The manifestations of this free printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.
Why? One way to think about it is supply and demand. Print A LOT more dollars and each one is worth a little less. Or, consider it this way: Extracting Oil or Gold from the earth ain't easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car -- all for less per gallon than diet Coke or peach Snapple!
For gold, the process is not all that dissimilar.
Just crank up the printing press: It's cheap and easy. But why should us gold and oil producers exchange our hard won commodities (it's hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value -- or instead, we will insist on more of your crappy little pieces of green paper.
Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices: Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.
It's easy to understand why inflation has been called The Cruelest Tax.
Thursday, September 27, 2007
when dollar fall, we pay higher price for commodities
The greenback has been in freefall, and that means the prices we (Americans) pay for commodities just go higher.
A few examples: Oil is at an all-time high, having broken through $83 last week. 2008 could be the year we see Crude hit triple digits. Gold is at a 28-year high, having broken through $735, with $800 a realistic possibility. Copper is soaring.
Agflation is very strong: Wheat recently made all-time highs, along with recent big moves in Orange Juice, Corn, and Soybeans. Dairy prices are out of control, up nearly 100% over 24 months.
A few examples: Oil is at an all-time high, having broken through $83 last week. 2008 could be the year we see Crude hit triple digits. Gold is at a 28-year high, having broken through $735, with $800 a realistic possibility. Copper is soaring.
Agflation is very strong: Wheat recently made all-time highs, along with recent big moves in Orange Juice, Corn, and Soybeans. Dairy prices are out of control, up nearly 100% over 24 months.
Wednesday, September 26, 2007
Current Economic Condition: how to invest
http://seekingalpha.com/article/47995-sell-the-u-s-market-before-october
Readers know of our incessant bleating about the worsening Economic Time in America.
But we are now on "red alert" for the current month of October - and suggest how to earn off this.
1. What is so bad about October?
Call it instinct. Many of the bigger market crashes have occurred in October, but nobody knows why. So we are just going to accept the reality of this perception.
What we would say is that finally, finally, markets have woken up to our long-held concerns about The Economic Time™ in America getting worse and worse.
Their next shock is another long-held belief of ours: stagflation is returning.
Those of us who survived the oil shocks of the seventies and eighties know this scenario: growth stops and inflation rises.
Inflation rises because of cost-push pressures. Today's cost-push pressures are:
Rising RMB. The avaricious politicians in Congress keep forcing China to revalue. That means that Chinese exports to America rise in cost.
Falling dollar. Besides, the rate cut in America implies that the USD has to fall more - as all superpower currencies do.
Rising commodity prices. Wheat, oil, gold - you name it, people are scrambling for safe havens.
Slower productivity growth. As suggested in The Economic Clock™ of America: unit labor costs are rising 6x faster than when they bottomed.
The bottom line: companies either pass higher costs on, or they don't. If they pass such higher input costs on, the Fed will have to tighten yet again. So down goes turnover. Alternately, if they don't pass these higher input costs on, with demand receding, their margins wilt. Either way, profits have to disappoint.
This stagflation scenario is going to start souring the market subconscious this month, so expect a bear run to follow. Initially, all markets will get hit. But America will get hit the longest and hardest...
2. How to Make Money Off This Idea
1. Always consult your financial advisor before investing!2. Buy commodity ETFs and individual commodities like gold, oil and wheat.3. Buy high yielding Asian currencies.4. Buy the Euro and Sterling.5. Buy a "short" ETF on the US stock market.6. Load up on China and Hong Kong.
Readers know of our incessant bleating about the worsening Economic Time in America.
But we are now on "red alert" for the current month of October - and suggest how to earn off this.
1. What is so bad about October?
Call it instinct. Many of the bigger market crashes have occurred in October, but nobody knows why. So we are just going to accept the reality of this perception.
What we would say is that finally, finally, markets have woken up to our long-held concerns about The Economic Time™ in America getting worse and worse.
Their next shock is another long-held belief of ours: stagflation is returning.
Those of us who survived the oil shocks of the seventies and eighties know this scenario: growth stops and inflation rises.
Inflation rises because of cost-push pressures. Today's cost-push pressures are:
Rising RMB. The avaricious politicians in Congress keep forcing China to revalue. That means that Chinese exports to America rise in cost.
Falling dollar. Besides, the rate cut in America implies that the USD has to fall more - as all superpower currencies do.
Rising commodity prices. Wheat, oil, gold - you name it, people are scrambling for safe havens.
Slower productivity growth. As suggested in The Economic Clock™ of America: unit labor costs are rising 6x faster than when they bottomed.
The bottom line: companies either pass higher costs on, or they don't. If they pass such higher input costs on, the Fed will have to tighten yet again. So down goes turnover. Alternately, if they don't pass these higher input costs on, with demand receding, their margins wilt. Either way, profits have to disappoint.
This stagflation scenario is going to start souring the market subconscious this month, so expect a bear run to follow. Initially, all markets will get hit. But America will get hit the longest and hardest...
2. How to Make Money Off This Idea
1. Always consult your financial advisor before investing!2. Buy commodity ETFs and individual commodities like gold, oil and wheat.3. Buy high yielding Asian currencies.4. Buy the Euro and Sterling.5. Buy a "short" ETF on the US stock market.6. Load up on China and Hong Kong.
what is ETF?
http://www.minyanville.com/articles/AMGN-DNA-CKFR-CP-TBH-QQQQ-AMGN-DNA-CKFR-CP/index/a/14233/from/yahoo
ETFs Explained
Scott Reeves Sep 26, 2007 2:15 pm
ETFs, including funds devoted to domestic and foreign stocks, have grown to about $488.8 bln since the first fund started trading on the American Stock Exchange in 1993.
