Box Home Loans®

The day after the Fed lowered interest rates we had so many visits to our website that our server actually got overloaded and shut down temporarily.  Needless to say, it’s been a busy couple of weeks, and we are grateful for that.  Though the Fed’s rates cut significantly increased our web traffic and loan applications, its emergency move to cut rates .75% actually caused interest rates to increase.   This seems somewhat counterintuitive, but it actually makes a great deal of sense.  Let me explain (which I got from the Mortgage Maket Guide, a daily publication that does its best to forecast and explain interest rates).

Does it seem strange that a Fed rate cut makes mortgage rates rise?  Do you wonder why a weaker economy helps lower mortgage rates?  This edition of the Focus includes these topics along with an explanation of the wild and crazy week in the financial markets.

What The Fed Rate Cut Means To You

In a surprise move, the Federal Reserve decided last week to cut their overnight lending rate by .75%.  This was done in an attempt to stave off a worldwide stock market “crash.”  There had already been dramatic selling in foreign markets.  Plus, the futures markets were indicating that U.S. markets were going to drop at least 4% right at the opening bell Tuesday morning.  It would have been nowhere near the catastrophe of Black Monday in 1987 or the stock market crash in 1929, but it was definitely a troublesome situation.

Well, the stock markets did drop about 4% within seconds of opening, but they made a very fast recovery.  The Fed rate cut did encourage investors to get back into stocks, but it was more related to prices dropping so low that traders felt there were bargains to be found.

When the Fed cuts rates, it does not directly affect mortgage rates with the exception of equity lines.  And even then, the banks still have to vote to lower the Prime Rate, which they almost always do.  So, for those of you holding equity lines, your rate just dropped another .75%.  That’s a total of a 1.75% decline since August.  Plus, the Fed will hold their official meeting next week at which they are expected to cut their rate at least another .25%.

Unfortunately, the move had the complete opposite effect on all other mortgage rates.  Generally, when stocks are rising, bond prices fall.  This happened in a big way on Wednesday and Thursday of last week.  Rates were pushed .25% higher or more in many cases. 

As of right now, it appears that this was an overexcited knee-jerk reaction.  The economy is still headed for additional weakness, which should lead to greater stock market declines over the next few months.  There was already a hint of this when the stock market slipped again on Friday.  We foresee rates staying relatively low if not falling lower over the next three to six months.

The Rubber Band Effect

When a rubber band is stretched and then released it snaps back.  The further it is pulled, the harder it is going to snap back.  The financial markets work in very much the same way.  Anytime there is a large move in one direction, you can bet that the turnaround is going to be strong and swift.

There were several examples of this effect last week.  It began on Tuesday.  The U.S. markets had been closed for Martin Luther King Day on Monday, but they were primed to collapse when they reopened the following day.  The Dow gave up 450 points within seconds, but the Fed rate cut and low stock prices brought buyers back into the mix.  The market was almost unchanged from the previous day within hours.

The following day presented an unprecedented flip.  The Dow tumbled early, dropping as low as 300 points at midday.  But, in the final three hours of trading there was a 600 point swing.  It came back from a one-year low around 11,650 to almost 12,300 at closing.

On top of quick intra-day flings, the longer term trends get hit with even bigger reversals.  The Dow had dropped from 13,550 to 11,650 in less than a month.  So, it was not entirely shocking that the market bounced about 750 points off the low.  However, the sharp pullback was so much stronger than normal because of how rapidly prices had deteriorated.

Based on Friday’s significant downward movement, the sling-shot may be over.  Once a rubber band has finished snapping back, it needs to be re-stretched before the next pullback.  Especially as the economy seems to be extending its slowdown, it appears that the stock market could fall substantially further.  Just look for that next sling shot.  You can really get stung if you’re on the wrong end of the rubber band.

There are two kinds of people in this world:  Problem Solvers and Blamers.  I would consider most politicians as the latter:  blamers.

 

The political finger-pointing that has resulted from the mortgage meltdown of 2007 has astonished me.   I suppose that I should give most of them the benefit of the doubt, and refrain from believing what I want to believe, which is that most of these finger-pointing politicians are really just pandering for votes to the desperate and ignorant among us.   No, I won’t say that.  I’ll just say this:  be careful because most of the things that our state and national lawmakers legislate are things about which they know very litte.

 

Consider the following.  Leading Democrats such as Chris Dodd and Hillary (Republicans are often as guilty as well, lest you think I’m making some partisan plea here) are blaming the mortgage crisis on mortgage brokers who have duped unsuspecting homeowners into loans that they couldn’t afford.  They have urged President Bush to offer a lifeboat to consumers who have been “victimized” by unscrupulous, greedy mortgage brokers.  They ask for the President’s help to bail people out of their stupid financial decisions knowing full well that the president really can’t nor shouldn’t do that.  But by merely suggesting that the President take action, they can now hit the campaign trail claiming that they have tried to stick up for the “little guy”, “the common man.”

