After learning from the CWC, the high schools form teams to participate in a competition, testing their financial knowledge. This year, the competition is taking on a new look and an enhanced presence. It includes an added component of using their financial stability understanding towards making a decision about purchasing a home. The Tucson Association of REALTORS ® (TAR) has partnered with the TCAI, providing an additional presentation on successful homeownership to be taught by trained members of the TAR speakers’ bureau. The added element of a home purchase will reinforce the concepts of financial stability and emphasize that successful homeownership is based on the foundation of good habits. Students will be judged by a panel of local experts from many fields on how well they managed their finances. The winner will be the team that has attained the most financially stable situation.

The competition is only a part of the “Family Finance Day”. As the name suggests, there will be activities for participants of all ages. Face painting, jumping castles and story time will entertain the youngest attendees. The middle school aged “Next Generation Competitors” will have activities to challenge and enlighten them; adults will be able to attend workshops on taxes, mortgages, savings, and budgeting. Organizations throughout the community will have tables and booths to provide information on all things relating to financial stability.

It is great to see a community come together to create the foundation of what will become our financial future.

Save the Date March 27th to spend a Saturday afternoon with your family at the University of Arizona Family Finance Day.

The week was based on uncertainty about the confirmation of Ben Bernanke, expectations of a strong 4th quarter GDP number, and the prediction that the Fed would not indicate any raise in interest rates.

Friday culminated a volatile week with counter intuitive action. Bernanke was confirmed, which led to confidence in Wall Street; The GDP numbers were even greater than expected, showing signs of stability; and a bond auction earlier in the week was met with tepid results, indicating the appetite was not strong fro long term secure investment.

What should have been a strong day for stocks and, inversely, a bad one for bonds started normal, but took a fast turn late morning. Concerns over worldwide stability, discussion of what was really driving the GDP numbers, and month end looming caused investors to sell off in the stock market and drive the price of MBS up. From late morning to end of day, we gained back everything we had lost during the week.

This week starts and ends with economic data that can shift markets in a hurry. I would be prepared for another rough ride. Stay in contact with your mortgage professional, as big swings are again possible this week.

All eyes are searching for the culprit who created this financial mess. I can save everyone a lot of time; I found him. I see him every morning when I look in the mirror. He did not act alone, however, and was joined by thousands of others in mirrors all across America.

If these investigations are truly aimed at finding the truth and not just creating a popular campaign foundation, the results can easily be anticipated. Some of us were greedy and the rest of us were apathetic.

High powered geniuses created the financial instruments, Wall Street executives ate them up, banks pushed reckless lending, originators marketed the products, and consumers devoured them voraciously. Few people questioned the meteoric rise in the stock market that was fueled by the housing boom; few questioned the rise in tax collections and infrastructure building to accommodate the growth; and few voiced objection to the rising number of jobs being created.

There is one common denominator to this mayhem, and yet, it is rarely talked about with any of the proposed fixes–lack of knowledge. The only tool that we can develop to prevent a future cycle of boom and bust is education. The regulation and legislation will limit the type of activity that led to our crisis, but it won’t prevent the next one. The next crisis will be created by things we have not yet envisioned.

Looking at simple, but painful example will demonstrate my point. Millions of Americans signed mortgage loan documents that they did not understand. The industry did a poor job of educating them and explaining the ramifications of their decisions. In the worst of situations, dishonest originators mislead borrowers or hid material information from them. Consumers, however, are not without fault as they blindly leaped into huge financial transactions that they did not comprehend. As we find ways to prevent the same “toxic” loans from occurring again, the unscrupulous actors have moved to a new arena. Unfortunately, the same unaware consumers are falling victim to foreclosure rescue and signing loan modifications scams because they are, again, entering into transactions they don’t understand.

Our focus was so much on what happened, we failed to prevent what was coming.

This is a recurring theme as we talk about reform. The fix isn’t sexy. The fix isn’t fast. The fix isn’t easy to discuss.

The fix is knowledge. We have to develop a process by which consumers can make educated choices. Purchasing a home and getting a mortgage involves cost, but also value. It results in potential reward, but with potential risk.

True consumer protection will only come from arming them with the tools to evaluate the cost, value, risk and reward for themselves. Allowing them to make an educated decision about the financial choices they have before them.

1-http://online.wsj.com/article/SB10001424052748704509704575019032416477138.html?mod=WSJ_hps_MIDDLEForthNews

Last week the stock market dropped about 500 points and bonds picked up steam up through Friday. Three major news pieces made investors nervous about stocks: President Obama took a hard-line attitude towards Wall Street; Fed Chairman Bernanke’s nomination is no longer a given; and China has started to pull back on its own stimulus.

This week is jam packed with news; the State of the Union speech, the Federal Reserve Rate meeting, the fate of Ben Bernanke, a host of corporate earnings reports, more on bank reform and health care reform. At the end of the week we will have GDP numbers, which are supposed to be “eye popping”.1

Last week’s stock sell off was not a huge surprise to many who believed the market had taken off too fast.

