Previous Blogs:
* Free Candy, Free Ice Cream, Free Money
* Extend and Pretend
* Mortgage and Financial Markets Swing Wildly This Week
* Wall Street Moves at the Speed of Light through Dark Pools
* Old Wine in New Bottles -- Wall Street Reinvents Itself, Again
* Pensco Trust Investor Symposium
* American's Financial Institutions: Is the Balance Sheet Half Full or Half Empty?
* Stimulating the American Economy not like American Idol
* AIG and the Shadow Banking Industry
* How to avoid Bernie Madoff and Foreclosure Scams: Trust but Verify
* Understanding the New Financial Concept
* Another Investing Swindle
* Bank Bail Out Plan Is Like a Forest Fire
* Where Are Interest Rates Headed in 2009 / Should Bernard Madoff be in Prison Now?
* Holiday Greeting / PT Barnum and Bernard Madof : Don't Get Fooled Again
* The Election is Over, Now What?
* How You Can Change Fear-Based Financial News Into A Positive Outlook

Extend and Pretend
November 06, 2009


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Mortgage and Financial Markets Swing Wildly This Week.
November 04, 2009

It appears that stocks and bonds are going to continue their broad swings for the foreseeable future. All the volatility indexes have gone up over the past several weeks indicating that we're going to see more of these broad swings in both the stock and the bond markets. The reason for this is that we continue to have varying opinions among investors, economists, and analysts about where our economy is headed.

From what I see pretty much 50% think things are headed up and 50% down. The leading economic indicators are the same way.
Let's look at some specifics, for example, commodities. China is back in the market to purchase commodities and commodity providers over as broad a spectrum as they can. They're making huge in-roads into the Australian commodities and raw materials markets, which we think is going to continue to push up commodity prices in the near future. On the other hand a sluggish US economy means that actual use of commodities won’t be going anywhere for awhile.

In terms of housing, we have some good news in the real estate markets, and that is that the entry level markets are on fire. Very, very hard for individuals to even get their purchase offer accepted in the entry level arena because there is so much buyer demand. In San Diego, we see houses below $400,000 that have multiple offers, and the same is true all through California’s urban areas and through most of the West and in the Midwest as well. That’s good news, but it's important to note that 1/3 of all home sales are REO's. REO means “Real Estate Owned”, owned by banks and investors, including Fannie Mae and Freddie Mac. There is also a huge supply of “shadow” inventory, which are homes that have been foreclosed upon and that are sitting and waiting for the banks to put them back on the market. And with unemployment poised to rise further it’s hard to know where the continued buyer demand will come from. So, we see again that half the indicators are good and half are bad.

I think in other markets as well we see the same kinds of conflicting patterns going on. It appears that many investors have fled the stock market and are putting their money into gold and the bond markets. I believe the mid-term trend is for the stock market to have a second dip and to go back down to perhaps the 7,500 level and for interest rates to ease down a little more to where they were earlier this year. One of the reasons is the job market. We still have soaring unemployment rates and even though many people are speaking about a jobless recovery, there's never been such a thing. It’s going to be hard to have a recovery that's based on speculation over certain stocks going up. We saw that yesterday with Warren Buffet’s purchase of Burlington Northern Railroad.

A lot of the economic growth that we seen, probably 2/3 of it, is due to government stimulation of the economy, which is necessary and critical to our financial health and recovery. At some point though that will have to be taken away. I do not believe that most sectors/industries, or the financial markets will be able to stand on their own for the next few years. Therefore, I think the mid-term trend is for the stock market to have a second dip and correct down a couple of thousand points and for interest rates to remain low and perhaps go down another 0.25% in rate. We’ll know more when the current Federal Reserve meeting ends on Wednesday and we hear what their forecast is for all this.

Later this week I'll discuss the performance of certain mortgage sectors, residential option ARMS and commercial CMBS loans to see what effect they’re having on the financial outlook for you and your family's economic situation. Thanks a lot. Please send your comments by e-mail to me at iawerbuch@unitrustmortgage.com

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Old Wine in New Bottles - - Wall Street Reinvents Itself, Again
October 27, 2009

At a time when Main Street America is just struggling to get by and most people consider themselves successful if they can pay their bills, Wall Street's been enjoying record profits in the last couple of months. Coming just one year after Wall Street teetered on the edge of collapse and several Wall Street firms disappeared before the US government intervened, it's incredible to most people that Wall Street is showing record profits. A lot of executives at Wall Street firms are getting very, very fat
compensation packages. We may argue whether that's morally or ethically valid, but the bottom line is that there are people earning hundreds of millions of dollars at entities that were basically salvaged and saved by U.S. Government intervention. I believe that Main Street is starting to feel very, very resentful about this because government monies that were invested into these companies represent tax payer dollars. The returns so far have been good and some banks and Wall Street firms that have been repaying their TARP money are showing nice returns for the government, in some cases 20% or more. The fact remains that it's government bailout funds that salvaged a lot of these firms, and now that their executives are being paid record bonuses, it's playing very badly on Main Street.

