Paul Kedrosky: Mortgage Market Week in Review

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July 18, 2008

Mortgage Market Week in Review - A Guest Post

Tom Vanderwell here, and I'm taking the liberty of reposting my Mortgage Market Week in Review that normally appears at my blog at www.straighttalkaboutmortgages.com. I'll have more thoughts about the mortgage world next week and thanks to Paul for giving me this opportunity......

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

thomas.vanderwell@53.com
straighttalkaboutmortgages@gmail.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

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