I was hoping that this post would be something fun but alas it is not.  It is however something I feel needs to be addressed.  This will affect your business....

This past week was one for the record books.  As a result of the perceived credit crisis on Friday afternoon we witnessed an unprecedented widening of the spread between conforming interest rates and non-conforming and/or jumbo rates.  To most it is clear that the subprime crisis is not contained and it appears that we are seeing the first signs of the spread into the A paper world (A paper refers to borrowers that have good credit and typically can document their income and assets).  This coming Tuesday Fed Chairman Ben Bernanke and the Fed board have a big decision to make.  Do they try to stop the bleeding by cutting the Fed funds rate by 1/4% (the Fed Funds rate affects short term interest rates, things like equity lines of credit, car loans etc.) and by doing so send a signal to the market that they think the situation is dire, or do they refrain from a cut in an effort to encourage the continuation of foreign investment in our fixed income instruments?  We will have to wait and see, but in the mean time...

The more pertinent question is what do we communicate to our clients to help them make informed decisions given the current reality.  As real estate professionals it is important that we have a working knowledge of the situation and that in clear concise terms we can explain what is going on.   So here it is, I will try to be brief...

On Friday morning the Labor Department's Jobs report came in lower than expected which was good as it helped calm fears of wage inflation.  This in turn helped push the price of Fannie Mae and Freddie Mac mortgage backed securities higher and conforming interest rates lower.  Fannie Mae and Freddie Mac only purchase mortgages that are considered "conforming".  The conforming loan limit is $417,000.  Most loans above the conforming loan limit or that are non-conforming in any other way (stated income, most interest only loans, exotic adjustable rate mortgages, etc.) are pooled into securities by the private sector which is why the interest rates on non-conforming loans are higher but that is a topic for another time.   The risk associated with non-conforming loans (not to be confused with "sub-prime" loans which are loans made to people with flawed credit) has increased in recent months as a result of increasing default rates and the implosion of several large hedge funds with significat investment in non-conforming mortgage backed securities.  As a result the appetite by both domestic and foreign investors for mortgage backed securities that contain non-conforming loans has decreased and those that are continuing to invest in these instruments are demanding higher rates of return.  To add insult to injury Bear Sterns finance chief Sam Molinaro said on a public conference on Friday "this is about as bad as I've seen it in the fixed-income market", which sent the market into a tail spin.  

The result of all this is that the spread between conforming interest rates and non-conforming interest rates will widen significantly on Monday.  For example a 30 year fixed rate for a well qualified buyer for a jumbo loan amount will be in the mid 7% range up from the high 6% range on Friday morning.  At the same time a 30 year fixed rate for a well qualified buyer on a conforming loan will be in the mid 6% range, a full 1% lower than the jumbo rate!   We, in all likelihood, will witness several more major lenders suffering the same fate as American Home Mortgage which has officially shut its doors.  The coming weeks may see the tightening of qualification standards for non-conforming mortgages...advise your clients accordingly. 

The good news is that HomeServices affiliation with Wells Fargo is more meaningful than ever.  As we all know Wells Fargo is the 2nd largest lender in the country and more importantly Wells Fargo is one of the most sound from a financial perspective.

Any questions....no, OK great.