There is not a day that goes by that I read about some new or coming soon government program that will have a possible generational impact on the mortgage industry. Everyday new lending guidelines come out that will have huge implications on a consumers ability to borrow money.  Some of these changes were necessary, but most were reactions by government to slow down free enterprise during the  banking bailout meltdown.  Now we are seeing more government funded bills getting through congress and signed into law by the president to help consumers deal with the foreclosure crisis.  So far most of these well intended programs were mismanaged by the receiving parties and millions of tax dollars wasted with little or no help to the consumer.  Politicians are now using the foreclosure crisis as another political weapon to gain votes or give each side a talking point.  Our own political action groups such as National Association of Realtors and the Mortgage Bankers Association have done little to help educate the public and government about what implication these programs or swift changes will have on the mortgage industry.  In my local market, 90% of all loan originators have gone out of business.  I also believe the fallout among my colleagues will continue for at least another 2 years.  Less competition yes means high consumer costs.  The Home Valuation Code of Conduct to help curb appraisal fraud and other issues has come at again a huge price to the consumer.  Less options and more expenses means the cost to purchase a home and get a mortgage have gone up.
Now a consumer is likely to pay for 50% more in lending costs to get that same mortgage.  The consumer will have less choice and the recovery process of the real estate industry will take much longer.  I know many colleagues of mine that worry everyday now where the mortgage industry is heading.  Will government intervention be so extreme that the mortgage industry is forced to change their entire business model? These questions are hard to answer, but the damage has already started to set in and the government regulation costs for all these changes are through the roof. Now the last punch thrown by big government was passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Rumors are now flying that the creation of the Bureau of Consumer Financial Protection Agency will be the advocate behind getting rid of Yield Spread Premium and Service Release Premiums in mortgages.  Based on some past abuse, the government now wants to regulate another way to give consumers options on how to price a mortgage.  If this last piece of our industry is gone for good, the consumer will be forced to pay all loan costs upfront.  Most consumers save money for years just to scape together minimum down payment
requirements.  Now all loan costs will be possibly forced onto the consumer for the mortgage.  This impact will have a ripple effect in the housing industries ability to move inventory.  Again I want to be optimistic about what lies ahead, and politicians come and go like prevailing winds, but I feel we have real concern here and it seems we are all asleep at the wheel.

I am sure you have heard about this by now, but if you have not let me share again.

Effective July 1, 2010 all Mortgage Bankers and Mortgage Brokers in the State of Arizona will require their loan originators to be licensed.

Now based on an exemption in the laws the big Interstate Chartered Banks do not require their loan originator working for a big bank such as Chase, Wells Fargo and Bank of America to be licensed.

Now I am not trying to make this into a David versus Goliath story, but I am trying to emphasize the huge differences and implications this change will have on the consumer.

Here is a chart to show the differences:

So I think the choice is clear.  The funny part is the cost for the service based on rates and fees are about the same.  The best analogy I can use is having a choice of working with a CPA vs. Turbo Tax but paying the same price.

As of Thursday, February 18, I am officially a licensed Loan Originator with the state of Arizona and NMLS (Nationwide Mortgage Licensing System).  Beginning July 1, 2010 all Loan Officer’s will be required to have a license to originate any loans.  This is an exciting and necessary step for the mortgage industry!  Here is my mortgage license.

Gary Miljour Loan Originator license

I have known for years now by gauging how the financial markets are doing gives us great insight of what the mortgage business will be like for tomorrow.

Portfolio Manager Chuck Wennerlund did it again by providing the inside track of what is going out in the financial markets.  His Managing Director and owner of Fuller Assets Management Lawrence Fuller again breaks down the numbers for us again.

January 2010 Market Review and February Outlook

We decided to depart from our typical format this month to address the President directly in an effort to shed light on what we believe to be the greatest risk facing our country and our financial markets through the remainder of his first term in office. The Dow Jones Industrials (-3.5%), Standard & Poor’s 500 (-3.7%) and Nasdaq Composite (-5.4%) all finished lower for the month. Healthcare led sector performance with a gain of less than 1%, while the telecom sector was the worst performer, posting a loss of more than 9%.

