Monday, May 5, 2008

Housing Lending Standards Continue to Tighten/Markets

Hello Everyone!

Well it was an interesting day in the markets. I wanted to talk about a bank survey that Bloomberg reported on today. What it showed was that banks continue to tighten up their lending standards in both commercial and home lending.

Here are some points from the article:

"May 5 (Bloomberg) -- The Federal Reserve said the share of banks making it tougher for companies and consumers to borrow approached a record after the subprime-mortgage collapse made them more reluctant to lend.

For home loans, the proportion of U.S. banks making it tougher for prime borrowers, those with the best credit, rose to about 60 percent from 53 percent. About one-fourth of U.S. banks reported slower borrowing for prime mortgages and 30 percent said nontraditional loans were weaker, both ``significantly smaller'' numbers of banks than in the January survey.

``I think we're back to 1980s lending'' in terms of acceptable credit records and down payments, David Kittle, the chairman-elect of the Mortgage Bankers Association, said today. Kittle, chief executive officer of Principle Wholesale Lending Inc. in Louisville, Kentucky, spoke at a conference hosted by the trade group in Boston."

The article also showed that the Fed cuts are not lowering borrowing rates:

"The Fed's rate reductions since September have failed to put much of a dent in the cost of a mortgage. The average rate on a 30-year fixed mortgage was 6.06 percent last week, down from 6.46 percent at the start of September though up from 5.45 percent in January, according to Freddie Mac."

My Take:

Well I guess after losing $318 billion by lending to anyone with a pulse, the banks have realized they better tighten up their lending standards. The brokers are now expecting borrowing to go back to 1980's standards. You know what that is folks? 20% down, a great credit score, and strong employment history.

This has big reprocussions for everyone involved in housing. The Fed is about done cutting rates. The last Fed cut has had zero effect on interest rates. As you can see, rates have actually climbed up a half a point up to 6.03% from 5.45% in Janruary. So we had lower interest rates BEFORE the Fed cut.

So I have a simple question. Why do we keep cutting rates and risk inflation when its doing nothing to lower borrowing rates? Oil hit a record $120/barrel today!! The only people benefitting from the rate cuts are the banks. The consumer suffers as a result with higher prices. A win for the pigmen and a loss for the middle class.

The most frightening thing about the commodities surge today was that the dollar was stronger. This spooked Wall St. because the trades that have been working the past few months was buy commodities with a weaker dollar and buy equities on a stronger dollar.

Well today we had a stronger dollar AND higher commodites. The market dropped on the dollar strength. Traders will now probably pause a little bit and re-evaluate what they are doing. Expect the bulls to to take a breather.

If this trend continues it could lead to disasterous inflation and a bad market if our economy continues to weaken. This is because the Fed would likely have to cut rates again which will drive up inflation and kill the consumer. This was only one day of trading so lets see if it becomes a trend.

Just as a reminder, anyone thinking they need to go buy a house because rates are going to rise needs to just relax. The price of housing will plummet so you will be able to afford your house. If you have a good chunk of cash to put down on a house then you are in an even stronger position.

The way things are going in housing, people with strong cash positions may not even need a mortgage because they will be able to pay cash! The housing disaster is speeding up. Rates should continue to rise as the credit crisis deepens.

Check out the comments section if you get a chance. I have a couple of good reads that I picked up this weekend.


Jeff said...

Hey everyone

I picked these commentaries up this weekend. I thought they were excellent. Enjoy!

Here is the second one:

One more for fun. I thought casinos did well in recessions. Tropicana to declare BK!!

Minton Mckarkquey said...

The Fed clearly has a weak dollar/high inflation policy and it's not helping anyone but the banks. If their only rational is to help them but screw the small guy, we need to have a revolt in the country immediately.

Anecdotally, btw...

- Here in San Francisco, there are massive lines at the Costco gas outlet all the time as city gas pumps are hitting $4.39/gallon.
- The Westfield Shopping Mall - an iconic retail beacon - was stone cold dead all weekend and normally you can't even park by 9am.
- Several people we know who moved here to join startups and hedge funds all got fired because their firms couldn't secure the credit they were promised.
- Three of my credit cards have reduced my limits substantially, even though I always pay them off completely every month and have a great credit score. And, I hear, I'm not alone.

I mean, everyday now the evidence on the street is showing the devastating impact of these policies in real time (ignore the delayed economic data!).

Since commodities are priced in $, this will just keep getting worse. And where in the hell is the help for J6P when prices are rising at this rate? Annual inflation is meaningless in the face of 2-5% monthly price rises.

In short, can somebody in charge here have an urgent State of Union address and let us know which village is missing an idiot? I feel like I'm taking crazy pills at the moment.

God help us.

Rant over. Loved your piece on Countrywide. That POS ain't worth a dime. We should buy puts tomorrow.

Jeff said...


I agree man. Great anecdotal evidence on the reality of the economy.

I am seeing the same things in Baltimore. I never see cash anymore. Everyone pays for stuff via credit cards.

Housing is falling off a cliff out here. Nothing is selling. Realtors going to work at Walmart.

Prices are flying up everywhere on everything. I just bought a plane ticket to chicago for $280 that cost me $100 a year ago.

Scary stuff

Anyone else seeing the same stuff?

Minton Mckarkquey said...

Bernanke: "High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy," concluded Bernanke. "Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."

Er... what? This is like the guy who preaches about Jesus and then beats his wife.

Minton Mckarkquey said...

Sorry to spam the comments today, but I just saw this one: Target - yes, Target - is offloading it's credit cards... wow.

Jeff said...



It seems the Fed wants to fight this reset of prices all the way down to the bottom. If they would stop intervening it would happen a lot faster and the pain would be over with.

I heard about the Target credit card sale. The evil side of that deal is I heard a rumor that JP Morgan, who bought the target debt is potentially selling its use of the discount window and taking on this debt.

Not sure if its true but what a bunch of slimes if it is.