ETFs, or Exchange Traded Funds, represent a basket of stocks and offer diversification that few investors can match on their own. ETFs aren't actively managed and this keeps costs low. Investors don't hold the shares directly. Instead, ETFs represent ownership shares in the fund that holds a portfolio of common stocks that track a market sector, index or international stocks. "The basic mistake individual investors make with ETFs is that they don't use them in accordance with their own asset allocation policy – many just buy an ETF at random," says Philip Yockey, president and chief investment officer at Tactical Analytics, an independent research company. "The reality is that not all ETFs are designed to be a buy-and-hold – not every asset class works 365 days a year." ETFs, including funds devoted to domestic and foreign stocks, have grown to about $488.8 bln since the first fund started trading on the American Stock Exchange in 1993. Mutual funds represent about $11.3 trln, the Investment Company Institute reports. An ETF can be bought and sold as a single security. Just about anything that can be done with shares of common stock can be duplicated with an ETF. Unlike a mutual fund, ETFs can be traded intraday, shorted and placed with stop or limit orders. Many funds offer options. Remember: Extensive trading will drive up your costs and erode your returns because most individual investors must go through a broker to buy into an ETF. But that doesn't mean ETFs are on automatic pilot and investors can buy and forget about their money. "In a bear market, it's silly for an investor to sit there and just grin and bear it and watch the investment go down the drain," Yockey says. "You've got to pay attention to ETFs just like anything else." Tactical Analytics offers a Web site, MarketMetre.com, that tracks the performance of ETFs and provides investors with information needed to make sound decisions. No one expects ETFs to slug it out with mutual funds for the affections – and assets – of individual investors. But if you're a long-term investor, ETFs offer distinct advantages, including low management fees and generally low exposure to capital gains. An ETF's diversification reduces risk without incurring upfront sales loads or redemption fees common to many mutual funds. ETFs enable investors to track just about any sector, including financial services, real estate, healthcare, technology, telecommunications, natural resources, utilities, semiconductors, software, biotech and manufacturing. Other funds track S&P indexes, the Russell 2000 and international equity indexes. The Nasdaq 100 Trust tracks the index and offers broad exposure to the technology sector. The funds can be equally weighted or based on other parameters such as market-cap, liquidity and price/earnings ratio. Most funds are sliced every which way, but some invest heavily in a few major stocks such as Amgen (AMGN), Genentech (DNA) or CheckFree (CKFR). An ETF investing in overseas stocks is likely to hold an array of stocks to limit volatility. But there are ETFs that track the new operations formed by the break-up of major foreign companies, including Brazil's telecommunications giant, Telebras, and Canada's Canadian Pacific Railway (CP). Another ETF tracks the stocks that comprise the Dow Jones Industrial Average. In general, index funds have a lower turnover than actively managed funds. Typically, this means lower capital gains taxes. However, ETFs may not be suitable for Mom and Pop because, in general, shares must be purchased in lots of 100. If an ETF's shares trade at $188.87, it would require an investment of $18,887, plus a broker's commission to participate. Investors can't make monthly contributions to an ETF without getting slapped with a broker's fee. This makes ETFs a bad choice for monthly employee contributions to a retirement or education fund. ETFs are dominated by institutional investors and hedge funds, but can make sense for individual investors. If you're thinking about an ETF, be sure to check the fund's holdings to see that it provides the diversification you seek. Investors putting their money in an obscure ETF may encounter liquidity troubles, but a quick review of a fund's daily trading volume should eliminate this potential problem. Some ETFs are eligible to receive dividends on the stocks held in trust, less fees. Read the prospectus to see if stocks held in the fund pay dividends.ETFs can be purchased on margin. Contact your broker about margin requirements and fees. ETFs don't deal directly with shareholders, cutting cost. However, you must buy and sell through a broker. If dealing in small amounts, this drives up the cost of trading and erodes returns. If you're a day trader and flip stocks quickly, ETFs probably aren't for you. But if you're a long-term investor, give ETFs a long look.Like any other investment, do your homework. Start by reading the prospectus, a basic step some individual investors apparently skip in their haste to get in on what they see as the next big thing. Be mindful of cost and always keep an eye on your money
ETFs Explained
Scott Reeves Sep 26, 2007 2:15 pm
ETFs, including funds devoted to domestic and foreign stocks, have grown to about $488.8 bln since the first fund started trading on the American Stock Exchange in 1993.
ETFs, or Exchange Traded Funds, represent a basket of stocks and offer diversification that few investors can match on their own. ETFs aren't actively managed and this keeps costs low. Investors don't hold the shares directly. Instead, ETFs represent ownership shares in the fund that holds a portfolio of common stocks that track a market sector, index or international stocks. "The basic mistake individual investors make with ETFs is that they don't use them in accordance with their own asset allocation policy – many just buy an ETF at random," says Philip Yockey, president and chief investment officer at Tactical Analytics, an independent research company. "The reality is that not all ETFs are designed to be a buy-and-hold – not every asset class works 365 days a year." ETFs, including funds devoted to domestic and foreign stocks, have grown to about $488.8 bln since the first fund started trading on the American Stock Exchange in 1993. Mutual funds represent about $11.3 trln, the Investment Company Institute reports. An ETF can be bought and sold as a single security. Just about anything that can be done with shares of common stock can be duplicated with an ETF. Unlike a mutual fund, ETFs can be traded intraday, shorted and placed with stop or limit orders. Many funds offer options. Remember: Extensive trading will drive up your costs and erode your returns because most individual investors must go through a broker to buy into an ETF. But that doesn't mean ETFs are on automatic pilot and investors can buy and forget about their money. "In a bear market, it's silly for an investor to sit there and just grin and bear it and watch the investment go down the drain," Yockey says. "You've got to pay attention to ETFs just like anything else." Tactical Analytics offers a Web site, MarketMetre.com, that tracks the performance of ETFs and provides investors with information needed to make sound decisions. No one expects ETFs to slug it out with mutual funds for the affections – and assets – of individual investors. But if you're a long-term investor, ETFs offer distinct advantages, including low management fees and generally low exposure to capital gains. An ETF's diversification reduces risk without incurring upfront sales loads or redemption fees common to many mutual funds. ETFs enable investors to track just about any sector, including financial services, real estate, healthcare, technology, telecommunications, natural resources, utilities, semiconductors, software, biotech and manufacturing. Other funds track S&P indexes, the Russell 2000 and international equity indexes. The Nasdaq 100 Trust tracks the index and offers broad exposure to the technology sector. The funds can be equally weighted or based on other parameters such as market-cap, liquidity and price/earnings ratio. Most funds are sliced every which way, but some invest heavily in a few major stocks such as Amgen (AMGN), Genentech (DNA) or CheckFree (CKFR). An ETF investing in overseas stocks is likely to hold an array of stocks to limit volatility. But there are ETFs that track the new operations formed by the break-up of major foreign companies, including Brazil's telecommunications giant, Telebras, and Canada's Canadian Pacific Railway (CP). Another ETF tracks the stocks that comprise the Dow Jones Industrial Average. In general, index funds have a lower turnover than actively managed funds. Typically, this means lower capital gains taxes. However, ETFs may not be suitable for Mom and Pop because, in general, shares must be purchased in lots of 100. If an ETF's shares trade at $188.87, it would require an investment of $18,887, plus a broker's commission to participate. Investors can't make monthly contributions to an ETF without getting slapped with a broker's fee. This makes ETFs a bad choice for monthly employee contributions to a retirement or education fund. ETFs are dominated by institutional investors and hedge funds, but can make sense for individual investors. If you're thinking about an ETF, be sure to check the fund's holdings to see that it provides the diversification you seek. Investors putting their money in an obscure ETF may encounter liquidity troubles, but a quick review of a fund's daily trading volume should eliminate this potential problem. Some ETFs are eligible to receive dividends on the stocks held in trust, less fees. Read the prospectus to see if stocks held in the fund pay dividends.ETFs can be purchased on margin. Contact your broker about margin requirements and fees. ETFs don't deal directly with shareholders, cutting cost. However, you must buy and sell through a broker. If dealing in small amounts, this drives up the cost of trading and erodes returns. If you're a day trader and flip stocks quickly, ETFs probably aren't for you. But if you're a long-term investor, give ETFs a long look.Like any other investment, do your homework. Start by reading the prospectus, a basic step some individual investors apparently skip in their haste to get in on what they see as the next big thing. Be mindful of cost and always keep an eye on your money
Friday, September 14, 2007
tanganykan cichlids
Hello,
www.cichlid-forum.com
they deleted my post.
