More of the Same......Shockwaves!

What to talk about.....there is so much happening so fast that this post cannot keep up! Let's start with Treasury Secretary Paulson deciding that the $700B appropriated by the government for the specific use of "purchasing toxic assets from financial corporations" thus freeing up their capital to lend has essentially been thrown out the window! He stated yesterday that by the time TARP was approved and passed the global situation had deteriorated to such a degree that he believed the asset purchase program would not be effective enough. "Therefore we exercised the authority granted by Congress to develop and quickly deploy a $250 billion capital injection program, fully anticipating we would follow that with a program for troubled assets purchases." I'm confused...we have been told since day one and for the week and a half leading up to the TARP bill passage (for which I was a big fan of) that the funds WOULD be used for the purchase of "toxic" assets from financial institutions. Mr. Paulson even outlined and deployed a structure to hire, facilitate and implement staff for the valuing, booking and purchasing of these assets. Now we are being told that the time and energy of this move is essentially wasted at least for it's primary purpose! I tell you what I honestly do not know what to believe, opinionate on or read for that matter when it comes to the financial market system and the U.S. government for that matter. They certainly are not doing themselves or the economy any favors by wavering on such decisions. Don't get me wrong the markets, credit availability, and economy for that matter are changing at faster speeds but to have this type of swing in philosophy because of "market conditions" is a little hard to fathom.





The bottom line and I will say it again.....YOU MUST STABILIZE HOUSING if you want to see a turn around in the economy. In fact the NAHB (National Association of Home Builders) Chairman Sandy Dunn said that yesterday's home builders sentiment "shows that we are in a crisis situation. If there's any hope of turning this economy around, Congress and the Administration need to focus on stabilizing housing." Again, there are people on Capital Hill more intelligent than I but one thing I do know is that if you want a housing uptick and if you want that uptick to sustain itself for any period of time three things must happen. First, you must have mortgage rates lower than where they are currently. A 30 year fixed rate mortgage must hover between 5.25% and 5.5% for borrowers "sitting on the fence" to be enticed to take advantage of extremely low rates. In order for this to happen we need bulk buying of Mortgage Backed Securities and more than likely Asian and U.S. Government involvement to solidify confidence in this fixed income sector. Two, there must be "make sense" loans available. Sub-prime is gone, Alt-A is nearly gone and conventional has tightened so much we have gone from one extreme (loose guidelines) to the complete opposite (very tight guidelines). By "make sense" I mean do they have the ability to pay, do they have a track record of solid timely payments (even if there were extenuating circumstances that led to late pays or even bankruptcy), do they have money in the bank for a "rainy day" and does the loan (from a risk perspective) simply make sense. Yes.....these scenario's are out there I see them every day! Third and finally you must have an availability of lenders and money to access. Large financial institutions/lenders are really scared of buying back loans currently so they are really making sure they get the cream of the crop borrowers even to the point that some lenders are offering incentives if we have borrowers with 800+ fico's and send them their way.



There is a caveat to all of this and that involves risk. There will be defaults but the question is have the loans been structured in such a way to limit the default risk, do the rates being charged on these loans warrant the inherit risk and was the loan originated in the right fashion. I'm not talking about 580, 100%, stated products. But let's face it borrowers, at least at times see a rocky road. I mean there are companies that have been around for over 150 years that have been cliff diving lately. One of my main concerns about even talking about this subject is my opinion on FHA origination. In my mind we are setting ourselves up for another windfall of problems if FHA continues to originate and guarantee the volume of loans that it now sees. Just yesterday it was announced that during fiscal year 2008, the FHA endorsed over 1.2 million single-family mortgages. That's up from 532,000 in 2007! HUD credited the recent rise in FHA lending to the fall of sub prime lending, plentiful adjustable rate mortgage resets, higher FHA loan limits, and more affordable housing prices. Did you get the part that said the fall of sub prime lending? As of June 2008 the FHA's share of mortgage origination's rose to 22% skyrocketing from under 2% in early 2007. However, all that new lending has put a strain on the FHA's capital ratio, which fell to just 3% (1% above the minimum requirement) this year, down from 6.4% in fiscal year 2007. What does that mean? Bottom line they are lending more money, collecting fewer interest payments in connection with that money because default rates/foreclosures are going up! I'm not quite sure what the answer is to all of this but what I do know is that FHA will need to make some changes because the WRITING IS ON THE WALL.



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