Dear Mr. President,

It was with sound reason and centrist views as a candidate that independent voters accepted you as a viable alternative to the status quo. Yet in recent months your policy agenda has taken a sharp left hand turn off the road we believe leads to a sustainable economic recovery—a road that divides the two opposing and dysfunctional ideologies that plague Congress. Voters in Massachusetts made this abundantly clear following a special election last month in what could be interpreted as a demand that you reprioritize your agenda. Your response has been to push a more populist message that Democrats hope to be politically advantageous come November, but we view this as imprudent. The Dow Jones Industrials (-3.5%), Standard & Poor’s 500 (-3.7%) and Nasdaq Composite (-5.4%) all finished lower for the month. Healthcare led sector performance with a gain of less than 1%, while the telecom sector was the worst performer, posting a loss of more than 9%.

We endorsed your $787 billion stimulus plan last February under the auspice that it would be focused on the investments necessary to transform our economy and lead to economic growth that created jobs. What we have seen up to this point is predominately transfer payments, entitlement spending and tax benefits intended to induce consumption based growth. According to your website (recovery.gov), only $58 billion of the $275 billion in stimulus funds set aside for the grants, loans and contracts that create jobs have been paid out. Could this be one reason that the public is frustrated?

Your healthcare reform efforts, while well intentioned, did not succeed because you chose to focus on coverage before addressing cost containment. Forcing insurance companies to provide coverage for all and reducing government reimbursement rates would lead healthcare providers to negotiate higher rates with managed care companies. The higher rates would then be passed on to the insured in the form of higher premiums. The uncertainty surrounding such significant changes is more than Americans are willing to accept during difficult economic times. Our greater concern should be how we can continue to pay costs that are rising at more than double the rate of inflation. We believe that some states, facing bankruptcy, may have no choice but to no longer participate in the Medicaid program.

Your Administration’s response to the growing frustration over the economy has been to enflame the public’s outrage over the bailout on Wall Street. Meaningful financial reform that will prevent a future crisis has little to do with dictating salaries and bonuses or imposing a tax on bank liabilities to recoup losses from the bailout. Perhaps it is simply good politics, but it wreaks a hypocrisy that further undermines the public’s trust of government and thwarts the potential for progress. It is more than disingenuous to question compensation practices after approving $6 million pay packages for the CEOs of Fannie Mae and Freddie Mac this year and last, especially when the Congressional Budget Office estimates the total cost to taxpayers for the government takeover of both companies will be $389 billion. Proposing the largest banks pay a fee to cover the projected $68 billion loss likely to result from bailing out AIG and the auto industry is equally as glib when they have all repaid the loans they were forced to take with interest.

It would behoove you to recognize that we require as robust a recovery on Wall Street now as we hope to see on Main Street in the near future in order to maintain the high levels of economic growth needed to avert the looming fiscal crisis that lies ahead. Our $14+ trillion economy is saddled with more than $12 trillion in national debt. Your 2010 budget proposal totaling $3.8 trillion, which is expected to approximate 25% of GDP, has been exalted by your handlers as similar to President Reagan’s 1983 budget, which followed a recession and his first year in office. That budge totaled nearly 24% of GDP. The critical difference is that the national debt stood at less than 40% of GDP, and not the 85% we grant that you inherited today. We spent more on interest payments last year ($200 billion) than it cost to finance the wars in Iraq and Afghanistan in what was a historically low interest rate environment.

Based on Congressional Budget Office projections for the deficit over the next three years, even if we assume a 5% nominal rate of economic growth (GDP) and no increase in interest payments, the debt-to-GDP ratio will approach 100%. Economic growth has historically slowed dramatically in developed economies when this ratio exceeds 90%. Slower rates of growth result in a decline in tax revenue that further increases the deficit. Rising debt levels inevitably result in higher borrowing costs as creditors demand to be compensated for the additional risk. You can be sure that Republicans in Congress will continue to push for tax cuts, while Democrats insist on more spending initiatives, but since both are delusional, neither will materially reduce the deficit until a new crisis unfolds. Ultimately, you must use your powers of persuasion to raise taxes, reduce spending and embrace pro-growth policies that expand GDP in order to avert another financial crisis that would undermine your Presidency.

At the present time, we perceive there to be more risk to the bond market than in the stock market given the potential for a substantial increase in interest rates. We have noted our concern regarding individual investors piling into bond funds at what we believe is the bottom of the interest rate cycle, but the latest investment strategy to surface in the world of pension funds is a far better contrarian indicator. The State of Wisconsin Investment Board, which manages $78 billion, recently approved the adoption of a strategy to leverage their safest investments (government and investment grade bonds) in an effort to boost returns in lieu of investing in risky stocks following a decade of negative returns.