One of the things that Wall Street is good at is repackaging and reselling the junk in its basement. After all, if you liked it before or even if you didn't like it before you may like it in a new wrapper. They may even get the rating agencies to bless this junk. This is what I refer to as old wine in new bottles. One of Wall Street's old/new creations which might make you shudder is called a "re-remic" (not Lee Remick, the great Hollywood actress of the 50s and 60s). The term “re-remic” stands for repackaged real estate mortgage backed securities. Many of the same securities pools that have had devastating consequences for investors world wide for the past two and a half years, are now reappearing as re-remics. I guess the “older and wiser” Gordon Geckos of Wall Street feel no shame reselling these repackaged, repainted, and refurbished toxic products to unsuspecting investors. The marketing line is that these are the better quality securities (“I saved them just for you”), but at this point I am sure that no one really knows which end is up and which end is down. It will probably be three to five years before anyone can say how these
securities are going to perform.

Some banks, corporate credit unions, and other large institutions are trying to hold their mortgage securities all the way through to maturity with the thought that they'll bounce back, but with increasingly high foreclosure rates that may not happen. These higher foreclosure rates are occurring with prime borrowers, especially with our pet loan program, the negative amortization/pay option loans that were sold to many unsuspecting people and represented as things that they are not. I think we're going to
see increasing foreclosure rates on this loan product for some time to come. At the same time we have Wall Street repackaging these “re-remic” securities and telling everyone these are absolutely safe, these are absolutely fine.

Once again we see that the rating firms, Standard and Poor’s, Fitch, and Moody’s are caving in and giving high ratings to securities that they have no real knowledge of. And it seems that Congress and the regulatory agencies are not going to stop this charade any time soon. So at a time when these tired, old securities are being offered up to people as a great, new, wonderful product, I send a word of caution to anyone who is being offered a product like this by a broker or financial planner. Be very, very careful of something you don't understand. The common sense rules that we've been talking about for a while still apply and will apply for the rest of our lives. That is, if you don't understand it, ask questions. Ask questions until you understand what you're getting into. It may be a great investment or it may not, but the key is that you understand it and that
your comfort zone and your risk tolerance are being taken into account in your investment decisions. For further information, or to respond to this blog, please send me an e-mail to iawerbuch@unitrustmortgage.com and I'll be happy to speak with your further about this. Thanks very much and have a great day…

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American's Financial Institutions: Is the Balance Sheet half full or half empty?
April 16, 2009

A small, but very significant accounting change that took place about two weeks ago is going to have a profound impact on resolving the financial crisis faced by America's Financial Institutions. The Financial Accounting Standards Board, also known as "FASB", has altered the acceptable guidelines in terms of "mark to market" accounting, which should allow all financial institutions a lot more latitude in using their own judgement to determine the fair value of their assets and investments like mortgage-backed securities, and collateralized debt obligations. This rule change will modify the controversial "mark to market" guidelines that came about in the 80's and 90's as a result of some of the big financial and accounting scandals such as WorldCom/ MCI and Enron. In the "mark to market" guidelines, a financial institution must take into account the current financial market value of any investments they hold.

In plain English, that means that an institution that holds a lot of sub-prime mortgage paper, collateralized debt obligations known as CDO's, or other mortgage backed securities would have very little opportunity to sell of these investments due to lack of investor interest in taking on the risk. These institutions would have to markdown these items to the current market price level of these securities. So if they can't sell the security or the paper they hold for anything near what they paid for it, they had to account for it in terms of what those items are worth today, in a classic example of supply and demand economics. If the current value is 25% of what that security cost, they had to show that on their books as being worth only 25% of what they paid for it. That was the "mark to market" accounting guideline. Given that there's been a staggering lack of liquidity (buyer's money) in the marketplace, a lot of these securities and collateralized debt obligations have had little or no interest from investors except at bargain bin prices. Therefore, the value of these things is a fraction of what they originally were and probably will be for some time. So, when financial institutions had to "mark to market", they'd be taking a 75 or 90% markdown on the value of that investment. That has played havoc with balance sheets for all types of financial institutions of all sorts, and has in very real terms exacerbated the crisis that we're in.

