No doubt you have heard the weekend hubbub about AIG paying $100+ Million in bonuses to their financial engineers. When I first saw the NY Times alert on it I was incredulous. My career has largely been as a financial executive with large multi-national corporations in Silicon Valley. In that competitive environment, I never saw bonuses paid when corporations were missing targets badly, let alone losing money and I can’t even imagine it with the kind of failure that took place at AIG. Geithner was apparently right in the thick of the original AIG bailout negotiations and I am not surprised this got overlooked in the rush to put the protection in place – they couldn’t think of everything that would come up in the next 6-12 months. But I am disappointed that he just blamed the prior administration like he has amnesia or something. So the good news is that just an hour ago, Obama instructed Geithner to try and block these payments. Or is that good news?
Here is the connection to mortgage rates. The reasoning given over the weekend for not canceling the bonuses was based on respecting the contracts. That is an appropriate concern but contracts can be renegotiated. GM and their unions are being asked to renegotiate in order to accept fed money. And the kicker is that while the Obama team was saying they had to respect the contracts for AIG, at the same time they’ve been saying they need to disregard the contracts of mortgage lending in the bankruptcy “cramdown” legislation that will be settled this week. And this is where it will hurt mortgage lenders and therefore rates. Investors will shy away from secondary market if the real estate backed securities can have that real estate protection over-ridden by bankruptcy judges. Having reluctant investors means higher rates. In the meantime, rates are stupendous. We locked more loans in the 4.5 to 4.875% range this past week. The 4.5% loan had an APR of 4.612% so you can see that these are great rates.
Obama has also been busy this morning announcing with Mr. Geithner the program to improve SBA commercial lending and it is better than expected. The SBA fees are suspended both on 7(a) loans and 504 loans until the pool for that runs out. The best guess is that will be through the latter part of this year. And for the 7(a) loans made by banks and guaranteed by the SBA, they will expand the guarantee to 90%, eliminating substantial risk from the banks. And finally, it looks like $15 B of TARP money will be used to buy SBA backed loans in the secondary market so there should be some demand for these loans and a chance of better liquidity and reasonable rates.
This week is Fed week where the FOMC will announce its rate decision. The pundits are projecting zero chance of a change up or down. For the 4th day in a row, stocks are up with major indices all up over 10% from the beginning of last week. Wells Fargo Bank for example has moved from $8 to $15. Bonds have had good money flow, through the same time and interest rates are holding their own in spite of stock moves and China statements. We’ll keep our eye on it and let you know if there is anything extraordinary. Please continue to refer your friends and family. We appreciate your association and friendship. Make it a blessed St. Patrick’s week, may the rain fall lightly on your fields and all that! Oh and BYU has 2 tough matches this week, but they are in the dance - go Cougs! -Dave
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