We believe the correction in stock prices last month (6% from recent highs) was in reaction to the more severe declines we have seen in developing markets. Australia has already raised interest rates three times in the past three months. China and India have both raised short-term rates and reserve requirement for their banking systems. They are tightening monetary policy to reign in the rise in inflation that naturally follows unprecedented economic stimulus. As the engines of global growth, it is not surprising to see investors pull risk off the table, but it is too early to tell whether these countries, led by China, will be able to contain inflation without stymieing economic growth. For the moment, the uptrend in equities markets has not been interrupted and we view this pullback as a consolidation of recent gains until we breach the previous lows on the S&P 500.

I wanted to let everyone know about my recent and exciting move to Sunstreet Mortgage, LLC.   I will still be your Southwest Mortgage Advisor and can help you with any of your mortgage needs and questions.  I am thrilled with the new opportunity at Sunstreet and am looking forward to the new year!  Here is my new information:

Email: gmiljour@sunstreetmortgage.com

Office: 480.775.3682

Fax: 480.248.3206

Cell: 480.251.0002

4500 S. Lakeshore Dr. Suite 342 (Southwest Business Center)

Tempe, AZ 85283

Posted: 02 Nov 2009 08:19 AM PST

Lawrence Fuller, Managing Director and Portfolio Manager

The string of seven consecutive monthly gains in stock prices ended in October over concerns that the economic recovery is losing momentum, despite a report that the economy grew 3.5% last quarter, signifying that the recession is likely over. The Standard & Poor’s 500 (-1.9%) and Nasdaq Composite (-3.6%) both edged lower, while the Dow Jones Industrials finished the month unchanged. Energy led sector performance with a gain of 3.2%, while the financial sector was the worst performer, posting a loss of 6% (source:Bloomberg.com).

Concerns that the recovery had stalled emerged following reports that weekly unemployment claims increased, consumer spending in September declined for the first time in five months, and consumer confidence slid in October. These reports cast doubt on the sustainability of the recovery, which many believe to be mostly driven by government stimulus. Fueling the negative sentiment were fears that the end of the home-buyer tax credit in November will bring a halt to the improvements in home prices and sales. Cynics argue that when the government’s stimulus efforts run their course, the economy will slip back into recession. Yet at the same time the index of U. S. leading economic indicators rose in September for a sixth straight month.

The market correction underway, similar to the ones we saw in July and September, is a correction in confidence and not economic fundamentals. While a weekly figure for first-time unemployment claims did rise, the four-week moving average declined for an eighth consecutive week to the lowest level in nine months. The decline in consumer spending for September was due to the end of the cash-for-clunkers program. Consumer spending actually rose on a monthly basis when auto sales are excluded from this artificially inflated figure. In fact, the current level of chain-store sales are on pace to far exceed the National Retail Federation’s projection for a year-over-year decline in November and December. We expect Congress to approve an extension and expansion of the home-buyer tax credit this month that will further support home values and sales through April of next year.

We can’t deny investors’ concerns and the public’s dismay, given the short-sighted policies coming out of Washington and the politicization of the economic stimulus funds to date. The vast majority of the billions of dollars approved for investment sit idle. What’s the excuse? The original plan was to spend the funds over a two-year period. Why two years? It is no coincidence that the mid-term elections will be held approximately two years after the economic stimulus plan was enacted. Meanwhile, programs designed to induce consumption, like cash-for-clunkers and the home-buyer tax, credit simply steal future demand so as to create the illusion that the status quo is better than reality dictates. These misplaced priorities are clearly demonstrated by the Obama administration’s announcement to send $250 checks to social security recipients for a total of $13 billion, compared to the $3.4 billion made available for projects aimed at modernizing the nation’s power grid. The $250 checks may buy lots of $10 toys at Walmart come year-end, and even fewer votes for incumbents in next year’s mid-term elections, but they do little to support job growth or the long-term investments we need to stay competitive in the global economy. Give a social security recipient a check for $250 and you feed him for a week. Create a job and you feed a middle-class family for a lifetime.

The sustainability of this recovery and continuation of the bull market underway depends predominately on one thing – employment. We still find more reasons to be optimistic than pessimistic, because our focus is on what the jobs data will look like six months from now rather than on what it was last month. Ironically, the rise in consumer spending (ex-autos) that contributed to a 3.5% advance in GDP last quarter is not the driver of growth or employment upon which our bullish outlook is dependent. That driver has yet to materialize. This is a profits-led recovery. The surge in corporate profits over the past nine months is unprecedented for a recessionary period. Therefore we should be focusing on the inevitable revival of corporate spending that will lead to job growth. Companies reduced labor costs and consumers cut spending earlier this year well in excess of what the severity of the recession in economic activity would normally dictate. This is because practically everyone assumed the recession was really a depression.

