The FED cut the Discount RATE so what
The kill switch just shuts the boat down and it wont run. Let me try to tie this into a mortgage analogy. The current liquidity crisis that is BEATING this market up and down is similar to pulling the kill switch on a boat. When you have solid lending insitutions like Countrywide and Thornburg on huge stock slides and possible rumors of BK, you have to question, WHO PULLED THE KILL SWITCH? The mortgage markets for all practical purposes have shut down. Sure you can still get a loan, and banks are still closing them, however I am watching my rate sheets on a daily basis and although the 10 yr bond is rallying like I have never seen, our conforming and more importantly VA/FHA rates are not really doing much.
So if you are still surviving and are in the loan business than today you are feeling mixed emotions. As we are pulling off the lake after a suprise morning of a broken down boat(kill switch) I ask some of my LOS if I can turn on XM and listen to the market. What happened???? I am hearing all sorts of talk about a suprise 50 bps rate cut to the discount rate!?!?!?!? Holy crap, this is great right? WRONG. Here is the dilemna I have faced every single time there is a rate cut. Borrowers that are in processing automatically think that because the FED cut rates that I need to lower their rates by a 1/2 point also. I tell you it is so frustrating to try to have this converstion with an average JOE home owner.
So what is the discount rate and why won't it affect mortgage rates like the Fed Funds Rate?
The discount rate is the rate at which banks/lenders can borrower money directly from the Fed Reserve. This basically means that in light of this liquidity crunch as it is being called, that now banks can g to the FED and borrow money cheaper than they could yesterday. This will obviously help at least a little. HOWEVER, this is not the same thing as CUTTING THE FED FUNDS RATE, which is what our genius Alan Greenspan did something like 20 times in a row from 2000- June 2003. Cutting the FED FUNDS Rate would have had a more immediate effect on MORTGAGE markets because this is the rate at which banks can lend out money to eachother and this has a much more direct affect on credit card rates, home loan rates and even auto rates. I personally think the FED will also be cutting this key rate sometime in the next few months solely because the discount rate they just cut will only have a temporary effect, not a long term one!
So what does all this mean now? I think we are still only seeing the beginning of what will go down in the econ history books! I am telling you that WE brought this on ourselves. What were we thinking when we were giving loans like this? 100% stated income NO MI down to 580 fico? Centex home equity reps were here just 3-6 months ago taking these loans left and right. What did that accomplish? Moron people that could not balance a check book, let alone pay a bill on time were out buying HUGE homes. This in turn drove home prices to insane highs nationwide and now we have tons of new homes, new homeowners, and a softening real estate market. So now these home owners cannot make their payments since all the arm rates are going higher, they cannot sell the home since they bought the home at its high and even if they could sell the home to someone that wanted it, the LOAN program that they would have qualified for a month ago, IS NO LONGER THERE since someone tripped the kill switch. So what can be done to help? Step in HUD/FHA and the department of veterans affairs. Here is what I think the government insures like FHA and VA need to do:
Raise max loan amts
FHA needs to go 100% financing
allow 40 yr amort
VA needs to allow NON SPOUSE co-borrowers
VA needs to do away with JUMBO REFI WORKSHEET
VA need to follow FHA and go to 95% cashout refi
This Blogging stuff is not really that easy
The Birth of the FHA VA Blog
Well where do I begin? This sure could take a while but as I launch this blogging site, I suppose I am about 10 yrs behind if I really want to explain my mortgage background and how I have come to love the hidden treasure of VAand FHA loans.
So I was attending BYU as a college student back in 1997 and absolutely no history or experience with mortgages. I absolutely loved sales and had been in and out of telemarketing, roadside selling of knock off sunglasses, lemon aid stands as a kid, you name it and I would have sold it. So a buddy of mine, named Will Farrar owned a mortgage company and I believe at the time he was running his loans via a net branch set up called Allied Mortgage. Will had seen me in action as far as my ability to shoot the shmack with others and build a relatively quick rapor with them. He also knew I was currently selling coupon books over the phone and got really excited every time I made a $20 commission. So he (Will) invites me to come to his office one evening and get on the phone and as he called it, "Shoot fish in a barrell." I got a crash course training in calculating PI and savings on a old HP12C calculator and he began to train me in VA STREAMS. VA STREAMS are the VA IRRL loans for those of you in the industry. So back then there was no such thing as the DO NOT CALL LIST so he hands me some phone numbers and off I go to cold calling. Fast forward a whole 30 mins and I am telling a man that he could save $220 a month by refinancing his current VA loan down from 8.25 to 6.5. I had also calculated the commission I was able to make and it seemed to good to be true. Are you kidding me, Will was going to pay me $1700 bucks and I could save this man THOUSANDS in interest with little to NO work from his part!
Needless to say I did not sleep much that night or ever since for that matter. The loan closed not too long after this initial phone call as did many others before the market dried up back late 97 early 98. However, my love for mortgages and more specifically VA home loans was just starting to grow. It was not for some years later that I was also introduced to the lovely world of FHA loans.
Im going to fast forward a bit and cut out a lot of details, but I am sure they will appear from time to time as this blog continues to grow up. So fast forward to graduation from college in 2000 and the need to find stable employment. Will and I stayed friends during the downturn or rise in rates if you will. When I graduated in 2000 Will was no longer doing loans and rates were about 8.25-8.75 Par on your conforming and govie products. Heck this was way before subprime surfaced and NO DOC or stated loans were not even thought up at this time. So here I am looking for a job and Will had also been thinking that he could make the same kind of "fish in a barrell" money like with VA streamlines, but this time he was going to do it with this insane loan called the 125% second. Fast forward 7 yrs and this would be an extinct loan and the loan that started the crazy over extending of loan products etc. So we decided to start selling 125% seconds and truthfully they were not as gravy train as the VA loans but still we had everyone and their brother wanting to borrow more money than the home was worth and they could give two hoots about the 12-19% rates we gave them. Heck section 32 was not even being enforced back then. We could charge 10 points up front and price the loans with 3% YSP. Now that I look back this seems way crazy! So we sold these 125% loans from about May 2000 until Dec 2000 when the tech bubble was starting to implode and the economy was freaking out. Will said that VA rates were coming down and we should start mailing letters again and really get some money coming in. So we started targeting VA owners and the PHONE, yes we had one phone, a QWEST cell phone, would NOT STOP RINGING. Greenspan cut rates in early Jan 2001 and let me tell you it was the ride of a life time for the next 3.5 yrs.
Over the next 3.5 yrs I went from being one employee of Wills, running loans out of a basement and meeting WAMU underwriters in dark parking lots at midnight to hand literally 50 files at a time to them and getting them to underwrite them at home to keep up all the way to having equity in his company and having hired well over 50 employees myself and having a typical month of 45,000,000 in loan volume! Certainly many things transpired in between all of this, but I will leave some room for future posts.
I now currently manage my own (much smaller) loan operation, managage some VA and FHA lead sites, and am beginning this wonderful blog in which I will shed light on the recent mortgage implosion, talk about how to survive and explain why I strongly welcome this major mortgage correction. HOLD ON TO YOUR SEATS and enjoy this ride. You will find lots of interesting stories and useful info.