FedUpUSA

I don’t know how much clear it gets than this:

By Scott Lanman and Craig Torres
Jan. 7 (Bloomberg) — U.S. regulators including the Federal
Reserve warned banks to guard against possible losses from an
end to low interest rates and reduce exposure or raise capital
if needed.

“In the current environment of historically low short-term
interest rates, it is important for institutions to have robust
processes for measuring and, where necessary, mitigating their
exposure to potential increases in interest rates,” the Federal
Financial Institutions Examination Council, which includes the
Fed, Federal Deposit Insurance Corp. and other agencies, said in
a statement today.

Let me point out a few things.

1. We have never seen a crash and rebound in US stock market history like what we have just experienced, except once.  That “once” was 1929/1930.  What followed next was a grueling grind – not a crash, but a grind that never ended, and in which the market lost more than 80% of it’s value.  Those who argue “the bigger the dive the bigger the bounce” forget that the only true comparison against what we have just seen was in fact the prelude to a grinding 90%+ overall decline.

2. If you believe in “long wave” cycles – that is, Kondratieff cycles, we have precisely followed the several-hundred-year long pattern though its latest incarnation, with the 1982-2000ish period being “Autumn.”  Winter follows fall.  These cycles seem to happen mostly because all (or essentially all) of the people who lived through the last cycle’s horrors are dead.  Unless we have found a way to break a cycle that has endured far longer than our nation, we’re right where we should be – which incidentally aligns with what happened in 1929/30 as well.  This means that while there may be ups and downs we have not bottomed – not by a long shot – no matter what people tell you.

3. Interest rates can only go up from zero.  That should be obvious.  Rising rates are not positive for equities and multiple expansion.

4. The Financials are getting a tremendous bid the last few days, presumably on the premise that “employment is at least somewhat stabilizing.”  With zero short rates and a steep yield curve, this means they make a lot of money.  But rates cannot stay where they are if in fact the economy is recovering, and if the long end rises it will choke off housing.

5. At the same time people are rotating into a sector The Fed and regulators just said will be forced to constrain its profits people are fleeing the stocks (tech) that have been on a tear.  This is exactly backward based on the news flow.  Are The Fed and Regulators lying or is the “optimism” incredibly misplaced (and even stupid if they’re rotating out of winners for what were just announced would be losers!)

6. P/Es are at record levels.  Yes, that’s on “as reported” 12 month trailing, and it is down materially since one of the two “disaster quarters” is now gone.  But even with the other gone (which it will be in another month) we will be trading at somewhere around 40 or 50x earnings, an utterly unsupportable level and above where we were in 1999 – just before the entire market fell apart.  Even on “operating earnings” we’re trading at 24 times – outrageously overvalued from a historical perspective.

We also have the BIS calling in bankers to warn them that they’ve changed nothing in their behavior (gee, really?) and China making a serious attempt to pop their property bubble (must be nice to actually pay attention to such things, eh?)

For today, “party on Garth” in equities.

Let me simply remind people that what got me writing The Market Ticker was this event – something that I missed the signs of because I was overly complacent, just as people are being right now.

That was 2006 and into 2007, remember?

Straight up – right up until it wasn’t, and 60 SPX points came off in one day.  That warning (and mine when I started writing) was ignored by a whole lot of people too who thought it was a “blip.”

Uh, no, it was a warning and those who failed to heed it got their heads handed to them.

Don’t worry folks, it can’t happen again.  Remember, The Fed has our back, just as they did in 2006 when they told us there was nothing to worry about in the summer when we got the swoon (remember that?  I do – and bought into it!)

The picture now is actually worse than it was in early 2007.  In early 2007 we had solid employment, we still had a reasonable housing market although it had slowed some, GDP was positive and we had just come off a GREAT Christmas season with extraordinary profits and sales.  In addition we were running ~350 billion in deficits, not $1.6 trillion (estimated for FY10) nor did we have to roll and issue over $2 trillion of treasury debt (to someone!) in the next 12 months.