 

Here’s the deal:  the mortgage meltdown of 2007 wasn’t cause by a wolf-pack of greedy brokers and lenders trying to swindle borrowers into stupid decisions.   The mortgage meltdown was cause by this:   In the midst of the greatest housing market our country had ever seen, mortgage lenders and borrowers alike continued to think more aggressively and speculatively about how much money was to be made in housing.  For several years, no one could lose:  borrowers had unprecedented access to capital.  If you had a pulse, you could get a loan.  That kind of access to capital opened the housing market to millions of buyers who historically could not have qualified to buy properties.  With the housing market flooded with new buyers (especially with investors who could now purchase investment properties with no money down), the housing market sky-rocketed.  And when the housing market sky-rocketed, relatively few people defaulted (initially) because with equity building by the day in their property they could always refinance into a new loan if they ever got in trouble on the old one.

 

This unprecedented access to capital—the ability for EVERYONE to get a loan—was one of the primary contributors to the amazing housing market of 2000-2006.   Unfortunately, the housing market—as all markets do—took a breather about the middle of 2006, and began to slow.  Thank goodness for that.  Markets must correct—if they didn’t, they would inflated us all out of the market!

 

When the housing market slowed, all of the speculators—either investors who were buying and flipping properties, or owner-occupants who had over-leveraged their home with a teaser-rate ARMs—found themselves in a precarious situation:  they could no longer dump their newly acquired asset so quickly, and the snowball started to compound.  Defaults rose.  Wall Street panicked, and pulled the plug on buying most of these aggressive mortgages, and many mortgage companies (whose very existence depends on the ability to sell their loan portfolio for cash) got stuck with their pants down, and sputtered quickly into bankruptcy.  All of that bad news has made consumers even more jittery, and so the cycle continues. 

 

Now the politicians are jumping on board, proposing all kinds of knee-jerk regulations to “protect” the American public.  The next time I blog I am going to share with you some of the more ridiculous proposals and new laws that have been passed.  Those proposals are really just placebos for politicians to self-medicate themselves into believing that they are actually making a difference.  Their proposals remind me of some of the gun legislation that has outlawed firearms in churches—as if such legislation is going to deter a psychopath that might actually pull a gun on a church congregation from doing. (No, I’m not a member of the NRA, nor do I own a gun, nor do I ever plan to).  My point is this:  blaming one particular segment of the mortgage industry for the market correction of 2007, and then creating a bunch of cumbersome laws to “fix” the problem is analogous to believing that legislation on where one can or cannot carry a concealed weapon will deter a psychopath from randomly shoot strangers.

 

You won’t believe some of the laws that are brewing.

We say “NO” better than anyone. That may sound harsh, but it’s the secret to our success. It’s the driving force behind our ability to cut closing costs by nearly 70%. In today’s economy where one-stop shopping is the rage, we take a different approach: we do one thing, and we do it very well.We liken our thinking to that of a revolutionary entrepreneur—Henry Ford. He proved a hundred years ago that one could dramatically reduce the price of goods by mass producing them on a moving assembly line. Consider these astonishing facts about Mr. Ford’s legendary Model T.

In 1908, Ford produced the Model T and made millions selling it at an affordable $805. Five years later he perfected the moving assembly-line, which allowed him to exponentially increase production of his cars at a much lower cost. By 1913, the price of the Model T was reduced to just $290—nearly a third of its original price just five years before. Ford’s business model was pure genius and revolutionary, and it forever changed our country’s and our world’s economy.

So what does this have to do with mortgage lending? Everything. Mortgage processing is the antithesis of Ford’s assembly line. Imagine if Ford had wanted to capture more of

America’s pocket book by sending a vast array of products down the same assembly line: first down the line was a Model T, then a toaster, then another Model T, then a washing machine, another Model T, and then a radio. You get the picture. It’s absurd. Yet that kind of random assembly line epitomizes the mortgage industry. As mortgage companies face an increasingly shrinking market, they continue to expand their product line to appeal to a broader group of borrowers. Such randomness is analogous to an assembly-line mixed with toasters and automobiles.In contrast, Box Home Loans has copied Ford’s highly specialized assembly line. We do one kind of loan for one kind of borrower, and we do it again, and again.  We opted to shrink our product line to better serve a minority of the population. By saying “No” to the masses, we are able to serve a few customers at an amazingly low price with astonishing speed and with legendary customer service.

And like Ford, who introduced a very affordable Model T in 1908 for $850 only to sell it for a third of that price five years later, Box Home Loans is fanatically driven to continually reduce the price of getting a mortgage. Our costs are currently a third of what the competition offers. Imagine how low they’ll be in five years!