because they do not believe in my strategy on how to keep a low maintenance freshwater aquarium, free of diseases and ailments.
Later, I willshow my pictures and my strategy on this blog.
Thanks,
Chip
www.cichlid-forum.com
they deleted my post.
because they do not believe in my strategy on how to keep a low maintenance freshwater aquarium, free of diseases and ailments.
Later, I willshow my pictures and my strategy on this blog.
Thanks,
Chip
Tuesday, August 21, 2007
The Fed Prepares the Bailout Bucket
Seeking AlphaThe Fed Prepares the Bailout BucketTuesday August 21, 3:41 am ET
Markham Lee submits: The big news on Wall Street last Friday was that the Fed cut the discount rate.
From Bloomberg:
The Federal Reserve unexpectedly cut its discount rate and said it's prepared to take further action to "mitigate'' damage to the economy from the rout in global credit markets.
The central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.
The Fed also noted:
The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets.
[...]
These changes are designed to provide depositories with greater assurance about the cost and availability of funding.
This statement was in response to the fact that many banks are increasingly unwilling to let hedge funds and other institutional investors use credit portfolios as collateral for loans. However, it doesn’t address the fact that many banks are employing common sense by being wary of loans backed by debt securities, after scores of institutional investors lost billions due to improperly valuing debt securities and then borrowing against them.
The rate cut led to a wild ride for many beleaguered financial stocks, with many rocketing up in early morning training, prior to settling down by close, but still up for the day.
click to enlarge
It appears, for now, that Wall St. may indeed get the Federal Reserve bailout it was praying for with the first round occurring today. If the Fed’s goal was to restore investor confidence, the early returns show that we’re headed in that direction (for now at least). Only time will tell if we’re able to turn the momentum from Thursday afternoon and Friday morning into a long-term rally.
My thoughts on the rate cut are as follows:
1) The biggest beneficiaries are going to be companies like Countrywide (NYSE: CFC - News) and Thornburgh Mortgage (NYSE: TMA - News); profitable on the bubble companies that were in danger of becoming victims of the credit crunch. For Countrywide in particular, the rate cut should give them the breathing room necessary to make the transition to funding their loans via Countrywide FSB and/or originating loans that can be sold to the Mortgage GSEs.
2) It doesn’t change much and in many ways, it’s just a placebo. Lower rates can’t truly raise investor confidence when investors worldwide are still losing money due to mortgage debt securities, loan defaults, and accelerating losses. In addition, hedge funds and other institutional investors are still over-leveraged on mortgage debt securities, etc.
3) Once the excitement dies down and bad news related to mortgage lenders, retail bank loan losses, and credit markets continues to pour in, we could see things reverse drastically.
4) We’re on a potentially dangerous sliding slope right now, because if the Fed decides to “fix” the credit crisis via multiple rate cuts. It’s basically sending the message that the Fed is going do what it can to create the level of confidence required to enable the credit markets to function as if it was 2004. The long-term consequences of this action would be rather disastrous as low rate cuts coupled with bad business practices are what got us into this situation.
The rate cut is here, but it still doesn’t change the real question “What is going to be done about the assumptions, lending standards, and business practices that created this mess in the first place?” There is a lot of talk and thought going into short-term solutions, but not enough into long-term solutions that would prevent a credit crunch from happening in the first place.
Markham Lee submits: The big news on Wall Street last Friday was that the Fed cut the discount rate.
From Bloomberg:
The Federal Reserve unexpectedly cut its discount rate and said it's prepared to take further action to "mitigate'' damage to the economy from the rout in global credit markets.
The central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.
The Fed also noted:
The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets.
[...]
These changes are designed to provide depositories with greater assurance about the cost and availability of funding.
This statement was in response to the fact that many banks are increasingly unwilling to let hedge funds and other institutional investors use credit portfolios as collateral for loans. However, it doesn’t address the fact that many banks are employing common sense by being wary of loans backed by debt securities, after scores of institutional investors lost billions due to improperly valuing debt securities and then borrowing against them.
The rate cut led to a wild ride for many beleaguered financial stocks, with many rocketing up in early morning training, prior to settling down by close, but still up for the day.
click to enlarge
It appears, for now, that Wall St. may indeed get the Federal Reserve bailout it was praying for with the first round occurring today. If the Fed’s goal was to restore investor confidence, the early returns show that we’re headed in that direction (for now at least). Only time will tell if we’re able to turn the momentum from Thursday afternoon and Friday morning into a long-term rally.
My thoughts on the rate cut are as follows:
1) The biggest beneficiaries are going to be companies like Countrywide (NYSE: CFC - News) and Thornburgh Mortgage (NYSE: TMA - News); profitable on the bubble companies that were in danger of becoming victims of the credit crunch. For Countrywide in particular, the rate cut should give them the breathing room necessary to make the transition to funding their loans via Countrywide FSB and/or originating loans that can be sold to the Mortgage GSEs.