The "mark to market" rules were created for a very good reason, but when they were developed it was hard to see how what effect they would have in the future, how they always would operate. What "FASB" realized was it was having a profoundly negative effect on the current market. It was designed to prevent large accounting scandals from growing and being perpetrated on an unknowing and unwitting public. But what's it done in this situation is handicap financial institutions and hamper their ability to operate. There are many who think that the "mark to market" rules should have been left where they were and that the best thing in the current situation was that these institutions would have to markdown their investments to what they are currently worth.

This has caused many institutions to be illiquid and not have enough funds or capital to operate. In real terms, that is true. If they had to sell these securities in the current marketplace, they would take serious hits. But most of these institutions are not planning on selling these securities at the present time. They need to hold them to maturity or until the market returns, which of course they're hoping will be soon, but will most likely be one to two years. The Financial Accounting Standards Board is trying to operate within the current environment and to modify the excessively negative emphasis of these rules. Again, there are those economists and other observers, who think that this is giving financial institutions way too much latitude in how to value their current assets. It's true that some financial institutions, like regional banks, will most likely use this to their greatest personal effect.

But the government has insisted that all financial institutions undergo a rigorous series of stress tests. Most sound institutions do regular stress testing of their portfolios. That is, they apply factors which would indicate what their portfolio or underlying investments would do if interest rates went up or if interest rates went down. Some institutions notably some large banks have not really applied this stress testing and they're basically trying to hide their problems. They're not going to get away with that in the current environment. The Administration is pushing through the stress testing for all financial institutions. These will be impartial objective rules that they will have to apply to their portfolios and all their investments. It will tell the government auditors and investigators which banks are most at risk of having problems if interest rates go up or down, and what's going to happen potentially with that institution's investment.

Now, the question is how they're going to release this information to the public. Clearly, they don't want to create a run on any financial institution. The public is very, very jittery and as we see what happened previously with institutions like IndyMac Bank, there was negative publicity about them. People wound up pulling all their money out. That of course can have its own negative effect in taking an institution down. The government is watching and trying to apply rules on how the banks and other financial institutions, like credit unions, the Federal home loan banks, Fannie Mae and Freddie Mac have to analyze their investments. These rules are also going to apply to insurance companies and any other large public companies that hold large numbers of securities in their portfolio. I think this stress testing is an excellent idea, and along with the modification of the "mark to market" rules by the FASB is going to allow some more commonsense to float back into the market, which should improve things considerably. There are positive signs emerging in certain areas of the economy, both in California and throughout the United States. These are small glimmers, but there is definitely some solidifying of home values in different parts of the United States. There are also glimmers of hope in investors' view of financial institutions. There are also investors who seem to feel there are some decent options in other consumer products, and even commodities. So, with all these factors, it looks like we are cautiously beginning to see our way in some sense of where the end of the tunnel is. It's not going to be immediate. It's probably going to be another nine months to a year until we really firm up. But, at least we can take comfort knowing that we have some idea of where we are, and we're beginning to turn the corner on this thing.

A lot of this crisis and this depression have left people feeling depressed, and many people having emotional concerns about where they are. Let people get a sense of confidence and begin to see that certain industries are starting to hire, that there is some growth on the horizon. We think that will start to become contagious, and will spread. What each of us can do is help to spread that sense of optimism. Yes, things are bad. Yes, many people are having a hard time. Yes, many American institutions are struggling. But, we are a resilient group of people. We have had problems before that we have overcome, and we need to look toward the end of this crisis as our goal, and not be stuck in where we are. With that, I wish you all a very, very successful week and I look forward to being in touch with you next week...

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Stimulating the American Economy Not Like American Idol
April 1, 2009