As home prices have stabilized and financial markets have recovered, consumer net worth has increased nearly $5 trillion over the past year. It has now returned to a level relative to disposable income consistent with the historical average that predates the stock market and housing bubbles of the past decade. We know that a rise in consumer net worth leads consumer spending by approximately six months, which bodes well for sustaining current spending levels as we move forward. Furthermore, we believe that earlier this year the 90% of consumers who are still employed cut back on spending more than necessary for fear their net worth would continue to decline. The dissipation of their fear explains the incremental rise in spending (ex-autos) from depressed levels over recent months and runs counter to the argument that the increase was stimulus induced.

Under the same misconception, corporations reduced expenses and cut employment well in excess of the peak-to-trough decline in economic growth (3.7%) in preparation for what they thought might be a depression. As a result, productivity and profits have soared and capital spending is down to its lowest level as a percentage of GDP in decades. Corporate revenues inevitably rise when the economy begins to expand, forcing companies to increase spending on capital equipment and to hire more workers.

Temporary employment continues to improve and the rate of decline in unemployment claims now exceeds the pace set in the previous two recoveries (1991 and 2001). Manufacturing employment surveys and the Institute for Supply Management’s payroll indicators are all moving higher. The current trajectory of the data leads us to believe we will see job growth by year-end, but the unemployment rate will still exceed 10% in the near term. An unemployment rate of 10% isn’t much different than the current 9.8%, but there will be a psychological impact on the public and undoubtedly visions of pink slips for politicians come next November. Herein lies the silver lining.

The unemployment rate exceeded 10% just two months prior to the mid-term elections in 1982, and the Republicans suffered significant losses in the House and Senate. We believe a 10% unemployment rate today will force the Obama administration to surrender political gamesmanship and accelerate an initiative Democrats intended to use prior to next year’s mid-term elections – a new jobs tax credit for businesses. We believe this would garner overwhelming support from both sides of the aisle and serve to speed up the improvement in employment that is already underway.

Another significant driver of economic and employment growth in coming quarters has yet to unfold. Businesses have continued to reduce inventories despite the improvement in sales activity. While industrial production is increasing, it is not increasing at the rate of end demand, so inventory-to-sales ratios are still declining. Businesses will be forced to bring inventories in line with sales over the next several months, which should boost economic growth more than most expect, further improving employment.

The trend in leading indicators that measure economic health six months from now collectively point to an improvement in the coincident and lagging indicators (unemployment rate) that the media emphasizes and the general public relies on to make emotionally based investment decisions. We believe these leading indicators will peak during the second quarter of 2010, at which point we are likely to temper our bullish outlook. In other words, when the unemployment rate is finally beginning to fall from its peak, and weekly unemployment claims (leading indicator) have bottomed, the majority of investors will finally feel comfortable taking on risk. From that point moving forward, stock market gains are likely to be muted relative to the gains we will have seen over the previous year. Investors scoffed at the idea of investing in stocks last April as leading indicators began to rise month-over-month, but they are likely to be euphoric several months from now just as these indicators peak. We believe we are beginning the seventh-inning stretch of the historic rise in stocks prices that began in March, and though we expect the breadth of participation to narrow in coming months, our upside target for the S&P 500 remains 1200. When the facts change, so will our outlook.

Our bottom line is that the economy is on the mend. The equation that supports our bullish outlook is unprecedented levels of liquidity plus historically low interest rates combined with elevated skepticism equals higher asset prices. Investors still hold more than $3.5 trillion in money market funds, which is nearly twice the historical average relative to the value of the stock market. The Federal Reserve is highly unlikely to raise short-term interest rates until the unemployment rate begins to decline, which we believe won’t occur until next spring. We can’t think of a bull market more loathed by the investor public than the one that began in March. Investor sentiment remains extremely subdued as evidenced by the flow of funds into stock and bond mutual funds. While investors directed more than $200 billion into bond funds during the first eight months of the year, there has been a net flow of just $15 billion into stock funds. This is all the evidence we need to know that most investors have not subscribed to the recovery thesis. The market should find its footing once again in November, following what may be a 10% correction from the October highs, but we would view this as yet another buying opportunity as the market averages achieve new highs before year-end.

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