Survival Tips

With all of the turmoil in the financial markets and loan approvals being yanked out from unsuspecting consumers, what can one do to protect themselves? 

The first rule of thumb is to know who you are doing business with.  If you are securing a home loan through a mortgage broker and you have been informed that you are locked and/or approved, then you need to demand to see the underlying funding sources confirmation in writing.  A written confirmation from a broker is worthless as they are not the ones guaranteeing the rate, approving the loan, or ultimately writing the check. 

If working with a lender that funds their own loans, then ask the following question.  “Do you fund your loans off of a line of credit (warehouse line) or are you owned by a bank and able to fund off of your deposit base?”. Lenders that rely on lines of credit to meet their funding needs are the ones that are disappearing from the market. (American Home Mortgage and Charter Funding as recent examples). Lenders that have a bank to fall back on are much more secure in today’s environment and are positioned to survive the crisis.

In short, when applying for a new mortgage loan or deciding who to work with, ask A LOT of questions and listen carefully to the answers.  You want to work with someone who is informed and up to date on the market, is open and honest in regards to the risks associated with financing in the current market, and will provide you with written confirmation of key components of your transaction (rate lock and approval). Thanks and good luck – it’s a jungle out there!!!

Thursday, August 9th

A very mixed reaction from economists yesterday over the Fed statement, split evenly between those who think what’s happening in the markets is no big deal and those who believe the problems in the credit markets have spread well beyond subprimes. Our take remains pretty much what it was yesterday: Bernanke had yet another opportunity to drop the inflation bias (a bias that makes little sense now that inflation has already fallen “as forecast” anyway) and thereby signal the market that the Fed is not only ready to provide liquidity if necessary, but able to do so without violating its inflation-fighting principles. Yesterday’s statement was, in our view, not even a small step in that direction. As CNBC’s Jim Cramer said in reaction to the Fed and the stock market rally, “the stock market rallied because the Fed proved it’s not clueless.” The statement acknowledged the markets’ problems, after all. But the statement also showed no ease and no intention to ease. So, not much to get excited about, either.

Lawmakers, including Chris Dodd, Senate Finance Committee Chairman, are urging for higher caps for Fannie Mae and Freddie Mac to help alleviate the liquidity crisis in mortgages. The WSJ also acknowledged the problems threatening mortgage REITs, saying some are at higher risk of failing.

Toll Brothers reported a 21% drop in revenue last night, as orders continued to drop.

No significant data releases today. The MBA mortgage application index rose 8.1% last week, but the series has had only limited value this year, because it favors large mortgage lenders which have continuously picked up market share as smaller lenders have fallen to the curb. Wholesale inventories are expected to be up 0.4% in June.

Monday Hangover

The WSJ has gone doom and gloom this morning, in sharp contrast to its guarded optimism at the start of last week. On Page 1, the top story is Warren J. Spector, Co-President and heir apparent – until recently, anyway – to of Bear Stearns CEO James Cayne, who resigned last week. He is the latest and highest profile individual on the Street to lose everything to what used to be the subprime meltdown. The WSJ offers all the details, including the smoky, dimly lit mid-town office where the drama unfolded.

Meanwhile, the markets section lead article says the “great unwind” may be here. It started with subprimes, says the Journal, but now problems have spread to every sector. The most significant aspect of potential market problems is the inability for Wall Street to provide capital and facilitate deals as balance sheets become increasingly encumbered by bridge loans and unsold securities. And new deals cannot be done anyway, they say, because the highest risk tranches have no bid in the market. While no one doubts that these problems will be resolved in time, it’s starting to look like it may take longer than a few weeks before things get back to normal.

In contrast, the Barron’s cover story this weekend was on picking through the detritus of last week’s market shakeup to lock in 10% yields. They recommend “ten names to buy and two to avoid.”

On Bloomberg, there’s no consistent theme. They start off with the Spector story, move on to the Fed (Bernanke may alter rhetoric, not interest rates) and then a story on the best Treasury returns since 2002. Down near the bottom of the TOP page is the buyout freeze shutting the Wall Street pipeline, but it’s the $1.3bn in lost fees that is emphasized, not the potential economic impact of a liquidity squeeze.

The WSJ ran its Fed story last Thursday, clearly so confident that nothing could convince Bernanke to ease that they didn’t bother to wait.

And so another week begins. The good news: stock futures are higher this morning, suggesting some stability may be returning to the markets. There’s a very light economic calendar this week – just productivity and consumer credit on Tuesday and import prices and the Treasury budget on Friday – which means all eyes will be on the ongoing subprime-meltdown/corporate-credit squeeze and, of course, the FOMC, which meets tomorrow.

Wednesday What’s Up

The Dow Jones industrials tumbled nearly 300 points from its high yesterday to close down 148 points, a dismal technical signal from just about any perspective, but especially at month end. The Nikkei index fell 2.2% last night, the Hang Seng was down 3.2% and most European markets are down about 1% this morning in sympathy. Dow futures have been down as much as 100 points.

Yesterday’s bad news centered around American Home Mortgage, which announced that it cannot pay its creditors. The company’s stock fell 90%. Also, two German banks warned of subprime-related losses.

This morning’s news from the subprime front is not good. Harvard says it lost $350mn from its endowment in a bad hedge fund investment. And Bear Stearns has stopped redemptions from another hedge fund, the Asset Backed Securities fund, which has mark-to-market losses of about 25%, according to CNBC. The fund does not use leverage, so it is protected from a total wipe out. The fund’s managers have told investors that this is not a good time to sell, and that the fund will not allow redemptions until markets recover somewhat. Also warning of losses this morning, Macquarie’s Fortress fund, the second Australian high-yield fund to run into the subprime minefield.

Oh, and if all this is not bad enough, CNBC says Moody’s and S&P are warning that some Alt-A mortgages are no better than subprime and that assets backed by them will be re-rated accordingly.

Treasury Secretary Paulson is in China, pressing for further appreciation in the yuan in an effort to hold off protectionist legislation in the Senate. The yuan has appreciated about 9% since the peg was abolished in mid-2005, which is close to the 10% that most US legislators have held up as a target. But the deficit with China continues to grow, suggesting some further appreciation might be needed. The Chinese are reluctant to give in, but appreciation is in their own best interest to counter domestic inflation, so a further slow slip in the dollar is likely.

This morning, the MBA mortgage index fell 0.3% last week, ADP is expected to report a 100k rise in July private payroll employment, June pending home sales are expected to fall 0.5% and the July ISM mfg index is expected to fall from 56.0 to 55.0.