In recent weeks, the Obama administration has continued to put forth plans in various systems for reviewing the state of American businesses, including banks, financial institutions, and major companies like the auto manufacturers, insurance companies (e.t.c AIG). For a lot of the public, it has sort of become a game, similar to American Idol, where people are weighing in as to which are the most popular, which should be retained, which should be ignored, etc. I'm writing to remind everyone that this is a very, very complex situation, and unlike American Idol, you really have to look at a widespread net of the company's influence, and effect of those companies closing. An example is the automakers. It made me common to think that we don't want these companies around anymore, they're dinosaurs, they were very, very late in coming to the game in recognizing in how they needed to switch their production line to more efficient vehicles. But the bottom line is, that automobile manufacturing and its various parts, really supports several million jobs in the United States. Letting this thing sink away would have a catastrophic effect, and a widespread rippling effect on many, many other industries. We've all begun to see very, very clearly the old adage of how everything is connected, and certain jobs disappearing has a layering effect, and a spread effect that takes into account many, many other people in many other industries. Same is true of banking companies. Some of these companies considered too large to fail, too bad to fail, too good to fail, the government is going in and just doing an analysis of what's going on, and what effect it will have on letting this particular bank fail. In the case of AIG, as we've talked in the past, AIG is involved in many facets of American business life. Aside from the vision that handled the insurance and derivative vehicles that got into trouble, AIG, in one way or another, insures a huge number of American homes, livelihood, lives, healthcare, et cetera, as well as provides reassurance to other insurance companies. So, as much as we'd like to do away with AIG for some of their bad practices, it will be a very devastating impact on most of American society. Another thing to keep in mind is that many of the people who committed wrongs, and excesses and so on, are long gone, or the subject of criminal investigations. In some cases, some of these people are still in positions of power, but in each case the government has got to make an educated decision as to whether these people can be replaced, whether they should be replaced, what their impact is, what their knowledge is, and really what effect they had. Were the bad decisions solely their own? Were they victims of circumstance, or other situations? In the case of AIG, public ire was directed at guys like Edward Liddy, who came out of retirement and agreed to go to work managing and running AIG for a salary of $1 a year. There are several other people at AIG who agreed to come over and help to straighten this company out and right the ship. It is really inappropriate to make them the scapegoat. They are hardly the people who were there when the problems took place. They are trying to deal with extremely complex situations. It is a lot like triage in an accident situation or a natural disaster. I've used the analogy of a fire before. A fire is widespread and firemen have to make immediate decisions when they are fighting a fire; what houses they can save, what houses are too much in the path of the fire, if the wind shifts. They may have to make instantaneousness decisions on the run, on the fly, over what to do to save people, to save livestock, to save homes, and to save the firefighters. In the course of battle, these things need to be done instantaneously. So, it is very easy to sit back like an armchair quarterback in a football game and then criticize the decisions that have been made. Folks, these things are happening at lightning speed. The decisions being made in terms of American business and the American economic landscape are being done at breakneck speed on the run. In some cases, yes, they're looking at performance and projection, but as you can see, news and situations break very, very quickly. The government is doing a fine job, I believe, at taking the stuff into account and dealing with what is an overwhelmingly complex situation. A lot of people have decided that President Obama has been in office for 60 days, it should all be resolved. I just want to remind everyone, it took about eight years to create this situation and a lot of different factors were at play; the cost of easy money, the lack of regulation in the shadow banking industries that we've talked about in previous blogs; the derivative products that we're going to talk about in the next day that just went crazy and really sucked a lot of companies down. It's going to take some time to get their arms around it, but you can see that the government is moving forward in a very, very clear, not always totally thought out way, but trying to respond to emerging crisis situations and shifts in the landscape. I suggest that we all give them some time. That may be six months or a year. Just continue to track the situation and allow them some time to deal with what is an overwhelmingly complex and widespread situation.

Mortgage Update

We've talked in previous weeks about the need for homeowners, consumers, and those who have home mortgages to move forward with their mortgages and find out if they're in a position to refinance. I've mentioned to everyone that the industry is really under staffed and as the refi wave ramps up, it's going to take longer and longer to get loans done. What that means for you as an individual is that if you wait until it's too late to make your decision to move forward, you're probably going to be taking 90 to 120 days to get your mortgage done. Possibly longer. Right now, many companies are taking 60 days to underwrite files and with the time it also takes to get all the paperwork together, you're looking at a 90 to 120 day window. Keep in mind also that given the events of the past couple of years, the mortgage industry has gotten insanely difficult at processing and at observing every single detail of a mortgage loan. First it went to one extreme and anything seems to be acceptable for a loan. Now it's swung to the other extreme and every single thing is being reviewed and analyzed and needs to be supported. We have a fantastic interest rate environment. In the past, we were able to do no cost loans or low cost loans, and they only cost a little bit more than sometimes paying points. In it's urge and it's need to get points and income to banks and to Fannie Mae and Freddie Mac, the government has sort of shifted the power and right now it's advantageous to pay points because we are seeing borrowers ending up with rates at 4.25 or 4.5% for 30 or fixed rate loans. We are seeing no points loans at 5%. For anyone who's going to be in their home for more than three years or so, the pay backs are very, very strong and in most cases are about three years or less. That's a good opportunity. Again, I urge everyone to get with your mortgage professional and consultant and take a look at this. The situation, as I said, has gotten more complex than ever before, so resist temptation to deal with your mortgage as if you were buying a television. There are a lot of factors at play and you should be dealing with someone who can give you different options and different payment plans that take into account how long you'll be in your home and the savings that you're going to get by being there and also to different mortgage programs that were available. There's still some very attractive potentials out there for 10 year loans if you're not going to be in your house a long time. Again, start early and don't wait until the wave has left because at any time investors could decide that bond rates are artificially low and by selling bonds rates will go up. Take advantage of the situation right now to move forward, work with a mortgage professional whom you know, and go forward to get your loan done or at least see what the possibilities are for you. That's it for today. I'll look forward to being in touch with you soon.. We will cover the topic of derivative in the financial market and the effect they've had on what's going on in our economy.

