Archive for March, 2009

A Conundrum Wrapped in a Paradox, Stuffed in a Burrito

There’s a poll on Ad Age’s website asking the question: Is Now the Time to Consider a Media Campaign to Get Consumers Spending Again?

Not too surprisingly, since the poll is being held on an advertising website, the response is running heavily in favor of “yes”.  But even if it weren’t, I think that would be the general mood.  Every talking head, most everyone you meet, thinks the economy is going into in the tank, and thinks that it is going into in the tank because the consumer is not spending enough money.

Part of that is true.  Part of it is not.  Let’s use an analogy.

My sister runs half-marathons.  Or, at least, she ran a half-marathon last week, so for me, that means she runs them.  She can run a long, long time, but she cannot run forever.  Eventually, she has to stop.  Now, I guess it’s true that she doesn’t HAVE to stop, at least not right there at the finish line.  She could keep running for a bit.  But sooner rather than later she’ll find that she’s running on borrowed reserves, that she needs to re-tool and rest and get food back in her, or she really will have to stop altogether.

TADAAAAA!  Same thing is happening here.  For a long time, the economy has been running on credit, that is, people are spending money they don’t have yet, hoping that the future will bring sufficient funds to pay back what they are spending now.  Now, if you are the only one doing that, it’s a problem but not a desperate one.  When everyone does it, however, there’s potential for a catastrophe.  Essentially, much of what everyone has been paid over the last thirty years was borrowed.  Now the bill is due, or, more accurately, the bills have been mounting steadily and they have now reached the point where the bill is larger than the income.

What smart people do when this happens is they look at the bills they have to pay, and they start cutting.  Nordstrom becomes Nordstrom Rack becomes Ross becomes the Salvation Army.  Market Street Grill becomes Outback becomes McDonalds, becomes “ah, I’ll have a piece of toast and go to bed”.  Vacation in France becomes the Grand Canyon becomes two days skiing becomes a Netflix disk of 24, the Second Season.  Etc.  Driving gets reduced, spending slows, people get defensive.  Now, I’ve written a lot about saving and what I call Financial Defense, and obviously really smart people play defense all the time, not just when things get tough.  But when they do, everyone starts playing defense.  This is terrible news for big chunks of the economy.

If you’re in luxury items, you’re in trouble.  You might survive (there are good ways to do that, but that’s not for this post), but you’re going to have to watch it.  If your business model depends on people paying $7 for a scoop of ice cream, you might have difficulties coming.  If you depend on true, non-food luxury sales, like for instance high-end art, you’re dead.  You will, absolutely, have to change what you sell, at least for a while.  In every recession, there are dead bodies, and if you think most of the dead bodies are going to be on Wall Street, you’re nuts.  Most of them will be on your street.  Businesses will have lower revenue, which means they have to cut something, and that something is you.

Less money coming in means you have less to spend.  It’s a very tight circle.  This is the cycle we’re in right now.  There is a way out, but it is NOT the way out that is currently being considered on Ad Age, or, in fact, anywhere else that I can find.  The solution to the decline in consumer spending is NOT throwing hundreds of billions of dollars at people in the hope that they will spend it (Stimulus I).  It is NOT throwing hundreds of billions at banks, hoping they will lend it (Stimulus II) – because PEOPLE DON’T NEED TO BORROW MORE MONEY RIGHT NOW.

What they need to do is LESS borrowing and more retirement of debt.  They need to get out of debt altogether.  Believe me, if the lending in the US vanished, and the debt in the US went with it, spending would skyrocket.  Who doesn’t want to spend money once they have no debt to worry about?  Seriously now, if you were in a position where you had no debt at all, no house payment, no car payment, no debt payments at all, how fancy would you eat out?  How many more movies would you see?  I you’re like most households, elimination of your debt would close to octuple (that’s 8x) your spendable cash.  Forget shopping sales.  You could go to any store, any time, and buy whatever you wanted (within reason).  Retirement saving becomes really, really easy if you don’t owe anything but the light bill and property tax.  Every part of the economy would benefit, and would do so in a sustainable way – to go back to our analogy, my sister would then be able to run forever, faster and faster.  No breaks.  Endless energy.

