Weekly Economic Update August 15, 2007

 didn’t want to put the following words in your mouths, but I must say that I am finding some reasons for optimism in the midst of the current chaos. No rose-colored lenses, just a simple fact. We keep hearing of deals that lenders are simply turning down, deals that make very good sense. The economy is relatively strong, the demand for real estate remains fairly strong, and there is a lot of money out there, though it has been scared into hiding.
 
Those with the money, therefore, are doing what they can to keep from losing it…saying no to big loans on luxury homes in which the borrower will have a 50% equity stake and has a tremendous FICO score. No? How long can a company be in business with the sole intention of not losing money? Companies exist, in fact, to MAKE money.
 
And it is my belief that there will be a lot to be made, and relatively soon. In the meantime, we need to clean up our financial act and stop treating debt as if it were the greatest asset to be found anywhere. We have hundreds of billions of dollars floating around in investments whose values are nearly impossible to value accurately. That is crazy, of course. But that is what we need to clean up.
 
Soon those with money will regain their ability to recognize a good borrowing risk and the existing demand for homes will doubtless be stronger than most analysts believe it will.
 
These are my suppositions, of course–but they are fueled by experiences long past. When businesses pass on good deals, it’s time to take out your wallet and start buying things. Fortunes are made…and may we all get a piece of the good that develops. (Knock on wood.)
 
Warm regards,

Steve Peterson

30-yr Fixed-rate Mortgage 7%

15-yr Fixed-rate Mortgage 6.60%1-yr ARM 6.14%[HSH average rates: 30-yr up 4 bps, 15-yr up 5 bps; ARM down 16 bps]Weekly Commentary 

Thumbnail Sketch: Confusion, uncertainty, panic. These three forces are shaking the markets—from the level of individual home sales to the level of massive corporate buy-outs—like a bucking bronco…intent, it seems, on bringing them all to the ground.

“In the past month, the market has been behaving in ways even seasoned players have been at a loss to explain,” several reporters write in The Wall Street Journal. And this is precisely the point. Hundreds of billions of dollars have been invested in exotic hedge funds that few people can pretend to fully understand and that have been responding to the market in unexpected ways. Investors don’t even have an accurate idea of the value of those funds and related investments.

And the great bugaboo, of course, is the subprime mortgage—though subprimes are certainly not the only cause of market woes. Yes, vast numbers of defaults may be in the offing; yes, we may see the number of foreclosures rise. But the real problem today is that no one knows where the next problem will show up. Ailing loans have been stripped and tranched (split into differently-valued pieces) so that they are no longer identifiable. An investor in Shanghai may discover that he owns slices of mortgages for homes in Azusa that are in foreclosure, threatening the viability of his hedge fund.

What is clear is that nothing is clear, nothing is certain. And until we achieve some degree of certainty, the markets will remain absurdly volatile, with occasional stock market jolts that dramatically over-express the actual possible losses at hand.

We have, in short, a time of panic in which it’s impossible to predict the future direction of any stock market—indeed, of any stock. And since dicey mortgages are the demon du jour, we have lenders who’ve grown very uneasy about writing the mortgages they had no problem with a few months ago, and the organizations that bought those mortgages (though Fannie and Freddie are doing what they can to help) are no longer interested in what currently looks to them like throwing good money after bad.

 We will, I believe, look back at this time with amazement and even humor. And it won’t be very long from now. The problem is that so many assumptions about how our markets work—notable among them the assumptions that we now have computers that can find the right investment under any market conditions and that it’s a great idea to invest with borrowed money—have been shaken profoundly.

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