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The secondary market overview: From bonds to production ... Predictions

Dave Hershman
May 10, 2010

One word … that says it all. We are constantly trying to predict the future. When you go on the street and meet with real estate agents, they ask you, “What do you think will happen with rates?” When you set up your business plan, it is all about know what will happen within several areas of the markets, such as refinances versus purchases. Consider this prediction released recently: “Refinances in 2010 will be down 52 percent and purchase mortgage volume will be down five percent from 2009, according to the latest projections from iEmergent, a Des Moines, Iowa-based market research firm.” Others have predicted rising rates this year and cite the following factors: ►The Federal Reserve Board withdrawing from the mortgage-backed securities (MBS) markets ►The Fed also starting to tighten monetary policy as the economy recovers. The Fed has already increased the Discount Rate as a “symbolic” gesture. ►The markets getting spooked by large government deficits which will fuel the threat of inflation. As the government borrows more, this forces rates up because of increased supply in the bond markets. Here is the problem. We cannot predict the future. One event tomorrow could change everything. That is why I have never been a believer in technical charts. It is the fundamentals which are important. Fundamentally, we are heading into an economic recovery, and if all goes well, rates will rise, but not drastically. If the economy gets too strong too quickly or steps back into a recession, all bets are off. These factors are so entwined that we never know how they will come out. For example, if the recovery is stronger, that means higher rates because of the risk of inflation. But a stronger recovery also means that the deficit will start to diminish more quickly and that could translate into lower rates. Finally, if the recovery is stronger, people will have more jobs and buy more houses, which makes it more likely that housing prices are not falling and mortgages become a favored investment again. Confused yet? Your job as an originator is to stay on top of what is happening. Today, that means every hour. You need not be able to predict the future. However, you should know what factors are in play and what events are on the horizon that could impact the markets. For example, if you don’t know that the employment report is being released the first Friday of every month, you cannot stay on top of the markets. I get a text message on my phone from RateLink that provides upcoming events, as well as changes in the markets. Once again, predictions are not only about rates. The economy itself provides much suspense for us. For example, I am surprised at how many originators are starting loan modification efforts now. I have often said that loan mods might be a great service from one to four years. It is now almost two years after I started saying that. Some see predictions of five million foreclosures to come on a market and predict that loan mods will be going strong five years from now. But the fact is that a stronger economy, along with low rates and a tax credit, could shorten this period to 18 months. And that would be good for all of us. Do I know the answer? No. However, I do know the factors in play that could change the time frame significantly. Even the value of the dollar becomes important because if the dollar stays weak, this increases demand from foreign investors. Basically, American real estate is on sale. And the sale is really great if you are from a country with a strong currency. So … what’s the answer? Be knowledgeable. That is why we teach the secondary markets as part of the Certified Mortgage Advisor Program. Hedge your bets. Make sure your business model is diversified. Putting all your eggs in one basket is never a good idea. I asked Eric Holloman, our secondary expert and the chief executive officer of RateLink, about his view of the future. He says that it is important to watch the national news. For example, many loan officers are trying to figure out why their loans are getting underwritten to death right now when the crisis should be easing. Yet, if you read about Fannie Mae repurchases and what lenders are going through in this regard, it makes perfect sense. If the loan is not perfect, when something goes wrong, it is being thrown back in their face. It is not only about rates, it is about how someone will have to navigate the process to achieve the American dream of homeownership. Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s Certified Mortgage Advisor Program can be found at If you would like to stay ahead of what is happening in the markets, visit for a free trial or e-mail [email protected].
May 10, 2010
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