2) It doesn’t change much and in many ways, it’s just a placebo. Lower rates can’t truly raise investor confidence when investors worldwide are still losing money due to mortgage debt securities, loan defaults, and accelerating losses. In addition, hedge funds and other institutional investors are still over-leveraged on mortgage debt securities, etc.
3) Once the excitement dies down and bad news related to mortgage lenders, retail bank loan losses, and credit markets continues to pour in, we could see things reverse drastically.
4) We’re on a potentially dangerous sliding slope right now, because if the Fed decides to “fix” the credit crisis via multiple rate cuts. It’s basically sending the message that the Fed is going do what it can to create the level of confidence required to enable the credit markets to function as if it was 2004. The long-term consequences of this action would be rather disastrous as low rate cuts coupled with bad business practices are what got us into this situation.
The rate cut is here, but it still doesn’t change the real question “What is going to be done about the assumptions, lending standards, and business practices that created this mess in the first place?” There is a lot of talk and thought going into short-term solutions, but not enough into long-term solutions that would prevent a credit crunch from happening in the first place.
Thursday, August 16, 2007
Credit Crunch
Combined with the mortgage ills of late, it's all starting to look like a perfect storm for real estate. Consider how the chain of events may be playing out. A builder sets out to construct a new house. In recent years, there was no trouble finding willing buyers who would sign a contract to pay, say, $500,000 nine month from now, when the home was finished. Between today and nine months from now, there was a halfway decent chance that the $500,000 house would be worth more. That combined with easy credit made banks and other financial institutions eager to back the home buyer with a loan, regardless of the buyer's credit history. The deal was beneficial for all involved.
But the game has changed. The builder isn't so sure that he'll have a buyer who can find the necessary credit. One reason: it's not clear that the $500,000 house will be worth $500,000 nine months from now. And with mortgages tougher to come by, it's a lot easier to delay purchases, which only inspires builders to become defensive and cut back on construction plans.
But the game has changed. The builder isn't so sure that he'll have a buyer who can find the necessary credit. One reason: it's not clear that the $500,000 house will be worth $500,000 nine months from now. And with mortgages tougher to come by, it's a lot easier to delay purchases, which only inspires builders to become defensive and cut back on construction plans.
Thursday, August 9, 2007
Mortgage crunch hits Bay Area hard because of jumbo loans
Mortgage crunch hits Bay Area hard because of jumbo loans
Carolyn Said,Kelly Zito, Chronicle Staff Writers
Thursday, August 9, 2007
Need a mortgage this month? It's going to be harder - and more expensive - to get one. In the past week, turmoil in the mortgage markets has caused increasing problems for home buyers in the Bay Area and around the nation.
Kurt Herrenbruck, a mortgage planner with Fishman Financial Group in Berkeley, saw one client's financing evaporate in the space of three days last week.
"The client is well-heeled, with (a high credit score), and $500,000 in the bank, making an owner-occupied purchase with a 25 percent down payment," Herrenbruck said. "He needs a no-doc loan (meaning he cannot provide documents to prove his income) because of an employment hiccup."
Herrenbruck said Wednesday he found two lenders willing to make a no-document loan. But by Thursday it was down to one. And Friday, when his client's offer was accepted, there was none. "He can't buy even though he had the strongest profile of any no-doc: superlative credit, money in the bank and a whopping down payment."
The story underscores how skittish Wall Street investors are causing a ripple effect that hurts multitudes of people buying or selling houses.
Simply put, less money is available for mortgages.
Most lenders sell the mortgages they write to Wall Street investors so they can get more money to make more loans. But as defaults and delinquencies on all loans - from exotic and risky to more traditional - have risen, those once-voracious investors have lost their appetites for mortgages. That caused lenders to tighten their standards. Borrowers with less-than-stellar profiles started getting rejections or had to pay much higher rates.
The credit crunch comes at a time when Bay Area homes already are changing hands at their slowest rate in 12 years, and in some areas, sales are off by 40 percent.
"It pushes on the brakes a little bit harder," Andrew LePage, a researcher at DataQuick, a real estate information firm.
This week, a raft of grim developments, with one big lender (American Home Mortgage) going bankrupt and five others ceasing to fund loans, has made the money supply much tighter, so that even borrowers with good credit and adequate resources are getting doors slammed in their faces or having to pay premiums.
A particular hardship for Bay Area home buyers: Lenders are charging top dollar to write nonconforming or jumbo loans - mortgages above $417,000.
"In the Bay Area, a substantial number of homeowners have jumbo loans because prices are so high," said David Berson, chief economist for Fannie Mae in Washington, D.C. For prime borrowers who need conforming loans under the $417,000 limit, there is not much change in the market, he said. But for everyone else, the changes are substantial.
Many lenders now only want to make loans that can be purchased by Fannie Mae or Freddie Mac, the two quasi-governmental entities that help provide liquidity in the mortgage market. Those two entities cannot buy jumbo mortgages.
"If your (mortgage) is above the Fannie Mae/Freddie Mac limit, even if you're a prime borrower, you will see a significant increase in the rates being charged," said Doug Duncan, chief economist with the Mortgage Bankers Association in Washington, D.C. "If you're not a prime borrower, you will have a hard time getting credit today."
Duncan said jumbo loans are carrying interest rates of 7.5 percent to 8 percent, 1 to 1.5 points higher than a month ago. "This is a big run-up, and we expect it to significantly delay the housing recovery, if it stays there for a while," he said.
Another category feeling the pain: Home buyers who can't make a 20 percent down payment.
Richmond real estate agent Marcus Hinds helped one first-time-buyer family find the perfect house - a $420,000 three-bedroom two-bathroom home. The three family members have good jobs as factory and assembly line workers, so the monthly payments are not a problem. But Hinds said they do not have a down payment, and few lenders want to fund a second loan.
"They're ready to close, all the contingencies have been removed, and they had approval on a first (mortgage), but there's a problem with the second," Hinds said. "Over the last week, the lender changed what they wanted ....
"They're scrambling to find someone else ... but they might have to walk away."
Getting a second mortgage is hard even at the upper end of the market.
Boris Morales, deal-desk manager at Residential Pacific Mortgage, a Walnut Creek midsize independent lender, said he had a well-qualified borrower buying a $2.5 million home in Greenbrae who wanted to put down 10 percent, borrowing 80 percent of the home's value in a first mortgage and 10 percent in a second mortgage.