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AIG and the Shadow Banking Industry
Wednesday March 18, 2009

As promised a few days ago, I am going to spend some time talking today about the shadow banking industry. The current fire storm surrounding AIG about Federal monies lent to AIG and payments that AIG made to other banks and bonuses paid to individuals, is very much at the heart of the shadow banking industry problem. The shadow banking industry refers to a kind of netherworld of all sorts of companies. It includes divisions of majors like AIG and Wall Street firms that you have heard of. Some are still with us like Goldman Sachs and some are no longer like Bear Stearns, Merrill Lynch, etc. This shadow banking industry was very loosely regulated when it came to their creation, sale and purchase of certain unregulated products. Let's clarify this: banks are regulated by several branches of the federal government. They are regulated in terms of what they can offer for accountholders and what they can provide for services. Wall Street firms and companies like AIG are regulated by certain other entities. For example, AIG is regulated by the New York State Department of Insurance, which is where AIG is headquartered. Wall Street firms are regulated by certain securities boards like NASD and so on, for activities tht fall under the NASD jurisdiction.

We all want to look for a scapegoat when there's been such a terrible thing going on that we can't really understand, but again, all that will come out. There will be scapegoats, there will be explanations, there will be trials, and there will be convictions. You just have to give it time to play itself out. In the meantime, try and control what you can control. Your personal lives, your expenses, your personal budgeting, and be grateful for the blessings that we have in our lives, and not get carried away with jumping on this bandwagon, because this thing is going to spin out of control emotionally, if people get whipsawed around with their emotions. I know there's a lot of loss, I know there's a lot of hurt, but we have got to try and get a handle on all of that. And the best way to do that is to let regulatory agencies, the government, manage this thing and get to the bottom of it. It's going to take a while. We're just going to have to bear with it, knowing that it will be resolved and we will move on. One day we will look back at this. Hopefully the day is not that far off where housing markets start to touch bottom, and we begin to see the stock market and the housing market take consistent turns for the better, which I think is coming. It's probably several months away, but I do believe its coming. In the meantime, stay clear, stay connected, and just be appreciative of the good things you have in your lives, and don't get too carried away with your emotions about trying to hang people before we really understand what is going on out there and how we can solve the problem. There's no point in pulling up the ring leaders, hanging them all and not really knowing what they created. The first thing we have to do is understand what these products are and their effect, and then we can kind of move forward from there. Thanks very much. I look forward to beng in touch with you tomorrow, when our topic will be derivatives

Take care.

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One thing that you can do when you research people is to ask for references from current clients. So your research can be personal, it can also be official, you can check up licensing and other things. Now in a case like Bernie Madoff, there's no way that an average investor would have figured it out because he had so many people that he had already scammed, and so many people who were singing his praises saying good things about him. So, that would have been very, very tough, but it's important to just do the research you can because it's unlikely you're going to be scammed quite in that way. Let's give you an example. Somebody who wants to do business with me could ask some of my current clients to get personal references from them. They could also check with the state of California and find out I have a license from the state of California to conduct real estate business, and also our company, Unitrust Mortgage, is licensed as a broker by the state of California. Researching further information that's on our website, someone could verify that we are indeed approved by the department of HUD as an FHA non-supervised mortgage. These are all things that help to tell you about someone, and what their credentials are. That's one way to avoid some of the scandals that have gone on.

Now the question remains, how Bernie Madoff could have spent, frittered or given away $64B. It's estimated that since the early 80s, he took in $65B from investors. So far, investigators for the government have located about $1B in assets and in cash. My guess is that there's a lot of other money hidden away because there's no way that he could have spent anything approaching that and no way that in returns to previous investors anything like that would have been given out. Most of the money was considered still under management. Again, it's staggering that that could have gone on and gone on for as long as it did with no one figuring it out. They were creating phony stock trading tickets. They would research the previous month's actual stock activity and then create phony orders to show that they had conducted trades and followed through on that, which they never did, which would justify Madoff having made the money they said he had.

