Bail Me Out

Okay, so everyone's asking what I think of the bailout. Let me get this on the record: I don't know. The fact is, nobody knows. That's one really, really good reason to vote "no".

Most people are a lot like me; they don't really know what the bailout contains, so they're generally opposed to it because this is not what government is supposed to be doing (or, alternatively, this IS what government is supposed to be doing, but it should be doing it for ME, and not for other people, depending on your home base on the political spectrum). But they also recognize that something is very, very wrong with the world financial system, and the only people that seem interested or capable of doing something about it are the people in Congress. So we'd like to see something happen, and sooner rather than later.

Several comments need to be made here:

1. It's silly, and I mean really silly, to blame Republicans for the bailout not passing. If you're Speaker of the House, you have to get more than 60% of your own party on board. No, the GOP isn't helping you, or the President, who is supposed to be a member of their party. Guess what? Right now he's ideologically closer to you than to them, Nancy, a point which I guarantee you won't be emphasizing in the next 5 weeks.

2. Early reaction is that the Republicans are going to catch it for voting this thing down. Nah. There are two reasons this is incorrect: one, the fact is that most of the nation, and by far the majority of people likely to be voting in November, were not supporting this bill, and two, something is finally going to get passed, and if it's even marginally better than what failed, the GOP comes off looking like Horatio at the Bridge. This will not be good for the Democrats.

3. There is a lot being made of how this bill would cost taxpayers $700 billion. This is just silly. It wouldn't cost even close to that much. [note: I am not saying this to support the bailout. I am saying it because it is true. I don't like winning arguments using bad facts or bad logic, even if I can win that way. There are reasons not to vote for the bailout, but this isn't one of them.] The government would be buying assets (at least some of what they spend will buy straight mortgages, for instance), and those assets have value. In fact, they almost certainly have greater value than their cost. I predict that if the bailout finally passes, that the government will eventually turn a substantial profit on the deal. This is actually worse than if the government lost money, and I'll elaborate below.

4. There is at least one plan I have heard that makes much more sense (I think) than what was voted down on Monday. That plan would still authorize the expenditure of hundreds of billions, but would require that those billions be spent exclusively on the whole mortgage notes being held by banks, and not on the Collateralized Debt Obligations (CDOs)those mortgages ostensibly back, much less other debt that banks are holding. This does several positive things, in my opinion. First, it allows the government to demonstrably spend our money on things with real value. Not 100% of face value, I grant this, but some value. Even houses in downtown Detroit or suburban Cleveland have some value. The mortgages can be bought cheap and the value maximized by, second, negotiating the terms of the note with the homeowner when he's in default, to allow him to stay in the house. In a rising market, foreclosure is a good option for recovery of value. In a declining market, it sucks. It not only loses immediate value on the note itself, but it exacerbates the decline of property value across the board, further harming the asset value of your other mortgages. The government has been yammering at mortgage servicers to undertake this negotiative process; this plan would allow the government to just do it themselves. Second sub a, it would put shims under dropping property values by reducing foreclosures. Third, it would pour liquid cash into banks, which is desperately needed, and fourth, it would put a floor under the CDOs, because the bad mortgages that have destroyed their value would now be backstopped by the government. Those notes would therefore begin to trade again, and the machine would re-start.

This plan, I suspect, has no possible chance of being enacted. It would still have two bad effects; one, it would give government a huge windfall if it did its job properly and two, it still isn't what government should be doing with taxpayer money. But since it is going to do something with it, this seems the least harmful in the long run.