THAT is how we get out of the trouble we’re in.  Unfortunately, to do that we need two things we haven’t got – discipline, and patience.  So it isn’t going to happen.  What we’re going to get instead (on the macro level) is a fellow coming to the end of the marathon with a cattle prod and goosing the runners to keep going long past the point where they have strength.  What we’re going to get is people running past the finish line as if they have unlimited strength, and can borrow forever.  Both of these things lead to disaster.

So whatever others do, don’t you be stupid.  Refuse to be goosed.  Save your money, and save faster by getting rid of your debt. All of it.  Yes, even your mortgage.  Just say no.  Cut.  Save.  Whatever happens in the general economy, you be smart.

Kind of Random

Okay, random enough.  I read a bunch of stuff today, and it’s rattling around in my head, and maybe some of it will be useful to you.

1. There’s a bookstore in Lehi.  I can verify this, because I just bought the book Three Cups of Tea from it.  I like the book, and I like the store.  It’s on the corner of 1st West and Main in Lehi, so 35,000 people drive past it every single day.  Go in.  Buy something.  Forget Amazon.

2. My sister Alison Wonderland wrote a post about how she’s adopted an alternative lifestyle.  This doesn’t mean what you think it means, but it does mean exactly what she thinks it means.  There are 23 comments, which is not a record for her, but it’s waaaaaay above average, so apparently she has hit a nerve.  I have only one thing to say about the comments – apparently people think that “conventional” means “everyone does the same thing”.  Being that I live the quintessentially conventional life that she is supposedly turning her back on, I have this to say about that: there are a whole lot more people living her uncoventional life than my conventional one.  A whole. lot. more.

3. It’s still a good post, and she’s a good writer and a better person, which is saying something.

4. There’s no such thing as “conventional” if “conventional” means “everyone does the same thing.”  Only “non-conformists” (you know, those people that all dress the same and laugh at kids that do homework) think that “conformists” are all the same.  My father and I are very much alike, and if you know us, we’re as different as water and rocks.  EVERYONE plays his music his own way, and playing a certain way just because you think it makes you different somehow is moronic.  Just play your way.  Don’t worry about the fellow next to you.

5. Apropos of that (sort of, and note that I used the word “apropos” correctly), here is a great post on microventures from the BrandBuilder Blog of Olivier Blanchard.  This man’s bog is under-read.  Seriously.  This is a good man who writes well, and I learned a week’s worth of lessons in the hour I spent reading through the last month.

6. For those of you in selling, and brother, that’s everyone, here’s a chapter from a forthcoming (I hope) book on selling from Kevin Hoffberg.  There’s some great stuff here.  Note that he starts his book the same way I ended #4 above.  That’s not a coincidence.

Go to it.  Send me some interesting stuff yourself, would you?

RateWatch FED Madness – Fed Gets Its Freak On

Yesterday the Fed announced a couple of things of critical import to the mortgage world.  One, it is not doing much of anything with the Fed rate for the forseeable future.  There is not going to be a rush to raise interest rates even if the economy improves dramatically, and there’s no reason to think that it will, not any time soon. Two, it is expanding its purchasing program of mortgage-backed securities from $500 billion (half is spent) to $1.25 trillion.  With a “T”.  Three, it is going to start buying back long-term Treasury bonds as well, $300 million worth.

For the technically inclined, here’s what this means: when Fed buys mortgage-backed securities, it is purchasing notes that are secured by mortgage contracts.  Those contracts are the documents you sign at the closing table.  Retail lenders – like me – originate mortgages and fund them, having usually pre-sold those loans to secondary lenders (this is called warehousing), which will bundle them up and sell them to FNMA/FHLMC (Fannie and Freddie).  This flow is critical to what most people think of as the mortgage process.  The mortgages back securities that allow banks to replenish their supply of cash to lend out again.  If the Fed starts buying those securities, the flow increases in the pipeline and lenders can lend more money.