MBS have had a good run, and depending on the news of the week, could be due for a slow down. Mortgage professionals will be watching the news, the stock market and the bond market for any hint of how things may shape up.

1-http://www.marketwatch.com/story/us-stocks-week-ahead-flirting-with-correction-2010-01-23>

The future is very cloudy, however. A main factor in mortgage rates remaining low has been the Federal Reserve purchases of MBS. By spending $1.25 Trillion, the Fed has created demand and kept rates artificially low. The plan has been to end these purchases in March, removing the ceiling on rates. Last week Fed Chairman, Ben Bernanke indicated that they may extend the purchases. However, other Fed officials have indicated the need to pull back and allow the market to return to normal.

How this unwinds will be critical to mortgage rates and the housing recovery. The Fed has created an artificial environment and if it stops “cold turkey” very negative repercussions are likely. This would include steadily increasing rates, making homes less affordable. However, the government cannot continue to prop up the housing market. Natural forces have to be able to work if we hope to get back to a free market system.

The Fed will likely reduce MBS purchases slowly; easing back rather than pulling out. This will allow the most opportunity for the market to stabilize and wean off of government funding.

Expect volatility as the Fed hints at the plan and investors interpret the news.

HUD Secretary, Shaun Donovan stated that FHA is insuring “almost 30 percent of purchases and 20 percent of refinances in the housing market.” 1 However, the stress of this load is showing and the fund that serves as the insurance for these loans is showing signs of fracture. By law, the FHA fund must have a 2.0% reserve, after anticipating losses over the next 30 years. The fund currently sits at .53%1

To return the funds viability, Donovan suggests that fixes could include: 1
• reducing the maximum permissible seller concession from its current 6 percent level to 3 percent;
• raising the minimum FICO score for new FHA borrowers;
• increasing the up-front cash that a borrower has to bring to the table:
• increasing the up-front insurance premium, the annual premium or both

Regardless of the solution, it will be painful and push some buyers out of the market. We must, however, strengthen the criteria, restore the fund, or risk losing this important loan option all together.

1- http://portal.hud.gov/portal/page/portal/HUD/press/testimonies/2009-12-02

The Mortgage Industry Update will be back in full force on January 11th, covering all of the issues that will reshape the mortgage industry.

The new 3-page Good Faith Estimate goes into effect on January 1. The new, standardized, format, and limit on fee changes after delivery, will lead to some confusion and, possibly, delays. This will be a learning experience for lenders and customers alike.

By the beginning of the year we will know the final rule change from the Federal Reserve regarding their approach to loan originator compensation. It is possible that mortgage originators will be restricted on the amount and method of their compensation.

Congress will debate the merits and details of a new Consumer Financial Protection Agency and whether to reduce the powers of the other regulators. Perhaps, adding the nation’s 106th regulator will be the answer. My sarcasm stems from doubts that any solution lacking in increased consumer education will do anything but shift the risk to another area.

Banks continue to evolve in their approach to short sales and foreclosures. Governmental incentives and pressures will certainly influence the process. The workouts will be critical as 2010 is projected to be another big year in Adjustable Rate Mortgage resets.

The Fed plans to end its purchases of Mortgage Backed Securities (MBS) by March. Demand for MBS has kept mortgage rates low and when the Fed stops buying, the demand is likely to dissipate. We will keep a close eye on rate trends to see if they will head up in anticipation of the Fed’s move.

Arizona loan originators are required to be licensed by July 1, 2010. The process of education, testing, and licensing can take 4-5 months, and some originators may find themselves unable to operate if they wait too long to start. Additionally, the state legislature is working through a fiscal crisis of epic proportions and has yet to appropriate adequate funds to the Department of Financial Institutions (DFI), increasing the likelihood of delays in licensing.

Commercial delinquencies are on the rise and commercial foreclosures may be the “next shoe to drop”, slowing Arizona’s economic recovery.

Another hurdle to our recovery is with the vitality of FHA loans. The insurance fund that allows for lower down payments is showing signs of fracture. The FHA Commissioner has indicated that changes are likely to increase down payment, decrease seller contributions, increase mortgage insurance premiums and raise minimum FICO scores.

The plate is full for 2010 and the Mortgage Industry Update will address these issues, provide insight, and offer guidance on how to best move forward.  CLICK THE LINK TO THE RIGHT IF YOU WOULD LIKE A FREE SUBSCRIPTION TO THE MORTGAGE INDUSTRY UPDATE.

Dubai World, a company owned by the Dubai Government, asked for an extension on its debt payments. Initially, stocks tumbled worldwide, but have recovered. It appears that Dubai’s neighbors are offering help and exposure to American banks is not as large as feared. However, this is a clear indication that we are in a global mess and need a global recovery before anyone can feel truly safe.