5. When the government makes money on an investment, it spend it on some pet project it couldn't get taxpayers to back. This is true at every level of government. Did you know that the Chrysler bailout in the 80s produced a $500 million windfall? No? YOu don't remember getting a check for your share? Darn right you don't. And if the government succeeds in getting this bailout to pass, and if it works, the government will get a profit that will dwarf the Chrysler windfall and make Exxon-Mobil look like a kid's lemonade stand. If the government gets these assets at .20 on the dollar, which seems likely, and they are worth .45 on the dollar, which, if the bailout is successful, also seems likely, the government will make a trillion-dollar profit. That money will not be paid out to you and me. It will instead be used to fund all the pet projects Congress can't get popular support for, like, most certainly, universal health care, among many many others. It will also lead Congress to believe that other intervention in other markets can have the same effect, and what you will get is socialism on a grand scale and the destruction of the free world. I do, in fact, predict that this is what will happen.

6. Europe is supposed to be immune to this cycle of crash and boom, because of its superior controls (read: socialism) provided by the government. Haha. Watch the news. The problems in Europe are worse, and they have no way to fight them. The EuroFed is only supposed to keep inflation in check, and has no mandate to stabilize markets. Oh, inflation is in check all right. It usually is when you have rising unemployment. The EU needs a bailout package as badly as we do, but they don't have any mechanism for getting one.

7. From a free-market perspective, the best thing to do is nothing at all, or to repeal some of the stupid regulations that contributed mightily to the current crisis. If the government will stop "rescuing" some things and not rescuing others, so that everyone knows they have to win or lose by these rules that exist right now, things will get worse very fast and better starting fairly shortly. I will lose my business, but I'm volunteering to do that if it will help convince the government to force the market to deal with its own problems. I'm not advocating some nebulous "hard time" for others; this would be my own financial ruin, despite my not having contributed in any way to the crisis. But it's the right thing and the best thing.

Instead, what we'll do is keep the comatose patient alive until all the organs fail at once and we have global meltdown and blood in the streets.

8. This brings me to the religious portion of this post, which you may skip if you don't care for that sort of thing. We know that this kind of financial meltdown is going to happen eventually. Most of us will have no idea it's happening until it's too late, which is why we are advised to be ready at all times. As the canary in the coalmine, so to speak, let me say that I do not think that this is the "big one". I think this is a head fake. It is a very clear, very obvious, somewhat painful warning that God is not kidding around when He tells us to be ready. But it is not going to be the beginning of the end. It is, however, the beginning of the beginning of the end. It is the day and a night and a day with no darkness. Right now, it's really obvious that the warnings we've been given to prepare are serious, but the signs will fade and things will go back to "normal", and we will forget, and the shock will be somewhat complete when, a few years from now, we get the three days of darkness and the tempests and the floods and the earthquakes. DO NOT FORGET. No matter what semblance of "normalcy" we get from whatever bailout passes, we must not forget. Get out of debt. Get food and water stored up. Lean on Christ and come to know Him well. Get close to the Spirit and listen to his voice. We have been warned.

And that's it for the longest post of my career. Let the comment wars begin.

End of a Wild Week

• Consumer sentiment comes in higher than expected. Durable
  goods orders come in higher than expected. NEW HOME SALES come in
  better than expected.
• Today is a victory for low expectations, much more than a sign of
  recovering economy, but still, stocks are benefitting and bonds getting
  beat up. We had had a little rally, but we're losing ground today.
• Of note: FHA conventional-to-FHA refinances have been put into
  the FHA Secure program, which was originally designed to allow
  delinquent homeowners to get out of their ARMs before they lose their
  homes. Obviously - OBVIOUSLY - lumping these two kinds of loans
  together is silly, as it takes good loans from responsible homeowners
  and prices them the same as risky loans to those missing payments.
  This costs good borrowers, no matter how good their credit, about .5%
  to their rate when refinancing to FHA.
  
  
• There is, however, an exception, and it comes from Countrywide,
  of all people. That company has decided that it will not buy FHA
  Secure loans except when the homeowner has never been delinquent.
  Therefore they do not have to lump risky and good loans together,
  therefore they can offer better pricing, and it is that pricing that is
  reflected in the chart above.
• Never thought I'd say it, but Countrywide is acting very smart. And it's a good thing for us.
  