With the collapse of the credit markets, the flow has been severely restricted and that has made mortgage lending sort of like being in the middle of the ocean dying of thirst.  There’s money everywhere, but we can’t lend it, because the secondary lenders have to restrict their flow to only the very choicest of loans, because those are the only ones they can securitize.  That flow will free up at some point and those outside the top 10% of borrowers will once again be able to borrow money.  In the meantime, the Fed action prevents the last trickle from freezing up as well.  The buying pressure reduces risk in the MBS markets, raising their prices and lowering their yields.  Since (in a circle, now) the yields on those MBS dictate to lenders what their risk is on mortgage lending, as those yields drop, rates drop with them.

Whew.  Still with me?

Yesterday, because of the Fed announcement, bond prices exploded to the upside and yields dropped like a stone.  That should (under ordinary circumstances) have meant a large drop in mortgage interest rates.  But it didn’t.

Rates on mortgages took only a small dip yesterday.  I say “small” because it was not nearly as big a move as would be expected from the way the bond markets moved.  Why is this?  Two reasons: one, refinance pipelines are choked, and I mean choked.  Our staff starts work at 6am and finishes (last night, for instance) at midnight.  The in-house underwriting staff at City1st is pulling 16-hour shifts and has been since roughly Christmas.  Secondary market lenders are doing the same with their staff – remember, a LOT of people got laid off last year, and most lenders went very lean to try to stay in business.  That means loans just can’t get through the pipe very quickly.  To slow the flow, lenders keep their rates artificially high.  Two, lenders know that most of their volume on these loans is coming from refinances of loans they already hold.  They’re not getting new, high-performing loans without losing older, higher-interest loans at the same time, so this boom is not necessarily good for them.  They’re being defensive about rates, and there are lots of good reasons for them to do this.

In light of this, what do I recommend? Same as always: if you have a deal that works, that pays for itself inside of three years, TAKE IT.  Don’t try to time this stuff.  It’s impossible.  It’s also a major drain on your resources.  The best thing you can do to make sure you get the rate you want is to get set up with us under the Mortgage Under Management program with a hard rate target.  You’ll get your lock when the rate reaches your particular level without your having to be reading tea leaves.  We’re professionals.  We do this for a living.  This RateWatch and the MUM program and all the other services you get here are part of what makes us the best.  Use us, that’s what we’re here for.  Hit me back with an email, and it will seriously take 10 minutes to get you set up.

Meantime, expect rates to be at 5% for FHA and slightly below for conventional, depending on about 100 different factors that could make your rate higher or lower.  Call or email for specifics.
This is going to be a fun few months, folks.  Stay with us, and keep your arms and hands inside the car at all times.

Chris Jones
City1st Mortgage Services

RateWatch ALERT!

The HomeRun Grant was passed by the Utah Legislature yesterday.  It will mean a $6000 grant for anyone that buys a new-constructed, NEVER LIVED IN home.  As long as you make less than $75,000 as a single person or $150,000 as a married couple, you qualify.  You don’t have to be a first-time homebuyer, or buy in any particular area, or anything like that.  It should even apply to you if you build a house now, although since there are only 1600 of these grants, I’d hurry.
Your loan officer has to apply for the grant; you can’t do it yourself, and you don’t get the grant until your loan is cleared to close, at which point the money is wired directly to the title company, where it can be used to cover down payment, closing costs, or, Heavens, given back to you.
Markets have rallied across the board this week, and that’s good news for everyone.  We’re down a fraction on bonds today, but we’re still seeing 4.875% on conventional and 5% (even as low as 4.75% on some programs) on FHA.  NOTE: do not assume that your rate is anything like the foregoing.  You could be better or worse depending on eight hundred sixty-four different factors too complicated to mention here.  Call me.  That’s what I’m here for.
Have a spectacular weekend.  We will.

This is how to behave:

We hear a lot of crap from the government about sacrifice, which means “pay more taxes”. We hear a lot from celebrities about suffering, which means “what is happening to other people in places I visit for photo ops”. What we don’t hear is stuff like this.

I’m very impressed by this.  Few CEOs seem to understand the power of the position they are placed in.  Leaders can make incredible differences in the lives of the people around them, but there are so, so few leaders left, and so, so many people that need to be shown, not just told, what to do.

I believe in a God that showed me, so I need this perhaps less than some, but I still look to my heroes for help and courage.  I am adding Paul Levy to my list of heroes.