Bay Area REBlog

Here is a commentary from Eric Trailer of Absolute Mortgage in Palo Alto, CA regarding the 60 Minute segment that aired on December 14th. Just because an opinion is aired on TV it still must be questioned as to the true motive of the interviewed person. What did you think?

Did you happen to catch that “60 minutes” segment on December 14^th titled, “A Second Mortgage Disaster on the Horizon”?  In true media form, it’s creating more concern than necessary.  My favorite aspect of the interview is the fact that Scott Pelly interviews a highly biased money manager, Whitney Tilson, who claims that “blows to the financial system will keep coming…” yet when asked the question, “Does that mean that the stock market is gonna continue plunging as we’ve seen the last several months?”, Tilson replies, “Actually,  we’re the most bullish we’ve been in 10 years of managing money…”  You think he’s not trying to scare people into investing with him versus buying real estate?

What the segment addresses is the fact that there were plenty of speculative real estate buyers who used “Alt-A” and “Option ARM” loans to finance real estate purchases.  While it’s mostly true that those types of mortgages were considered “mid grade” (not as bad as subprime, but not as good as “A” Paper), the disaster potential that those mortgages have are not half as alarming as the segment attempts to point out.  Why?  Consider the following:

1. credit score requirements for these loans were much higher than subprime mortgages (as you probably know, credit scoring is used to determine an applicant’s willingness to repay debt)
2. down payments were always required with Option ARM loans
3. Most Option ARMS have a defined, graduated payment schedule, which provides a predictable payment schedule
4. all of the adjustable rate mortgages have actually come DOWN in rate, making most resets actually more attractive than the initial fixed rate
   1. for example, those who have a 3/1 adjusting today are pleased to know that their new rate is 4.34%, fixed for another year!
5. for those with difficulties making their payments, many lenders are re-negotiating loan terms to help those borrowers stay current on their mortgage payments

As you probably know, refinance and pre-approval activity is up tremendously and we are seeing many buyers looking to buy before Superbowl to avoid the anticipated frenzy of activity projected to occur on February 7, 2009.  It’s difficult to predict whether jumbo money will truly loosen up by then, but adjustables on jumbos are still available below 5%– actually, some monthly adjustable are BELOW 4%!

Alright, here’s my list of important tidbits from the last week:

1.      The Fed cut it’s key interest rate to a RANGE of 0.00%-0.25%, the lowest in history—this means that Prime is now at 3.25%; so if you have an equity line at Prime – 1.00, you are now borrowing at 2.25%

2.      The Federal Reserve also reported that industrial activity fell by 0.6%, which was actually BETTER than expected

3.      The Labor Department reported that consumer prices fell 1.7% in November — the largest decrease since record keeping began in 1947—which followed an 8.6% decline in October

4.      The Commerce Department said construction of new homes fell in November by 18.9%, the biggest drop in 25 years. The decline pushed construction down to a seasonally adjusted annual rate of 625,000 homes, the slowest pace on records dating to 1959.

5.      The Conference Board reported Thursday that its index of leading economic indicators fell for the second straight month, dropping at a BETTER-than-expected 0.4% in November. That was slightly better than the 0.5% decline economists had expected– the index is designed to forecast economic activity in the next three to six months, so maybe things really are turning around?

6.      And my favorite, we bailed out GM and Chrysler on Friday, and gave Ford a lifeline to use as desired—is it just me or do you too think that they’ll be coming back for more?  

Eric T. Trailer, Principal

Absolute Mortgage Banking

555 College Avenue

2^nd Floor

Palo Alto, CA 94306

(p) 650.543.8001

(f) 866.568.6849

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