  

At Least Oil Is Down Too

• Bonds rallied yesterday a little, but have given back all that
  momentum and more today, so we're back to where we were Friday on
  rates. At least oil is falling - we're more than $18 off the high and
  still going.
  
  
• There is a proposal out there being put together by a
  private/public consortium of mortgage people and government regulators
  that actually has some merit. It will be a couple of months before we
  get the full details, but right now it appears that what we're looking
  at is a plan to increase transparency in the packaging of mortgage
  loans so they can be purchased. This would add confidence to the
  secondary mortgage market, increase liquidity, and probably drive down
  rates, especially for good borrowers.
• This is the technical part, so skip it if you don't care:
  mortgages are packaged in large groups for sale on the secondary
  market. Primary lenders have used this packaging to shed loans from
  the books and obtain new lending capital. However, up to the moment,
  the packages of loans have been fairly opaque; that is, the secondary
  financiers were never quite sure what it is they were buying. The
  packages of securitized loans were often significantly heterogeneous,
  and as the market has melted down, that has contributed to the
  distress, because the lending institutions that purchased these
  packages couldn't really tell what they were worth - they didn't know.
  
  
  
• Some of the loans were fine, most of them, even, but many were
  not. How many? Nobody knew. Was this package better or worse than
  that one? Nobody knew. How much real exposure did the financier have
  to market downturn? Nobody knew.
• To a large extent, nobody knows now, either, which is why the
  recent spate of better-than expected earnings from servicing banks has
  been such welcome news. At least we're pretty sure the entire
  portfolio isn't going to self-destruct.
• This opacity does two things: one, it increases risk-based
  pricing for good loans (20%+ equity, 720 credit, full income
  documentation) while significantly decreasing pricing for bad loans,
  and two, it allows lenders to make riskier loans, because they can then
  package them with good ones and sell the whole shooting match as "A"
  credit mortgages.
• You're right, this is stupid.
• What this proposal would do, then, is make it much easier for an
  investor to tell what he was buying, because all the loans in any given
  package would share characteristics. This will increase liquidity,
  especially for good borrowers, and get some money moving in the
  mortgage market again. Rates will fall for less risky loans.
• Rates will, of course, rise for more risky ones, which will
  emphasize things that need emphasizing, like having a job and some
  money in the bank, and a history of paying bills on time. That will be
  painful for some, but better on the whole for everyone.
• Congress will then step in and prohibit risk-based pricing as
  being discriminatory, and the entire market will collapse. But we will
  have made a good try, and that's important.

FHA Guideline Changes

Rates today are the same as yesterday.



What I want to take a minute to do is acquaint you with some of the new
rules for FHA loans that will be effective August 1. These are
critical to many borrowers, as FHA loans are currently substantially
better both in interest rate and in underwriting flexibility than
conventional financing.



Previously:

No loans approved less than 2 years from bankruptcy.

As of August 1:

No loans approved less than 4 years from bankruptcy, unless significant extenuating circumstances can be proved.



Previously:

No loans approved less than 3 years from foreclosure

As of August 1:

No loans approved less than 7 years from foreclosure



Previously:

Rental income allowed to offset liability for residence being converted to investment property (when purchasing a new home)

As of August 1:

Rental income disallowed on conversion to investment, unless 30% equity in the property.



There are more in the same vein. Please be aware of these changes.
Additionally, FHA is changing LTV requirements, cashout requirements
and reserve requirements for most loans, and altering the up-front
mortgage insurance premium required, although in this case, it is true
that many borrowers will now pay less than they otherwise would have.
So it's not all bad news.



Stay tuned for more. And as always, call with questions (801-310-3407)
or hit reply and we can get you the information you need.



Cj

Extra! Extra!