"He had both (lined up) back in the middle of July," Morales said. "Both got approved and were moving forward. As of this week, (the investor) will no longer do second mortgages, period."
Residential Pacific will write the first mortgage, he said, but is scrambling to find an investor who will purchase the second. (The company sells all its mortgages.)
Mortgage brokers are also caught in the fallout.
Leon Huntting, a San Francisco mortgage broker, said his firm has had to eat some of the costs to keep some loans on track.
"We had clients to the point where we were ready to order loan docs and we'd get a call from a lender saying we don't have that program anymore," Huntting said. "So there were a number of loans where we gave up (our commissions) to honor the pricing they had."
Even large banks feel the crunch.
Profit margins are so thin in the lending market that eliminating the middleman is part of the new economic reality. In the past two weeks, Wells Fargo stopped offering riskier loans through other lenders or independent mortgage brokers but still offers those types of loans through its own branches.
"We can control the quality from start to finish because we're doing originating through closing," said Brad Blackwell, Wells Fargo Home Mortgage national sales manager.
Many experts said they think tighter standards are necessary to temper a lending market that had run amok, handing out loans to people with poor credit, no proof of income and few assets.
Ken Rosen, UC Berkeley economics professor, questioned whether those consumers should have been able to get mortgages over the past several years.
"If you have to get a loan with a low down payment, if you have to stretch, you shouldn't buy a house. Stay a renter," he said. "These loans allowed people to stretch and get loans they shouldn't have."
"We're getting back to basics, back to what we had prior to five or six years ago when we had a proliferation of new mortgage products," said San Francisco mortgage broker Ed Craine. "Borrowers won't be offered some of these loans or qualify for loans that can be problematic. That's the silver lining - unfortunately there are some people who are getting caught right now who are going to suffer."
Fannie Mae's Berson said the tightening mortgage situation is likely to hurt the already troubled housing market.
"There are people who could have qualified for a mortgage a month ago who can no longer get that mortgage," he said. "That means there will be fewer home sales or else people will have to buy less expensive homes. The practical impact is that some people will choose not to buy now. This is an additional negative factor on housing demand. It means home sales are likely to be weaker than we thought they would be just a few months ago."
Increase in loan rates, payments
An informal survey of interest rates for nonconforming loans (more than $417,000) found that the average rate on a 30-year, $500,000 fixed-rate loan - which had been 6.75% since early July - suddenly jumped to 7.5% this week.
The percentage is an average of what large lenders, including Washington Mutual, Wells Fargo, IndyMac, Bank of America and Citibank, have been charging for a 30-year, $500,000 fixed rate loan with a one point (1 percent, or $5,000) loan fee.
Aug. 1
Average monthly payment at 6.75%
$3,242.99
Aug. 8
Average monthly payment at 7.5%
$3,496.07
The increase in average monthly payment
$253.08
Fast-changing mortgage market
In recent weeks, lending criteria for home mortgages have tightened considerably, making it much more difficult - and expensive - to borrow when purchasing or refinancing a house. Here's how and why these changes came about:
-- Housing prices, after enjoying a huge run-up over several years, began cooling.
-- Many borrowers who had taken out mortgages with low teaser rates could not make payments when those rates reset. Mortgage delinquencies and defaults - especially in the subprime market - began rising.
-- The secondary market on Wall Street for subprime and other risky home loans dried up. (Most home loans are repackaged and sold to investors.)
-- Faced with nowhere to sell those loans and get fresh capital, scores of lenders all over the United States closed, went bankrupt or stopped making certain loans.
-- Fewer of the remaining lenders are offering second mortgages, 100 percent financing, loans to people with poor credit, or "no-doc" loans that require little evidence of income or assets, although many lenders say they are still funding loans to those with good incomes, large down payments and strong credit scores.
-- Consumers will pay higher loan fees to compensate for the fact that the market for repackaged loans is skittish and many lenders must keep loans in their own portfolios.
What you can do
With the mortgage situation changing day by day, it's hard to say what's best for consumers. One thing all experts agree on: If you don't have to be in the market right now, it might be best to wait this crisis out. If that's not an option for you, there are still places to get advice. For instance:
-- Bankrate.com: A free, online source of personal finance information that includes an entire section on mortgages, including local rate comparisons.
-- FDIC: The Federal Deposit Insurance Corp. provides comprehensive consumer advice on mortgages and home lending. Check its "Looking for the Best Mortgage" page for starters. You can find it at links.sfgate.com/ZOL.
-- The Federal Reserve: The Fed offers a great consumer overview of lending issues, particularly focusing on settlement charges. Check it at links.sfgate.com/ZOM.
-- The FTC: The Federal Trade Commission also offers an advice site for consumers navigating the mortgage market. Here's a shortcut to the site: links.sfgate.com/ZON.
Can't figure it out? Send us your questions
If you can't find the answer you're looking for at those sites, please send us your questions and we'll find the solutions for you. E-mail your inquiries to Bill Burnett, The Chronicle's real estate Editor, at bburnett@sfchronicle.com .
Source: Chronicle research
Carolyn Said,Kelly Zito, Chronicle Staff Writers
Thursday, August 9, 2007
Need a mortgage this month? It's going to be harder - and more expensive - to get one. In the past week, turmoil in the mortgage markets has caused increasing problems for home buyers in the Bay Area and around the nation.
Kurt Herrenbruck, a mortgage planner with Fishman Financial Group in Berkeley, saw one client's financing evaporate in the space of three days last week.
"The client is well-heeled, with (a high credit score), and $500,000 in the bank, making an owner-occupied purchase with a 25 percent down payment," Herrenbruck said. "He needs a no-doc loan (meaning he cannot provide documents to prove his income) because of an employment hiccup."
Herrenbruck said Wednesday he found two lenders willing to make a no-document loan. But by Thursday it was down to one. And Friday, when his client's offer was accepted, there was none. "He can't buy even though he had the strongest profile of any no-doc: superlative credit, money in the bank and a whopping down payment."
The story underscores how skittish Wall Street investors are causing a ripple effect that hurts multitudes of people buying or selling houses.
Simply put, less money is available for mortgages.