Now we have the regulators issuing formal warnings about bank liquidity and interest rate risk (no really, you think that might be an issue with that sort of issue behavior?) while at the same time formal liquidity support in the form of monetization along with stimulus spending is slipping away – the source of the liquidity that fueled the rally from March.

Ignore all this if you’re brave – or stupid.

PIMCO isn’t.  Bill Gross sees the same thing I see.

With historically low rates, many homeowners are watching closely for the right time to refinance their mortgages. Those with good credit may well recall being showered with praise by a mortgage broker during the initial purchase for that solid credit score.

That was then. This is now.

A few years ago, a score of 620 or higher was good enough. That increased to 680 in early 2008. Then it jumped to 720 in April last year and 740 in August, says Rodney Anderson, senior managing partner of Plano, Texas-based Rodney Anderson Lending Services.

In the past, any score of 700 or higher would get a double thumbs-up from credit experts. Now, rate adjustments begin kicking in at 740, with every 20-point drop adding another adjustment.

In other words, many people who were taking pride in their credit habits either must pay significantly higher or try to make quick changes to nudge their scores upward. “What used to be great is now only good,” says mortgage broker Todd Huettner, president of Denver-based Huettner Capital. Refinancing that would have worked a year ago might well not make sense, he adds.

“I have clients all the time who literally wind up with a score of 739, 719, 699, 679 … and it costs them money to either fix it or pay for it,” Huettner says.

One of Huettner’s clients, who always had a score of about 740, went to do a refinance and found her current score at 719. “The reason was, she put a new washer and dryer on a store credit card,” he says. Many store cards are actually revolving credit, and your limit may well be equal or about equal to the purchase you’re trying to make that day.

Take the application that Stamford, Conn.-based Luxury Mortgage Corp. got recently. Interested in lowering the rate on an existing mortgage, the borrower could verify substantial income, assets and personal credit history, says chief executive David Adamo. But the borrower’s credit score had taken a hit after co-signing an auto loan for his son that had not been paid timely.

“As a result, the borrower, who otherwise met every other criterion, was unable to refinance the loan at a rate that made economic sense,” Adamo says.

Another wrinkle in today’s market: Even those with FICO scores of 740 or higher are penalized for buying in a geographic market on the downswing. “This adjustment affects all borrowers, regardless of score, if in a declining market,” says mortgage broker Jim Heidelberg, president of Heidelberg Capital Corp. in Tampa, Fla.

In many cases, the added costs of rate adjustments are “enough to make a refinance that would otherwise make sense have no benefit to the borrower,” Huettner says.

The road to new scoring

How did we get to this new reality?

The nation’s two largest mortgage lenders, Fannie Mae and Freddie Mac, suffered major losses in the market last year and then redefined risk, announcing price adjustments for borrowers with FICO scores below 720, says Sean Cragg, vice president of sales for Ann Arbor, Mich.-based Gold Star Mortgage Financial Group.

And, in case you were wondering, “these fees have nothing to do with your mortgage company or its various products and cannot be negotiated away,” Cragg says.

All mortgage bankers, brokers and credit unions must comply with the higher interest rates and delivery changes in all traditional mortgages, says Heidelberg. Only entities intending to hold the mortgages in their own portfolios can follow their own guidelines.

Worse news may be on the horizon. “There are many factors, including proposed legislation and regulation, that continue to change the mortgage lending landscape,” says David Chung, managing director of Towson, Md.-based CreditXpert Inc., which provides credit analysis services to consumers. “In the near term, it is more likely that this benchmark will continue to rise than fall.”

Surprise, surprise

Joe and Jane Homeowner have likely heard of the new credit restrictions. But the actual cost to them is often a surprise when they sit down with a broker.

“Often, lenders will quote rates that include the adjustments, without calling attention to them in order to avoid a negative reaction from their customer,” says James Guthrie, a partner in New Home Finance in Suwanee, Ga.

