclosures” that focused on the rewards and risks of buying residential real estate in one of the country's hardest hit burgs – the metropolitan Phoenix area.
A couple days later, a writer on CalculatedRiskBlog.com followed up with an anecdote of an individual investor who had bought nearly 100 homes (focusing on single-family homes) over the past 18 months in the same area. The writer noted that the average purchase price was under $35,000, with one of the properties being bought for $20,000 after selling for $180,000 in 2006. Most of the homes were of the three-bedroom/two-bath vintage, and most were rented, with some even renting by the room.
There are at least two worthwhile takeaways from this anecdote: One, investors need to seize opportunities. Jittery markets are great for finding bargains if you are a long-term investor. Second, money is available for real estate investing. Though the writer fails to mention it, we doubt the investor paid cash for all those properties.
To be sure, rental properties aren't for everyone – they come larded with work and headaches, but they can prove highly remunerative when gotten at the right price. In today's market, there are definitely more right prices than wrong ones, especially for someone with a good credit history who is working with a creative mortgage professional with a strong knowledgeable of financing options.

Jobs Anyone?

The monthly employment report is worth a little expatiation, because employment is key to opening the door to prosperity. But the report can be exasperating at times. The June report showed that payrolls declined by 125,000, while the unemployment rate dropped to 9.5 percent from 9.7 percent. It's a paradox, until you read the fine print and discover the rate drop was due to 652,000 people giving up their job search.
This latest edition of the employment report wasn't particularly well received by economists, with one particularly off-put fellow lamenting, "We need unprecedented rates of growth to get out of this hole in a reasonable amount of time. It's hard to overstate how deep the hole is."
Actually, it isn't hard. Bad news is always more titillating than good news: many of us simply enjoy wallowing in misery. We don't, which is why we have no compunction in pointing out that the employment situation really isn't as bad as all that. Yes, payrolls declined by 125,000, but only because 225,000 temporary census workers were given their walking papers. Glossed over in the report is the news that the private sector added 83,000 jobs. The private sector is where we want the growth, and we are getting it.
All in all, we still see a sustained recovery, which is why we continue to badger for home purchases and mortgage refinances today over home purchases and mortgage refinances tomorrow.

If you have equity, it's a GREAT time to refinance

WASHINGTON — Mortgage rates have sunk to the lowest level in more than five decades, but consumers aren't rushing to refinance their loans or buy homes.
Mortgage company Freddie Mac said Thursday the average rate for 30-year fixed loans sank to 4.58 percent this week.
That's down from the previous record of 4.69 percent set last week and the lowest since the mortgage company began keeping records in 1971. The last time they were cheaper was the 1950s, when most long-term home loans lasted just 20 or 25 years.
Rates have fallen over the past two months. Investors wary of the European debt crisis and the stock market have shifted money into the safety of Treasury bonds, driving down yields. Mortgage rates tend to track the yields on long-term Treasurys.
On Wednesday, the yield on the benchmark 10-year Treasury note dropped to 2.95 percent. That was the first time it has fallen below 3 percent since April 2009, when the markets were beginning to recover from the financial crisis.
But tighter lending standards and declining home equity have made it difficult for many borrowers to refinance. Many who do qualify have already done so over the past 18 months.
Applications for mortgages rose nearly 9 percent last week from a week earlier, the Mortgage Bankers Association said Wednesday. But they remain at only about half the level of early 2009 and a far cry from the refinancing boom of 2003 through 2005, when home prices were soaring and borrowers were able to pull equity out of their homes to pay for home renovations, boats and vacation homes.
Many Americans owe more on their mortgages than their homes are worth and can't refinance through the usual channels. The Obama administration has launched programs to help borrowers refinance if they owe up to 25 percent more than their home's value and have their loans guaranteed by mortgage giants Freddie Mac or Fannie Mae.
About 291,000 homeowners have participated as of March — a small fraction of the estimated 15 million homeowners who are "underwater" on their mortgages.
"I expect to see pockets of re-fi activity versus an overall wave," said Scott Buchta, chief mortgage strategist with Braver Stern Securities. "The problem is, for many borrowers, they don't have the equity in their homes."

Have low interest rates run their course?

We've stated that the benefits of low interest rates have run their course. We hold to our contrary opinion that low rates are actually hindering more than helping markets these days. Consider the mortgage market: Even though mortgage rates are dwelling in the basement, fewer people are applying for mortgages. The MBA reported that purchase activity declined 1.2 percent to the second-lowest level since 1997 last week, while refinancing activity slid 7.3 percent from its May 2009 highs.

The Federal Reserve's low-rate policy is hardly inspiring confidence. “Rates must be low because the economy is circling the drain,” so the man-on-the-street rationale goes. It's the wrong message to send, because promoting risk aversion also means promoting inertia. Risk-averse markets are simply less willing to engage in riskier, but worthwhile, economic activity.

This risk-averse sentiment is readily reflected in the capital markets, where the relatively non-productive assets of gold and Treasury securities continue to be the investments of choice. That's unfortunate, because we'd all be better off if there were more investment in the very productive (though riskier) assets of home purchases and renovation and mortgage lending.

www.sumnerhomemortgage.com

How Risky Is this Market?

The May/June edition of the Financial Analyst Journal featured an article titled “Dimensioning the Housing Crisis” (available for download at CFAinstitute.org). The article is noteworthy for encapsulating the problems of the housing market in a mere 12 pages.
The article is replete with sundry graphs, most of which accentuate just how bad things got over the past two years. One graph features the spike in first-time defaults; another features the seemingly exponential growth in housing overhang; yet another features the precipitous drop in cure rates for 30-day, 60-day, and 90-day delinquencies. The author notes, in pointed prose, that “we have a housing problem that affects 11 million to 12 million units. If nothing is done, more than one homeowner out of every five will face eviction.”
It's a pessimism-inducing article, to be sure, but we remain upbeat nonetheless. Reason being, these problems are well documented today, which means there are few shocks left to rock the market. What's seen isn't what kills, it's what's unseen.
Savvy buyers know that the time to buy isn't when everything is dear but when everything is disdained. Everything in housing isn't disdained, but sentiment remains low. So, we ask ourselves, was it riskier to buy a house in 2006 or is it riskier to buy one today? The sentiment feels riskier today, but the data show that 2006 was overwhelmingly riskier