Most lenders sell the mortgages they write to Wall Street investors so they can get more money to make more loans. But as defaults and delinquencies on all loans - from exotic and risky to more traditional - have risen, those once-voracious investors have lost their appetites for mortgages. That caused lenders to tighten their standards. Borrowers with less-than-stellar profiles started getting rejections or had to pay much higher rates.
The credit crunch comes at a time when Bay Area homes already are changing hands at their slowest rate in 12 years, and in some areas, sales are off by 40 percent.
"It pushes on the brakes a little bit harder," Andrew LePage, a researcher at DataQuick, a real estate information firm.
This week, a raft of grim developments, with one big lender (American Home Mortgage) going bankrupt and five others ceasing to fund loans, has made the money supply much tighter, so that even borrowers with good credit and adequate resources are getting doors slammed in their faces or having to pay premiums.
A particular hardship for Bay Area home buyers: Lenders are charging top dollar to write nonconforming or jumbo loans - mortgages above $417,000.
"In the Bay Area, a substantial number of homeowners have jumbo loans because prices are so high," said David Berson, chief economist for Fannie Mae in Washington, D.C. For prime borrowers who need conforming loans under the $417,000 limit, there is not much change in the market, he said. But for everyone else, the changes are substantial.
Many lenders now only want to make loans that can be purchased by Fannie Mae or Freddie Mac, the two quasi-governmental entities that help provide liquidity in the mortgage market. Those two entities cannot buy jumbo mortgages.
"If your (mortgage) is above the Fannie Mae/Freddie Mac limit, even if you're a prime borrower, you will see a significant increase in the rates being charged," said Doug Duncan, chief economist with the Mortgage Bankers Association in Washington, D.C. "If you're not a prime borrower, you will have a hard time getting credit today."
Duncan said jumbo loans are carrying interest rates of 7.5 percent to 8 percent, 1 to 1.5 points higher than a month ago. "This is a big run-up, and we expect it to significantly delay the housing recovery, if it stays there for a while," he said.
Another category feeling the pain: Home buyers who can't make a 20 percent down payment.
Richmond real estate agent Marcus Hinds helped one first-time-buyer family find the perfect house - a $420,000 three-bedroom two-bathroom home. The three family members have good jobs as factory and assembly line workers, so the monthly payments are not a problem. But Hinds said they do not have a down payment, and few lenders want to fund a second loan.
"They're ready to close, all the contingencies have been removed, and they had approval on a first (mortgage), but there's a problem with the second," Hinds said. "Over the last week, the lender changed what they wanted ....
"They're scrambling to find someone else ... but they might have to walk away."
Getting a second mortgage is hard even at the upper end of the market.
Boris Morales, deal-desk manager at Residential Pacific Mortgage, a Walnut Creek midsize independent lender, said he had a well-qualified borrower buying a $2.5 million home in Greenbrae who wanted to put down 10 percent, borrowing 80 percent of the home's value in a first mortgage and 10 percent in a second mortgage.
"He had both (lined up) back in the middle of July," Morales said. "Both got approved and were moving forward. As of this week, (the investor) will no longer do second mortgages, period."
Residential Pacific will write the first mortgage, he said, but is scrambling to find an investor who will purchase the second. (The company sells all its mortgages.)
Mortgage brokers are also caught in the fallout.
Leon Huntting, a San Francisco mortgage broker, said his firm has had to eat some of the costs to keep some loans on track.
"We had clients to the point where we were ready to order loan docs and we'd get a call from a lender saying we don't have that program anymore," Huntting said. "So there were a number of loans where we gave up (our commissions) to honor the pricing they had."
Even large banks feel the crunch.
Profit margins are so thin in the lending market that eliminating the middleman is part of the new economic reality. In the past two weeks, Wells Fargo stopped offering riskier loans through other lenders or independent mortgage brokers but still offers those types of loans through its own branches.
"We can control the quality from start to finish because we're doing originating through closing," said Brad Blackwell, Wells Fargo Home Mortgage national sales manager.
Many experts said they think tighter standards are necessary to temper a lending market that had run amok, handing out loans to people with poor credit, no proof of income and few assets.
Ken Rosen, UC Berkeley economics professor, questioned whether those consumers should have been able to get mortgages over the past several years.
"If you have to get a loan with a low down payment, if you have to stretch, you shouldn't buy a house. Stay a renter," he said. "These loans allowed people to stretch and get loans they shouldn't have."
"We're getting back to basics, back to what we had prior to five or six years ago when we had a proliferation of new mortgage products," said San Francisco mortgage broker Ed Craine. "Borrowers won't be offered some of these loans or qualify for loans that can be problematic. That's the silver lining - unfortunately there are some people who are getting caught right now who are going to suffer."
Fannie Mae's Berson said the tightening mortgage situation is likely to hurt the already troubled housing market.
"There are people who could have qualified for a mortgage a month ago who can no longer get that mortgage," he said. "That means there will be fewer home sales or else people will have to buy less expensive homes. The practical impact is that some people will choose not to buy now. This is an additional negative factor on housing demand. It means home sales are likely to be weaker than we thought they would be just a few months ago."
Increase in loan rates, payments
An informal survey of interest rates for nonconforming loans (more than $417,000) found that the average rate on a 30-year, $500,000 fixed-rate loan - which had been 6.75% since early July - suddenly jumped to 7.5% this week.
The percentage is an average of what large lenders, including Washington Mutual, Wells Fargo, IndyMac, Bank of America and Citibank, have been charging for a 30-year, $500,000 fixed rate loan with a one point (1 percent, or $5,000) loan fee.
Aug. 1
Average monthly payment at 6.75%
$3,242.99
Aug. 8
Average monthly payment at 7.5%
$3,496.07
The increase in average monthly payment
$253.08
Fast-changing mortgage market
In recent weeks, lending criteria for home mortgages have tightened considerably, making it much more difficult - and expensive - to borrow when purchasing or refinancing a house. Here's how and why these changes came about:
-- Housing prices, after enjoying a huge run-up over several years, began cooling.
-- Many borrowers who had taken out mortgages with low teaser rates could not make payments when those rates reset. Mortgage delinquencies and defaults - especially in the subprime market - began rising.
-- The secondary market on Wall Street for subprime and other risky home loans dried up. (Most home loans are repackaged and sold to investors.)
-- Faced with nowhere to sell those loans and get fresh capital, scores of lenders all over the United States closed, went bankrupt or stopped making certain loans.