The important question is again what Bernie Madoff did with all that money. My prediction is that in the coming months and years the federal investigators are going to discover a pretty large treasure trove that's been stashed away somewhere. There were a lot of activities where they moved money to offshore accounts, where they moved money to their subsidiary in London and other places, and I predict that there's other money stashed away. $64B, that's a staggering amount of money. Incidentally, not one of the large banks or funds that funneled money to him ever asked where the $64B was invested. Just unbelievable that that would have gone on. Now of course the subject of the investigation is shifting to his wife, and his family that are involved in the business, and other close employees. There's no way he could have done all this by himself. It's simply inconceivable that one person could manage an empire like this without an army of people helping him and that's going to come to light here in the coming weeks and months. Stay tuned for more outrageous revelations in this case

LOAN MODIFICATIONS

If you are currently behind in your mortgage payments and thinking of hiring one of the many companies that are now advertising that they can help you get your loan modified, check them out very, very carefully. This is tough to do but there are ways, again, to verify that the people that you're hiring to negotiate for you with your existing mortgage servicer are licensed in your state. Couple of things to mention at this point. It's going to be very hard for you to get your loan modified if you're on time in your payments. The servicers, and the mortgage lenders, are just very, very reluctant to take less than what they're contractually promised by you unless you can show that you're in real trouble. Showing that you're in real trouble can be very hard if youre trying to get them to modify your loan payment if you're not currently behind. That's a shame because a lot of people are trying to do the right thing when they see that they're coming to a crisis situation. Here and now the mortgage servicers are not doing much to help unless they really can see you bleeding and several months behind.

The new modifications the federal government has announced that President Obama spoke about several days ago, offers opportunity for two fairly large groups of people: 1. People who are on time on their mortgage but can't re-fi and take advantage of today's low rates because they have no equity in their house, typically people who bought or refinanced I the last 2-3 years. If your loan to value is up to 105% it will be possible for you to re-fi and get some assistance in that. 2. This is for people who are behind but would be able to make their payments if some modifications wee made in their loans. As long as the loan is owned by Fannie Mae or Freddie Mac, the federal government is providing guidelines that will help servicers to modify your loan and work with you.

Right now the mortgage industry, servicers, mortgage lenders, and mortgage brokers, is reading through the language and everyone is trying to figure out how it will actually be implemented. But getting back to the topic at hand, if you're in foreclosure, if you're struggling and having a hard time, be very careful on who you hire to work with you. It may make sense to hire a licensed mortgage company that can help represent you to your loan servicer. They'll know more about how to discuss things with them, how to negotiate, and basically it's like preparing a loan file on your behalf.

Initially, when you first got your loan, the object was to get yourself approved by showing that you qualified and could handle the payment. Now your goal is reversed - you're trying to show that you're not qualified for the current payments and that you need some modification. You dont need to work with a professional. It's something you can do yourself in talking with your servicer, but it may be advantageous to work with someone who is licensed and can work with you to get better results. Keep in mind that it is not legal in many, many states for someone to take an advance fee for doing this. That is, you would pay for this the same way that you paid for your mortgage - when the results are obtained and any agreement or contract you sign should say that. You should never agree to give someone upfront money, especially in the thousands of dollars, when the results may be vague and not really clear what they're going to come up with.

If you have any other questions, please give me a shout and e-mail in. I'll be happy to answer your question because this is an area that more and more people need information and help with and are curious about.

MORTGAGE RATES

Right now today mortgage rates are down a little bit (improved) as investors dip their toes into the bond market in a small but firming way. We're looking for the trend to continue long-term, for rates to remain where they are and perhaps dip down a little bit as the federal government tries to stabilize mortgage rates and entice first time buyers into the market. Keep in mind that first time buyers now have an $8,000 federal tax credit that they can use over the coming years, and several states, including California, are coming up with state tax incentives as well, so first-time buyers are really being courted. For most people buying a home in this market could make sense. Tomorrow we'll talk some more about what opportunities are there for first-time buyers or existing homeowners to buy new homes from builders. Until then, thanks, and I look forward to touching base with you then.

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Understanding the New Financial Concept (blog)
Wednesday, March 11, 2009

There are lots of new phrases and concepts being tossed around these days with regard to the financial crisis. Some of them have been with us for a few months; others have been around for the last year. Over the next several days, I'd like to address several of them to help give you a better understanding of what's being tossed around because these are critical factors in understanding the crisis and how it's evolving. The three terms I want to start out talking about are "mark to market", "the shadow banking industry", and "the use and return of stimulus funds".