You Read It Here First

• Oil has lost over $8 the last two days. If the runup in crude
  oil prices is, as has been contended often, mostly driven by
  speculators and hysteria, let's all remember that hysteria works in
  both directions. On the upside, it's called "irrational exuberance".
  On the downside, it's called panic.
• All commodities, actually, are down rather significantly from
  their highs, including precious metals and even corn and wheat. It
  appears that our capacity to grow things, find things, and innovate out
  of needing things is, in fact, expanding. Shocker.
• Bonds are up, the stock market is down, and despite FNMA and
  FHLMC writing off another $42 billion in bad debt yesterday, both those
  stocks are up this morning and there isn't any apparent worry that the
  backbone of the mortgage system will collapse any time soon.
• Fact is, the vast majority of homeowners will pay their bills on
  time and repay their mortgages on schedule. There's a lot of hysteria
  out there in the credit markets, but there are still good loans to be
  had, and lots of good people that need them. Lenders need to add
  really good loans to their portfolios, and are keeping rates relatively
  low to attract them.
• Here's the prediction: the sky is not falling. Oil will not hit
  $150 a barrel this year. Gas will not reach $5 a gallon this year, or
  next year. Mortgage rates will not hit 7% this year or next year. By
  spring of next year there will be a significant, noticeable rally in
  real estate. The world financial system will not collapse. Innovation
  will explode.
• You read it here first.

Cj


www.thechrisjonesgroup.com

Fed Holds Firm

• The Federal Reserve tried to have it both ways yesterday, leaving
  short-term rates right where they were, but talking about getting tough
  with inflation. That leaves the Fed rate at 2%, making the Prime Rate
  6%. As you know, because you are a faithful reader, Fed Rates and
  long-term mortgage rates do not have that much to do with one another.
• The long bond traders hated the news initially, but the stock
  traders hated it even more and by the end of the day we were back flat
  and repricing to the better.
• So this morning we have the first tick down in certain rates we've seen in a month.
• National Association of Realtors data this morning shows a 2%
  increase in month-to-month sales volume for houses, most of that in the
  markets like Vegas and the coasts, where house prices have dropped
  significantly. But again, it's a sign of increasing activity.
• My take? We're on the housing bottom. There will not be
  significant national drops in home prices from here. It's not going to
  get worse than it is. It is, however, going to stay bad for another
  nine months, so there's a significant buying window here. Not that I'm
  a real estate expert, mind you.
  
  

Same recommendation today, if you're going to buy, buy. Don't
try to time the market. It's a fool's game.

First Day of Summer

• Although it may have felt like it for a long time, today is
  actually the first trading day of summer. Everyone is watching crude
  oil prices, as the Saudis have indicated that they will increase
  production, possibly dramatically, by the end of 2009.
• Problem with that is, markets were hoping for a bigger increase,
  and Saudi Arabia doesn't have the kind of crude the world wants. Turns
  out the big producers of light, sweet crude are in Nigeria, Venezuela,
  and - get this - Iraq. Iraq is not entirely back on line yet,
  Venezuela is the home of one of the world's last real tin-pot
  dictators, and Nigeria is in the middle of a civil war.
• Markets are pricing in further increases in oil, and waiting for
  the Fed meeting which kicks off tomorrow. The Fed is virtually
  guaranteed not to do anything with rates, but you never know.
• Bonds, on the open, are absolutely flat. It's hard to see
  anything moving us dramatically today, given the flood of economic news
  later in the week.

For today, as we usually recommend, if you're going to buy, buy. Don't
try to time the market. It's a fool's game.



Thanks to those that came to the CJ Group BBQ this last weekend - it
was a hoot and a holler. Nice to meet so many RateWatchers, and we
look forward to seeing you again. And welcome to practically the
entire cast of Draper Arts Council's You Can't Take it With You,
a great show Jeanette and I caught on Friday. You wanna go, there's
info here.
You won't regret it if you do.

RateWatch Midday Update

This isn't a big deal, because markets aren't moving much, but it
illustrates one of the problems with market forecasting. The Philly
Fed number came in below estimates, but apparently the market estimates
weren't real, because, and I quote from CNBC, "I think we all knew the
estimates were going to be wrong."



What the heck is that about? If your estimates really aren't your estimates, then what are they?