Less surprising are other factors that go into securing financing for a new or existing mortgage. Paola Kielblock, national products manager for Sun Prairie, Wis.-based Fairway Independent Mortgage Corp., clarifies today’s requirements:

• Good credit.
• Stable job, with a minimum of two years of employment.
• Reserves after closing, including a minimum of two to six months of mortgage principal, interest, taxes and insurance.
• Down payment from the borrower’s own funds.
• Low debt-to-income ratio. The required ratio varies between banks but is generally less than 40 percent, according to many in the industry.
• Good loan-to-value percentage. It also varies, but it’s often cited as less than 80 percent.

Having equity in your home is a major factor in getting approved for a refinance and in finding the best rate, says Cameron Findlay, chief economist for LendingTree.com. The more equity in the home, the less risk there is to the lender if the home is repossessed.

Taking action on your score

What can a homeowner who wants to refinance do with a good FICO score that’s not good enough?

“Virtually everyone can raise their scores by at least 10 (points) to 20 points, sometimes significantly more in 30 days,” Anderson says. Here’s what to do.

1. Find out what might have gone wrong. Applicants should know their credit score, understand what it means to their loan rates and ask their loan officers to use credit analysis on their behalf, says Chung. Credit analysis tools are a simple way to identify key score influencers by scrutinizing the information contained in each of an individual’s three credit reports to look for inconsistencies, errors and omissions that may artificially depress the score.

2. Correct any inaccuracies. Although consumers can improve scores on their own, Kielblock notes that credit agencies offer services to mortgage brokers to help consumers raise their credit scores if something is reported inaccurately and there is proof of a discrepancy.

3. Decrease the percentage of available credit used. This can be done by paying down balances or increasing credit limits, says Guthrie. Ideally, this means keeping balances as close to zero as possible, and definitely below 30 percent of the available credit limit, experts say.

“We’ve seen people increase their scores by as much as 90 points or more, simply by paying off the right cards,” Anderson says.

4. Move things around. If one income can be used to qualify for the loan, transfer accounts to “park” the debt in the other party’s name, Guthrie says.

5. Get a rapid rescore. It’s the only way to find out fast if an attempt to improve a score was successful. It’s done through your lender and a rescoring company. The process takes about a week, but it can get the loan process back on track. The downside is it costs a few hundred dollars. The credit bureau Experian has seen an increase in rapid rescoring requests, says spokeswoman Cynthia Baker. “While we haven’t done a direct cause-and-effect analysis, anecdotally, the volume does appear to have increased as interest rates have dropped in March,” she says.

Aside from working toward a better score, there are two additional options. One is paying points to buy down the interest rate. “This is only a good idea if the borrower will then live in the house beyond the break-even point, meaning the time where the money they’ve paid in points is made up for by way of less expensive monthly payments,” says Findlay.

The other option: shopping around. Some lenders, such as Palo Alto, Calif.-based Addison Avenue Federal Credit Union, have loans, known as “portfolio” loans, that aren’t subject to blanket rules on credit scores because the lender intends to keep them rather than sell the loans in the secondary market.

Michelle Edwards, national mortgage sales director, reports that for these loans, her company increases the cost of a mortgage only for consumers whose credit scores are below 680. One customer looking to refinance avoided a pricing adjustment because of compensating factors such as loan-to-value ratio, assets and length of employment.

In a perfect world, anyone contemplating a refinance or a new mortgage anytime within the next year or so would start working on getting the ideal credit score now.

But what if that didn’t happen? Try not to let your emotions drive how you feel about your interest rate. A mortgage is a financial decision that should be driven by economics, “not the pursuit of the world’s lowest rate because having it would make you feel good,” Heidelberg says.

He also says some consumers wait six months for a slightly better rate when a refinance could save $500 a month means missing $3,000 in savings. As Heidelberg says,

“This is foolish.”