Let's start with mark to market. Yesterday, Ben Bernanke the Federal Reserve Chairman, told members of Congress he'd like to suggest an easing of the mark to market rules. Let's find out what those rules really are. To understand that, we have to go back to the early 90's. In the wake of the Enron scandal and several others like MCI-WorldCom, Congress tried to get a handle on how to accurately value a company's stock or an underlying security (bundle of loans, stocks, or investments). As you recall in the Enron crisis and MCI, their stocks were inflated and underlying values were inflated also, but it wasn't possible for anyone to get a real understanding of what the underlying value was. So Congress passed several different laws, and these rules require a mark to market of the underlying security or stock value. In the current financial crisis we're talking about now, the crisis has really been fostered and magnified because of the huge complex trading in sub-prime and collateralized debt obligations. Sub-prime mortgages most people understand. The collateralized debt obligations are giant mixes or stews of many different mortgages, loans or other investments. They are much more complex and require us to look at them on another day. The sub-prime mortgages are all secured by real estate, so even though the value of the real estate may have gone down and therefore the value of that mortgage, it's not really accurate to say that the underlying real estate is worth zero, but on the mark to market rules, we have to try and establish what the trading market is and what those loans may be worth. The problem is that no one currently knows or can say accurately what the value of these complex investments really are. So under the existing mark to market rules, the underlying value of a lot of the sub-prime mortgages and the securities that are owned by banks and other institutions, have been marked down to zero, as a safety precaution that is required by law. So that means that banks and the other companies, including life insurance companies like AIG have to set aside huge reserves they may not have, and ultimately not need. Therefore these banks and companies like AIG have to borrow a lot of money to cover their bets in these mortgages based on the rule that they could be worth zero although not very likely. The underlying fact remains that none of these mortgages is secured by real estate that's worth zero. In some cases the value may be as low as 50% of the original value of the real estate. Maybe it's even lower, but we still have an intrinsic value that's there that can not be recognized under current rules. Now keep in mind the rules were designed to keep an ongoing fraud or crisis from spreading, by trying to establish what would be a realistic market price of the underlying securities, stocks, etc. But as it's being carried out today, and this is how the law is set up, it's forcing banks, etc. to put aside huge amounts of money to guard against these securities being considered worthless. In terms of trading them, they are kind of worthless because nobody wants to buy them, but underlying all of these mortgages is real estate, which is certainly not worthless.

So, what's going on in the marketplace doesn't accurately reflect and can't reflect what the underlying security for these mortgages and mortgage pools is. In attempting to ease the market-to-market rules, and modify them to fit the current crisis, the Federal government could help to ease the crisis because, again, billions of dollars are being set aside for potential losses that may never happen because the underlying real estate has a lot of substantial value, maybe 40% of the initial value, maybe 50%/60% or more. So, it's not really fair to discount them down to zero. That's what the current rules require and, again, it was done for the proper reason.

It shows again how in this crisis we're covering new ground every single day, and nothing that happened before, or was addressed before adequately prepares our system for dealing with what's gone on. Over the next several days, I will discuss some of the other issues and new topics that have come up, the shadow banking industry and the use and repayment of bailout funds.

One other thing I want to address today is what's going on in mortgage rates, etc. As I've told you previously, mortgage rates tend to go up and down several times a day. We have today an improving market, where investors have started to dip their toe in the bond waters again, helping rates to go down a little bit. The long-term trend is somewhat downward and we expect to see mortgage rates continue their journey down into the 4% range, although it is doubtful they will get substantially better. As things begin to stabilize, that could be three to six months, we believe that the government is going to ensure and take all efforts to get mortgage rates down to where purchase money loans are around 4% and re-fi's may be a little higher. But there are no guarantees, and I do urge everyone to get going now starting to get their loan files put together and prepared. Most lenders, brokers, title companies, and appraisers are substantially under-staffed from all the layoffs that have gone on. No one has ramped up. And the lending rules have gotten three times as complex as they were before this crisis began. So loans that typically took 30 days are taking 60 days or more. I predict that within three months it will be 90 days or more to get a loan done and, if the borrower isn't ready to go, they are going to miss some potential refinance opportunities. The bottom line is to get all of your information together now, get it into your mortgage consultant or mortgage loan officer, and be prepared to go forward. It may be time to lock if your rate is 6% or higher range. There are opportunities for borrowers who are in the high 5% range and above, or who have substantial amount of consumer debt that they're going to pay off in their mortgage, to still get really attractive rates in the mid to high 4% range. We have some clients that are actually buying their rates down, down to 4.25%, because there are significant long term savings for them if they're going to be in their house for a long time. So, the best plan is to speak with your consultant, make sure your consultant really understands what's going on in today's complex financial market. It's really not a question of locking your loan based on a guess and wondering what it all means. You should understand why you're getting a certain rate and loan program, how it makes sense for you and your family, and what it will mean to you in coming years in your financial plan. With that information, you'll be able to make a good decision along with your real estate consultant and take care of yourself and your financial position for years to come. I look forward to being in touch with you tomorrow, when we'll discuss other aspects of the current crisis. Thanks very much, and have a great day.