-- Fewer of the remaining lenders are offering second mortgages, 100 percent financing, loans to people with poor credit, or "no-doc" loans that require little evidence of income or assets, although many lenders say they are still funding loans to those with good incomes, large down payments and strong credit scores.
-- Consumers will pay higher loan fees to compensate for the fact that the market for repackaged loans is skittish and many lenders must keep loans in their own portfolios.
What you can do
With the mortgage situation changing day by day, it's hard to say what's best for consumers. One thing all experts agree on: If you don't have to be in the market right now, it might be best to wait this crisis out. If that's not an option for you, there are still places to get advice. For instance:
-- Bankrate.com: A free, online source of personal finance information that includes an entire section on mortgages, including local rate comparisons.
-- FDIC: The Federal Deposit Insurance Corp. provides comprehensive consumer advice on mortgages and home lending. Check its "Looking for the Best Mortgage" page for starters. You can find it at links.sfgate.com/ZOL.
-- The Federal Reserve: The Fed offers a great consumer overview of lending issues, particularly focusing on settlement charges. Check it at links.sfgate.com/ZOM.
-- The FTC: The Federal Trade Commission also offers an advice site for consumers navigating the mortgage market. Here's a shortcut to the site: links.sfgate.com/ZON.
Can't figure it out? Send us your questions
If you can't find the answer you're looking for at those sites, please send us your questions and we'll find the solutions for you. E-mail your inquiries to Bill Burnett, The Chronicle's real estate Editor, at bburnett@sfchronicle.com .
Source: Chronicle research
Tuesday, August 7, 2007
When prepaying makes good sense
Smart mortgage move
When prepaying makes good sense
If you want to own your home outright, prepaying your mortgage can be tempting. Doing so potentially could save you tens of thousands of dollars in interest and years of monthly payments. Here's when the move can be smart:If you are taking care of your major financial responsibilities, you're a good candidate for pre-paying your mortgage, according to Keith Gumbinger, vice president of mortgage information publisher HSH. Especially if you think the extra money you put toward your mortgage will give you a better after-tax "return" than if you invested it in the stock and bond markets. Here's how Gumbinger recommends figuring out that after-tax return: Multiply your mortgage rate (say it's 8 percent) by the inverse of your tax bracket (if you're in the 28 percent bracket, the inverse is 72 (100-28)). So in this case prepaying your mortgage is like getting a guaranteed after-tax return of 5.76 percent (0.72 x 8).
When prepaying makes good sense
If you want to own your home outright, prepaying your mortgage can be tempting. Doing so potentially could save you tens of thousands of dollars in interest and years of monthly payments. Here's when the move can be smart:If you are taking care of your major financial responsibilities, you're a good candidate for pre-paying your mortgage, according to Keith Gumbinger, vice president of mortgage information publisher HSH. Especially if you think the extra money you put toward your mortgage will give you a better after-tax "return" than if you invested it in the stock and bond markets. Here's how Gumbinger recommends figuring out that after-tax return: Multiply your mortgage rate (say it's 8 percent) by the inverse of your tax bracket (if you're in the 28 percent bracket, the inverse is 72 (100-28)). So in this case prepaying your mortgage is like getting a guaranteed after-tax return of 5.76 percent (0.72 x 8).
I like this argument from somebody:
How come we can watch property go up 100%-200% in 5-6 years and think it's perfectly normal and great. But let anyone say it can fall 50% or more and everyone just "can't believe that will happen." It's just silly really. After the craziness we've been through economically, we know "anything" can happen.
from CNN, big ticket mortgage rates rise, Yeppe!!
Big-ticket mortgage rates rise
The cost of financing an expensive home purchase is jumping, making high-end buyers the latest victims of the mortgage meltdown.
By Les Christie, CNNMoney.com staff writer
August 7 2007: 11:17 AM EDT
NEW YORK (CNNMoney.com) -- Don't look now but the cost of financing a home purchase in some of the nation's priciest areas just got more expensive.
Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on it 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent. Other lenders followed suit and more are likely to join them.
The rate jump means the monthly bill for a $600,000 mortgage would hit $4,403, compared to $3,942 previously, an increase of $461.
Jumbos are loans of more than $417,000, the limit observed by Freddie Mac and Fannie Mae, the government sponsored enterprises (GSEs) that buy loans in the secondary markets. Freddie and Fannie don't buy loans above that cap.
Wells Fargo's timing may seem odd: 30-year, fixed-rate mortgages have come off their highs for the year; their benchmark 10-year treasury has fallen considerably in the past few weeks to 4.69 percent from 5.2 percent, with further drops expected. And the Federal Reserve, which meets on Tuesday, has shown no inclination to raise its key rate.
Even borrowers with shakier credit scores than many jumbo loan applicants can qualify for a prime loan at about 6.75 percent, only 0.25 or 0.30 percent above what more qualified borrowers get, according to Keith Gumbinger, of HSH Associates, a mortgage information publisher.
But jumbo borrowers are paying a point and a half more than those who receive a conforming loan. That's way up from the traditional premium spread of about a half to three/quarters of a point.
Why should jumbos, whose borrowers often boast high incomes and assets, cost more than conforming loans? It's because Wall Street has stopped buying the loans.
Conforming mortgages, or loans below $417,000, carry much lower risk, because Freddie Mac and Fannie Mae guarantee a market for them. In a tighter credit market, lenders are charging more for jumbos because of the extra risk of not being able to sell them to the investment community.
Allen Hardester, a mortgage broker in Maryland, said that jumbos have lost their appeal for investors. "[Lenders] are having trouble unloading even prime, fully documented, 20 percent down jumbos. Nobody has any faith in real estate," he said.
George Hanzimanolis, president of the National Association of Mortgage Brokers, said, "Wall Street is just so shaky right now that any kind of mortgage-backed anything is a concern."
The implications for high-priced markets may be serious. On a wider scale, jumbos account for 16 percent of the overall mortgage market, according to Inside Mortgage Finance, which provides news and stats to the mortgage industry.
On an individual level, it can push potential buyers out of a market, because they generally care less about a property's price than their final monthly mortgage costs.
A buyer with a budget of $4,000 a month may be able to afford a $600,000 mortgage at 6.875 percent, but with jumbos up to 8 percent, a buyer with the same budget can only afford a $545,000 mortgage. To make up for the increased interest rate, a home seller would have to knock off nearly 10 percent from a selling price.
In many places, rate hikes for jumbo loans matter little, because most house prices fall well below the limits set by the GSEs. The median house price in the United States still stands at about $220,000.