Related to this is the upcoming trial of two Bear Stearns hedge fund
managers, arrested today, that are accused of bilking their clients out
of millions by telling them that the subprime market wasn't going to
collapse when they really thought it was. The prosecution's evidence
for this is a couple of emails back and forth where these guys say
stuff like "man, this looks bad". Well, it DID look bad. Turns out it
WAS bad. But I myself was saying as recently as February that there
were signs of recovery in credit markets. Last year I was saying that
any broker that made it to the first of 2008 was going to be fine, as
things began to turn around. Nobody knew the markets were going to be
this bad this long.



I want to underscore the difficulties here. Nobody actually knows what
the market is going to do. Nobody. Not Warren Buffet, not George
Soros, nobody. People guess wrong and lose money. It happens all the
time. Advisors screw up and cost their clients. I suppose that some
of them do it on purpose, but why, exactly, would you? Where is the
incentive to destroy your portfolio and lose your clients millions?
This seriously smacks of scapegoating, looking for someone on whom to
take out general frustrations. Maybe there's real malfeasance here,
but boy, I'm having trouble seeing it.



My father has a saying that I really like: if incompetence is the
possible explanation for some action, it's a waste of time looking for
another one.



Bonds are down.

Good News is Bad News

Good News is Bad News

• Initial jobless claims were better than expected - good news,
  right? We want people to have jobs. Don't be fooled by the increase in
  unemployment rate; that's mostly caused by a gigantic flood of
  high-school graduates into the job market, and not by people losing
  their jobs, as this morning's number proves.
• Unfortunately for bonds, when employment increases, that raises
  pressure on the Fed to raise rates, and that is bad. Bad for us here,
  that is. So that's bad, right?
• So far, not very bad. The 10-year note is losing back everything
  it got yesterday, but mortgage lenders pay more attention to the 5.5%
  and 6% FNMA bond, and those aren't off quite so far.
• The big number is the Philly Fed coming out in about 20 minutes,
  and we'll be mostly flat until then. If it moves us significantly in
  one direction or another, we'll alert you on it.
  
  

We love referrals, so feel free to forward this to anyone you like, and
have them shoot me an email so I can get them on the list their own
selves.



And this weekend, Saturday 5pm to 7pm, is the Fourth Annual Chris Jones
Group BBQ. You're invited. It's at Olivia Votaw's at 565 East 300
North in Lehi, right next to the high school (north side). Please
come, eat our food, and enjoy. Really. Our treat.



Cj

www.thechrisjonesgroup.com

Well, You Know...

• No news out today, so bonds are taking direction from stocks.
  When stocks drop, and they are, bonds usually rise, and they are. Not
  strongly. Not like Superman spinning the world backward. But we're up
  a little and punching through resistance levels.

• Part of this impetus comes from the CNBC interview
  yesterday in which the guest said, and I quote, "if the Fed raises
  interest rates with employment up and financial firms in the tank, in
  an election year, they need to be prepared for people to come for them
  with torches and pitchforks. It just ain't gonna happen."
  
  
• There had been some pricing in of a possible Fed rate hike
  later this summer, but that seems vanishingly unlikely given the
  general state of the economy, so that pricing is coming back out of the
  market, giving us a little - a very little - boost.
• New FHA regulations are on the docket for the first of next
  month, more bad news for those with iffy credit and/or not much in the
  bank. There will also be new RESPA regulations - not good ones - at
  some point this year. It's tough out there, folks. But there's good
  news as well, it's just harder to find. Be smart. Do your homework.
  Keep reading.
  
  

Recommendation: if you're looking to buy or refinance, now's the time.
Pull the trigger. Get the deal done. Do not wait for rates to move
lower, because they aren't likely to do that. Do an FHA if you possibly
can, but do something and do it immediately.



We love referrals, so feel free to forward this to anyone you like, and
have them shoot me an email so I can get them on the list their own
selves.





Cj


www.thechrisjonesgroup.com