For the past few weeks, investors have been subject to calming statements on the subprime fallout by Fed Chair Bernanke, Treasury Secretary Paulson and others suggested that this problem will pass although there will be rough times ahead. In other words, let the markets handle it.
In fact, just last week, there was a growing concern over inflation risk to the economy even though the housing market was still a concern.
But the credit crunch continues to get worse and Countrywide, the nation’s number 1 originator, is having problems selling their paper to the point were they had to borrow $11.5B.
The action by the Fed was only 10 days since it stated that the “predominant policy concern remains the risk that inflation will fail to moderate as expected” in a prior release which says a lot about how quickly the mortgage market has deteriorated. I guess the 5%+ drop in the Nikkei Index, got the Fed thinking they had better take action immediately over coffee this morning.
Here’s a recap of the week.
August 7th: the Fed voted to keep the federal funds rate unchanged at 5.25% and said the following:
Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.
However, this action didn’t calm investors.
In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets.
August 17th: the Fed dropped the primary credit rate (not the federal funds rate) by 1/2% to help banks have access to funds
To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee’s target federal funds rate to 50 basis points.
The FOMC released a statement today indicating the downside risk to the economy is greater than previously thought and they are prepared to take further action.
It looks like the Fed Funds Rate Predictions were sort of right, assuming action by the Fed would be 1/2%, just not via the federal funds rate.
So what does this mean to housing?
In many ways, I think the credit upheaval has more of an impact on non-conventional mortgages than conventional, but all are affected. Lenders can’t lend if they can’t sell their paper (mortgages already issued) if investors don’t want to buy. Investors don’t want to buy because they don’t believe that the collateral and associated risks of the mortgage loan pools are fully understood. Its like buying a a 2-story single family house, but not sure if you also get the second floor with the purchase price. So what would you do?
Fewer mortgage products and tighter underwriting standards (actually, its the way they should have been interpreted all along), reducing affordabiliy, reducing the number of sales, and potentially, reducing prices are the result of all this. Its got investors spooked about whats in the mix of what they are buying.
From an appraiser’s perspective.
For years I have ranted, more than is probably healthy, about the appraisal industry and how it has been treated by the mortgage industry is a proxy for the credit problem. In the need to “do deals” appraisers who can crank out reports in lightening speed and always “make the number” are rewarded with huge volume. Its no wonder firms like us can’t get work from high volume mortgage brokers and large lending institutions who use appraisal management companies (but I digress). Complaints about slow turn times are really an attempt at misdirection. In the mortgage industry, the quality control people want appraisal firms that represent quality while the sales people want firms who represent speed and “service”. Because the sales function has had more politcal power than the quality function for the past decade, speed rules. We’ll see if that changes in the near future.
Some other interesting reading: The Quants Explain Disaster [Norris-NYT]