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Friday, February 20, 2009

The investing world has been rocked by another allegation of a massive Ponzi scheme or other financial swindle. This time the perpetrator's considered to be Alan Stanford, who headquartered himself in Houston, the Virgin Islands, and in Antigua. A lot of the earmarks of this swindle are very similar to the same one that went on in December, and that is that people tend to trust an individual who they know very little bit who's offering returns that just sound a little too good to be true. In this case, the Bank of Antigua, which was run by Mr. Stanford, was offering CDs at rates from 6% to 10%. A lot of investors in Houston got involved in this and this is Stanford's hometown. It would seem that the average person would think that that sounds a little too good to be true considering that other average CD rates are 2%, 3%, or 4%. So, getting something at 4% might be exciting, but at 6% to 10%, you have to think there's got to be something going on here, an offshore business run by one individual. It's amazing how many of these swindles are coming to light and I think there's probably a few more coming due. This was the go-go days of 2001 to 2008 where people thought you could just make money in every which way and it didn't really matter who was advertising the claim. We remind everybody once again, do your homework, and do a little bit of background checking. If it sounds too good to be true, it may be. It doesn't necessarily mean that it is, but it may be, and you should at least do a little bit of research. It seems that most people spend more time researching their vacation than they do where they're putting their life savings or their retirement money. A word to the wise is really, really critical at this point. Do your homework; be careful where you invest your funds.

In other news in the economy, the president has announced a major housing plan that would help to relieve the burdens of about 4M to 5M people who are in foreclosure and another 5M people who are struggling. We say once again that these plans are essential and that it's not going to be possible to turn this economy around without doing something at the grass roots level. Helping banks solidify and stay liquid is critical to our economy and financial system, but stopping the huge wave of foreclosures is also critical. I know first hand of several clients who are able to make payments; they just can't make the absurd payments to which their loans have adjusted. Someone put them into loans without telling them what was going to happen after a few years and they find themselves paying rates that they never thought they would. I believe that this plan is a very, very good idea. As with anything else, it takes a long time to put these things into effect. These are very complex plans and I caution everyone to just give them a little bit of time to work. Nothing is going to turn our course of events around immediately. It's going to take months and actually even years, but I predict that by May we're going to see lower interest rates, which will help strapped homeowners, in fact many homeowners to possibly refinance and lower their payment. It will also get the purchase money market going again and stimulate housing purchases. This is critical to getting the engine of our economy going. Well that's it for today. I look forward to writing you again soon on MortgageWatch

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Tuesday, February 10, 2009

As the bank bail out bill continues to work it's way through congress and the treasury secretary promises to unveil some new plans tomorrow, it seems more and more like this is an out of control open range fire. For those of you who have been around or not been around an open range fire, like a forest fire and anything like that, you will begin to see that it has a lot of the same similarities. When you are fighting an open range fire or forest fire it has a mind of it's own. A wild fire works in irrational ways. It spares some homes, takes out others and just shifts depending on wind, temperatures, and a lot of different variables. What's going on right now is looking more and more like an out of control fire. Clearly, the new administration is trying a lot of different approaches, just like in fighting a fire. The new treasury plan hopefully will have some decent stimulus, but what's happening is, at any moment, something comes in and changes the entire tenor of what's going on. A week or so ago, it was the news that Merrill Lynch had actually had staggering losses that haven't previously been reported. Now, who hadn't reported it is a means of some discussion, whether it's Bank of America or Merrill Lynch or perhaps Bank of America had told the federal government that it was a problem, but if we look at it, we just see that this continues to become out of control with the rational responses and the rational measure, but everybody really needs to do is try and get a handle on this thing in a rational way. There is hearings before congress, the treasury department has it's approaches, but I don't see that we have one super overriding view of at least some sane small steps to take. All of the proposals are huge and important, but clearly, we have to have some kind of a plan. When the fire department, the fire crews are fighting a forest fire or open range wild fire, there is somebody in charge and their job is to just direct the crews as they cat on the ground. They have tankers overhead and they have planes that are spotting what's going on. Right now, it's really hard for them to get a view from 30,000 feet or from 10,000, about what's really going on, and a lot of it is, that banks, especially banks, are keeping their problems to themselves until they are at the final 11th hour or 12th hour and have no choice but to disclose what's really going on for them. I really think that the administration needs to make it very painful for banks not to disclose the true story of what's going on for them. They have their own purpose in trying to maintain a silence where they don't have to disclose what's going on until they are absolutely forced to. This is really unconstitutional and basically illegal, considering that they are getting federal funds, most banks and institutions are, and those funds are designed to help them but not for them to hide their problems, and I think that is what's starting to happen or what's starting to continue to happen on a very very large scale. The largest institutions on down to the smallest institutions, these are basically banks, depository institutions that are getting federal funds to help them maintain through the crisis, are instead using these funds as a crutch to keep them from disclosing their true problems. If the administration and the treasury department and the federal reserve have any choice and any means of solving this problem, they are going to have to insist and do whatever it takes to force banks to reveal their true financial situation.

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