Mortgage Market Week in Review – to Bail or not to Bail?

Yikes, every week it’s getting more and more challenging to lay out for you what’s going on in the markets.   Hopefully it will get easier, but I’m not really sure that it will for a while.  So what are we going to talk about this week?   This week it’s about the proposed bailout, the biggest bank failure in the history of our country, and a few thoughts from Dick DeVos (huh – trust me, it will fit in later).

• They want to buy approximately 5% of the mortgage backed securities (presumably the worst ones) from the banks and investment institutions.
• Why?  The theory is that if they take those loans off their books, that will free those institutions to start lending again (start loading up their books with better loans this time.)
• Do we have any guarantee that it will work?   Nope, the only guarantee we have is the word of Treasury Secretary Paulson and Fed Chairman Bernanke, both of whom are very smart but both of whom have been wrong on numerous occasions as the credit crisis has spread.
• Would the tax payer end up paying for the entire $700 Billion?  Long term, probably substantially less than that because, depending on how the portfolio gets managed, because these loans are backed up by assets (houses) and the value of those won’t go the way of Washington Mutual stock and become worthless.
• Will banks immediately turn around and start lending more to others?   That’s a question that we don’t know the answer to.
• I read an article this morning that said that the Central Banks might actually be making the problem worse.   How so?   They keep pumping more money into the system and that is making it easy for banks to borrow money from the Fed so they don’t have to borrow money from each other and that has put a squeeze on the normal credit markets.   Interesting concept, have to check on that more.

Yesterday afternoon, it appeared that a “deal” on this was worked out.   But then the House Republicans came in with a different idea. What are the specifics of their idea?  I don’t know other than that it’s something similar to the FDIC insurance.   Let me make a few comments on why I think this has gotten so contentious and so difficult:

1. I think that the American people are getting fed up with Wall Street.   They are getting sick of Wall Street playing fast and lose with their and our money and then crying to Washington, “Save us!”   I heard one congressman yesterday say that the calls to his office (and the phones were ringing non stop) were running 150 to 1 against the bailout.     That’s not a small majority, that’s a pretty convincing majority if you ask me and right before an election, that speaks loudly.
2. I think that certain of the people in Washington (I’m trying to remain a-political about the labels) are saying, “If we don’t push to come up with a plan that is more of a workout than a bailout this time, we’re heading down a very dangerous path and we’ll be destined to repeat ourselves again and again.” So they are trying to force a solution that extracts some more pain from Wall Street and attempts to prevent this type of issue from happening again.
3. The concept of moral hazard appears to be back in play. Moral Hazard?  Yep, the concept that if you take a risk, you get the benefit if it works well but the pain if it works poorly.   Ask any business owner about the concept of risk and reward.

So the credit and financial markets remain wound up tighter than, well, let’s just say very tight.   I personally feel better about things today than I did yesterday because of one main fact:  At least the government is taking some time to discuss, argue, fight and look at options rather than marching blindly into a huge intervention in the financial markets.

One other note – I’m writing this at approximately noon on Friday (it takes some time to send out), so the news of a bailout might be different by then.   I’ll post any updates as I hear them at www.straighttalkaboutmortgages.com.

The Biggie (so far):  Last night, the FDIC came in and finally shut down Washington Mutual.   They are the largest bank failure in the history of our country.   The interesting thing is that they did the shut down in a way that isn’t going to cost the FDIC any money (Whew – that could have been a big one!).    No word that I’ve heard of yet on what happens to their loan portfolio.   My mortgage is with Washington Mutual and I’m going to keep sending my payments to Washington Mutual until I get notification of something different.   If you’ve got concerns about that, check out what I wrote over at Zillow’s blog.

So who’s next?  Based on the performance of their stock this morning, it seems that the markets are saying that Downey Financial (out west), National City, and Wachovia are the “short list” canidates.    Though I was listening to an analyst on CNBC today and he said that between now and the end of the crisis, he expects over 100 banks to fail.   So far, we’ve had 13.   Wow.

Now a couple of thoughts from Dick DeVos.   For those of you who aren’t from Michigan, you might not know who he is.   Dick is a son of Richard DeVos, one of the founders of Amway and he ran for governor of Michigan in our last election.   He spoke at a conference last night talking about what we have to do to rebuild Michigan’s economy.   A couple of points that I found quite interesting:

• In talking about Michigan’s need to evolve from an automotive state to a high tech/medical/? state, he said, “The pain threshold hasn’t been crossed to get us to be willing to change yet.” I think the same thing could be said for the financial world.   The pain threshold hasn’t been crossed yet, but I have a feeling that it will be crossed soon and that we’re going to see some significant changes in the financial world going forward.
• When someone (not me) asked him his opinions on the whole bailout issue, he didn’t want to get into any details because he said he didn’t know enough about the details to talk intelligently.   But he did say something that I thought was interesting, “Seldom do governments do a very good job of fixing things.” Hmmmm, food for thought, don’t you think?

Now a couple of “thoughts” about what it all means to the housing and mortgage markets:

1. It further reinforces my belief that we are heading into a market where the three F’s are the name of the game.  Fannie, Freddie and FHA are going to be the only mortgage lending that are going to happen for the majority of the markets. There will be small portfolio lenders, but nothing much.    This doesn’t bode well for the higher priced markets where they need jumbo mortgages.
2. The credit markets are going through what is frankly a structural revolution and until we end up getting to a “bottom” of the deleveraging, we’re going to see credit get harder and harder to get.
3. Do I think it’s going to be a “substantial” jolt to the housing market with this bailout?   No, I don’t.   I don’t think we’ll see an impact to the positive side and I don’t think we’ll see a major downward pressure from this.
4. I don’t see any of this making mortgage rates cheaper. I think we’re going to see that this has an impact on the value of the dollar and inflation trends is going to push mortgage rates up.   Not violently, but still upward.
5. Opportunities for the smart and financially savvy buyers and sellers will still exist but it’s going to be more important than ever to be prudent, know the numbers that you are working with and work with professionals.

If anything HUGE (as opposed to just huge) breaks out, I’ll let you know.   I’d like to say that I’m optimistic about next week being calm, but I’m not.

Oh, one other thought – the latter part of next week, I’m going to be traveling a bit (charity work – God’s Littlest Angels Orphanage) so my schedule is going to be a bit sporadic but I’ll still be available by cell phone and by e-mail.   Call or e-mail me if you need me.

Tom Vanderwell