Factoring in a 20 percent down payment, a home would have to cost more than $521,250 to trigger the higher interest rates of a jumbo loan.
But in some housing markets, such as most of California, much higher home prices prevail, pushing the majority of purchases into jumbo territory, according to mortgage broker Steve Habetz of Threshold Finance in Connecticut.
Buyers have to pay an extra premium, above already outsized home prices, to get a mortgage in the Bay Area, Silicon Valley, Los Angeles and many other California areas. The same holds true for the New York region, Boston, Washington D.C., parts of Florida and other high-priced markets.
"There are hot spots like that all over the country," Habetz said, "where there's a potential for a real meltdown."
The drying up of investment capital for jumbos is part ofa widespread liquidity squeeze. According to Gumbinger, a lot of the secondary market -the investors who buy securitized loans from lenders - has put itself on hold.
"They're saying, 'I'm not going to buy any more paper until I know what I have to know,'" he said.
As far as non-conforming loans are concerned, "We are seeing essentially a frozen market," said Jay Brinkman, the Mortgage Bankers Association vice president for research and economics. "When lenders can't get a bid even on the AAA loans, it's a market that has ceased to function."
A whole class of borrowers, subprime home buyers, has already been virtually eliminated from the home-buying universe. If jumbo buyers also face much higher interest rates, many will postpone home buying plans. And that can only add to the pain of slumping or stagnant markets.
Do you plan to sell your home on your own? Have you already done so? If you'd like to share your story for an upcoming feature in Money Magazine, e-mail Josh Hyatt at josh_hyatt@moneymail.com.Tempting ways to use your home for financial gain.Mortgage resets: Record bill due.American Home Mortgage goes into bankruptcy.
The cost of financing an expensive home purchase is jumping, making high-end buyers the latest victims of the mortgage meltdown.
By Les Christie, CNNMoney.com staff writer
August 7 2007: 11:17 AM EDT
NEW YORK (CNNMoney.com) -- Don't look now but the cost of financing a home purchase in some of the nation's priciest areas just got more expensive.
Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on it 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent. Other lenders followed suit and more are likely to join them.
The rate jump means the monthly bill for a $600,000 mortgage would hit $4,403, compared to $3,942 previously, an increase of $461.
Jumbos are loans of more than $417,000, the limit observed by Freddie Mac and Fannie Mae, the government sponsored enterprises (GSEs) that buy loans in the secondary markets. Freddie and Fannie don't buy loans above that cap.
Wells Fargo's timing may seem odd: 30-year, fixed-rate mortgages have come off their highs for the year; their benchmark 10-year treasury has fallen considerably in the past few weeks to 4.69 percent from 5.2 percent, with further drops expected. And the Federal Reserve, which meets on Tuesday, has shown no inclination to raise its key rate.
Even borrowers with shakier credit scores than many jumbo loan applicants can qualify for a prime loan at about 6.75 percent, only 0.25 or 0.30 percent above what more qualified borrowers get, according to Keith Gumbinger, of HSH Associates, a mortgage information publisher.
But jumbo borrowers are paying a point and a half more than those who receive a conforming loan. That's way up from the traditional premium spread of about a half to three/quarters of a point.
Why should jumbos, whose borrowers often boast high incomes and assets, cost more than conforming loans? It's because Wall Street has stopped buying the loans.
Conforming mortgages, or loans below $417,000, carry much lower risk, because Freddie Mac and Fannie Mae guarantee a market for them. In a tighter credit market, lenders are charging more for jumbos because of the extra risk of not being able to sell them to the investment community.
Allen Hardester, a mortgage broker in Maryland, said that jumbos have lost their appeal for investors. "[Lenders] are having trouble unloading even prime, fully documented, 20 percent down jumbos. Nobody has any faith in real estate," he said.
George Hanzimanolis, president of the National Association of Mortgage Brokers, said, "Wall Street is just so shaky right now that any kind of mortgage-backed anything is a concern."
The implications for high-priced markets may be serious. On a wider scale, jumbos account for 16 percent of the overall mortgage market, according to Inside Mortgage Finance, which provides news and stats to the mortgage industry.
On an individual level, it can push potential buyers out of a market, because they generally care less about a property's price than their final monthly mortgage costs.
A buyer with a budget of $4,000 a month may be able to afford a $600,000 mortgage at 6.875 percent, but with jumbos up to 8 percent, a buyer with the same budget can only afford a $545,000 mortgage. To make up for the increased interest rate, a home seller would have to knock off nearly 10 percent from a selling price.
In many places, rate hikes for jumbo loans matter little, because most house prices fall well below the limits set by the GSEs. The median house price in the United States still stands at about $220,000.
Factoring in a 20 percent down payment, a home would have to cost more than $521,250 to trigger the higher interest rates of a jumbo loan.
But in some housing markets, such as most of California, much higher home prices prevail, pushing the majority of purchases into jumbo territory, according to mortgage broker Steve Habetz of Threshold Finance in Connecticut.
Buyers have to pay an extra premium, above already outsized home prices, to get a mortgage in the Bay Area, Silicon Valley, Los Angeles and many other California areas. The same holds true for the New York region, Boston, Washington D.C., parts of Florida and other high-priced markets.
"There are hot spots like that all over the country," Habetz said, "where there's a potential for a real meltdown."
The drying up of investment capital for jumbos is part ofa widespread liquidity squeeze. According to Gumbinger, a lot of the secondary market -the investors who buy securitized loans from lenders - has put itself on hold.
"They're saying, 'I'm not going to buy any more paper until I know what I have to know,'" he said.
As far as non-conforming loans are concerned, "We are seeing essentially a frozen market," said Jay Brinkman, the Mortgage Bankers Association vice president for research and economics. "When lenders can't get a bid even on the AAA loans, it's a market that has ceased to function."
A whole class of borrowers, subprime home buyers, has already been virtually eliminated from the home-buying universe. If jumbo buyers also face much higher interest rates, many will postpone home buying plans. And that can only add to the pain of slumping or stagnant markets.
Do you plan to sell your home on your own? Have you already done so? If you'd like to share your story for an upcoming feature in Money Magazine, e-mail Josh Hyatt at josh_hyatt@moneymail.com.Tempting ways to use your home for financial gain.Mortgage resets: Record bill due.American Home Mortgage goes into bankruptcy.
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