http://www.jongordon.com/newsletter-030110-5things.html.

One of our clients was approached with this scam so we wanted to bring this out so people can be aware and avoid getting trapped. If you are having difficulty paying your mortgage or facing foreclosure, please call Andrew or myself at 808-242-8110 to assess your situation and see if we can’t help you! 

Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the past Fed rate cuts. This is difficult to explain to consumers who have watched the Fed Funds rate reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Federal Reserve can only control the Short-Term Overnight Lending Rate, the Fed Funds Rate and the Discount Rate, which have a very close relationship to the Prime Rate, fabulous news for all of you holding lines of credit tied to prime!

This is very different from mortgage rates.  A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

The reason for this is simply a matter of cash movement. The stock market has as much of an impact, if not a greater impact, on mortgage interest rates as the Federal Reserve. Mortgage interest rates move in accordance with the trading of what is called the mortgage-backed securities. This is a secured instrument similar to that of a bond, and when people are putting money into equities (that being the stock market), the money going into stocks is typically coming out of bonds and mortgage-backed securities to fund the purchase of these stocks.

When the stock market is selling off, money is coming out of stocks and the money needs to have a place to be parked, in many cases a safe haven, to generate a secured guaranteed yield. That is when the money goes into bonds or mortgage-backed securities. When the money goes into bonds or mortgage-backed securities, rates on mortgages come down. When mortgage-backed securities are sold to generate cash flow to investment stocks, rates go up. The much more accurate and dynamic relationship is that between stocks and mortgage-backed securities, not the Federal Reserve.

In summary, the Fed lowers rates, stocks rally, mortgage-backed securities sell off and mortgage rates go up. That is the dynamic and the occurrence that we need to be very careful to watch.  We are seeing this occur today as I write this piece!  

Now, I have seen the exact opposite happen, on many occasions where the Fed raises interest rates. The stock market does not like high interest rates because it cuts into corporate profits. The Fed raises rates, stocks sell off and mortgage rates actually improve. Just because the Fed is expected to lower interest rates, this does not have a direct impact of any positive result on your home mortgage.

We at Sapphire Mortgage are experts at monitoring the markets; we watch the Mortgage-Backed Securities as a trader would watch the stock market. 

If you or someone you know is seeking to purchase or refinance, please feel free to contact Nancy Bayron at Sapphire Mortgage  808-242-8110

to get a game plan together on your mortgage financing needs.

FOMC official statement: http://www.federalreserve.gov/newsevents/press/monetary/20081029a.htm

Whatever the political posturing regarding the current rescue plan, a plan needs to be passed. Credit markets are frozen and banks are going bust every day. This is not totally because of “toxic” mortgages. This has a lot to do with FASB 157, also known as “mark to market”.

Each day lenders must mark their assets to the marketplace. It’s like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But “mark to market” does not allow for this, which creates a vicious cycle.

Why is this so bad? Because as lenders mark down their assets, the amount that they have loaned previously becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to “mark to market” requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio…at cheap prices. And this makes the vicious cycle continue.

And a quick look at the holdings of these loans show that 95% are problem free. Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages are relatively safe. But this requires a bit of understanding. You see, when a pool of mortgage loans is put together, it isn’t just A paper or B paper etc….it’s everything. It’s got some A paper, B paper, C paper…and even what looks like toilet paper. An “A” investor buys the whole pool but because they are an “A” investor their safety is greater because they can avoid the first 20% (an example) of defaults. So they own the whole pool but are sheltered from the first batch of defaults, and for this they get the lowest rate of return. As you can figure from here the more risk investors want to take, the higher the return. So the investments are relatively safe, but the accounting rules currently place undue pressure on the banking institutions.

Now add to all this, the opportunistic “shorting” done on the financial stocks, much of it illegal because those shorts did not legitimately borrow shares (called naked shorting), and you exacerbate this whole problem. Thank goodness for the recent temporary ban on shorting in the financial sector. As for the plan the government is the only one who can step in to do this. And they have to do this. And they will do this. The nauseating political posturing from both sides is just part of the process.

This is not easy to understand for the general public. In fact most politicians don’t get this either. That’s why it is a difficult yet critical bill for them to vote on.

Once this is done it will take some time but the markets will stabilize. As for the real estate and mortgage industries, it will take a bit of time but we will make it through this.  Rates will remain attractive and the influx of credit availability will help the housing market gradually improve. This ultimately will be the medicine needed to improve the situation overall.

As always – please keep in touch, especially during these volatile times. I am here to help you in any way that I can.

Today after the bailot passed, the markets reacted negatively as uncertainty continues on whether the bailout plan will actually help our credit markets and ultimately avoid a very bad recession.   Time will tell, this is certainly not a panacea for all that ails our troubling ecenomy but something drastic needed to be done and I for one HOPE this HELPS!! Time will tell, perhaps traders and the market movers will have time to digest the entire Bill over the weekend and we will see some improvement next week.

If you feel up to to reading the bill in its entirety (451 pages) please shoot me an email at Nancy@MauisMortgage.com and I will be happy to forward it onto you in a pdf!

This past month will surely make the history books, little comfort in that but our Government is taking some strong measures to basically keep the Financial Markets afloat.

First Treasury Secretary Hank Paulson announced that the US government will guarantee public ally offered money market funds that pays a fee. You can read his entire statement at http://www.treas.gov/press/releases/hp1149.htm.  This helped dispel some of the fear and anxiety that is out there, as a result stocks around the world enjoyed a record day!

Secondly, since banks and the financial markets is stagnated with all the illiquid mortgage debts, the Federal Reserve stepped in to create a vehicle to buy these mortgage debts and will turn them into a liquid marketplace. How, details are still being worked on.  This move should be a major help to the long-term housing and lending environment.

Lastly, the SEC has placed a ban on short selling in 799 financially related stocks.  This ban will last through October 2nd and can be extended if needed in 30 day increments. Many short-selling has been placed as “naked-short selling” where the trader shorts a stock without the required step of buying it first!  Lately this has intensified the downward spiral we’ve seen in financial institutions stock pricing and overall losses.  These losses hurt banks and brokerage houses’ balance sheets and limits their ability to properly function.

These are wonderful moves – may not be a panacea for everything plaguing our economy and markets but it has immediately dispelled some of the fear and panic that was rampant. ‘..the crash phase of the Great Financial Crisis of 2008 would appear to be over.’ Stephen Stanley, RBS Greenwich Capital

Mad Money host on CNBC, Jim Cramer said he supported Paulson’s plan and he thinks the great depression 2 is avoided!