The Federal Reserve is sending mixed messages as to when it might say goodbye to its purchases of Mortgage Backed Securities.  The longer the government is propping up the mortgage market the longer rates will remain low, but once their involvement ends, expect a market reaction pushing rates up.

Good news for the economy will push investors out of the safety of bonds, pushing rates up. Continued mixed emotions on our recovery will keep investors with some investment in bonds and keep rates from accelerating too fast. It is unlikely that banks could handle the increased volume if rates get much lower, so I suspect we are still bouncing along the floor.

Tom Heath
Tom@TheHeathTeam.com

The internet boom in the late 1990’s led to massive speculation in “.com” companies that produced little, rarely profited but had tremendous confidence in turning technology into profits. Traditional methods of evaluating profit models gave way to faith in technological advances that would eventually drive traffic to these sites and profits to the investors.

We are suffering through the aftermath of the housing boom of the early 21st century. Home prices accelerated at an unsustainable rate and lending guidelines offered few barriers to anyone wanting to purchase a home, or two.

The railroad boom of 1866 led to the railroad bubble burst in 1873. The dot com boom of 1998 led to the dot com bubble burst of 2001. The housing boom of 2004 led to the housing bubble burst of 2007.

We are now into the next boom and when the bubble bursts we are going to be in the worst economic shape our country has ever seen. US Treasuries are being sold at unprecedented rate and the demand remains strong. Treasuries are the government’s way of borrowing money and, right now, they are borrowing TRILLIONS to fuel the “stimulus.”
The biggest single purchaser of our national debt is China and “Chinese premier Wen Jiabao is urging the U.S. to keep its deficit to an “appropriate size,” a clear message to the leader of the world’s largest debtor nation from its largest creditor.”2

If the US continues to borrow money to stimulate the economy, the high demand for our debt will rapidly turn to distaste. Once that happens the price will plummet and yields (interest rates) will increase rapidly.
Economic crisis follows the reaction when the buyers of railroad stock, dot com stock, and houses realized that the underlying value was not what they expected. If the Treasury bubble bursts, it will be far more costly to the vitality of the United States than any other previous bust.

1.http://en.wikipedia.org/wiki/Panic_of_1873
2.http://news.yahoo.com/s/nm/20091108/bs_nm/us_china_usa_financial

According to those that promote government spending, this is how to keep our country out of another Great Depression. Our situation, however, is unlike anyone has ever seen and we are not hearing about the major difference between other economic crisis and our current one, technology. Our advances in technology fuel two distinct problems for recovery; productivity and communication. While both are good results of technology, they hamper our recovery efforts.

Technology has allowed us to accomplish more with less. Businesses that have undergone massive downsizing have had to find ways to survive with less. Technological advances allow for each employee of the company to be more productive and as the need for products picks up, the owner will not re-hire all of the lost workers, but expect more production from fewer employees.

Communication at light speed creates an environment of experts (like me) who have a basic idea of what is going on and can formulate and share their opinions with others, rapidly. We are no longer subject to mainstream media or government pontification of progress, but are free to collaborate amongst ourselves. Consumers that see stimulus as a sign of weakness, not a foundation for growth our vocal and create uncertainty in the market place. Many fear job loss and inflation, so they keep cash readily available; this is evident in decrease spending and increased savings.

Technology will eventually lead to new jobs and new industries; years from now the economy will be driven by careers that I cannot even envision. The problem I foresee is that continued government meddling with the natural market forces will slow the development of our advances for fear of destroying what we currently have.

I have used the forest fire analogy before and it is appropriate here. “The very foundation of fire ecology is the premise that wildland fire is neither innately destructive nor in the best interest of every forest. Fire causes change and change has its own value. Certain forest biomes benefit more than others. Change by fire is biologically necessary to maintain many healthy ecosystems in fire-loving plant communities and resource managers have learned to use fire to cause changes in plant and animal communities to meet their objectives. Varying fire timing, frequency, and intensity produces differing resource responses that create the correct changes for habitat manipulation.”1

We are spending trillions of dollars to keep these institutions alive and fuel artificial economic growth; we are afraid of what change may occur if we let institutions fail. Our meddling has resulted in larger corporations with more risk to our economy. To combat that we are now contemplating an agency that has the power to step into healthy companies and take them over if the government believes they are acting irresponsibly. 2

The Government created their own need for intervention by not allowing the natural order of events to take place. Risks are a part of a healthy economy, but those that risk and lose must be allowed to fail; by circumventing the natural order we are allowing people to make risk free risks. Because the latter does not sit well, we create barriers to risk and implement strategies for companies, that may be healthy, but the Government feels are a threat.

We are abdicating personal responsibilities allowing government regulation to give way to government control.

1. http://forestry.about.com/cs/forestfire/a/prescribe_burn.htm
2. http://www.cnbc.com/id/33483768