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The secondary market overview: The wild ride ... just the beginning?

Dave Hershman
Jul 07, 2010

Last month, we talked about the Fed pulling the plug and pondered what would happen with regard to the markets. Of course, predictions about the future are all but impossible in any market. However, we were quite comfortable letting everyone know to be prepared for a higher level of volatility. Despite this level of comfort, we were not prepared for what we will now dub “Scary Thursday.” Who could have foreseen the Dow plummeting 400 points in a matter of minutes? Who predicted that the 10-year Treasury would move from almost four percent to under 3.5 percent in just a few weeks? What is behind all this volatility? Well the European debt crisis certainly was the spark and focal point. But I would say that this goes deeper than that. There were additional factors that came into play: ►For one, we don’t think that it is an accident that the Fed has exited from the markets just before this wild ride began. It may be illogical to some that rates actually headed down after the Fed quit purchasing, however, the Fed’s actions had provided more stability in the markets. We should also note the fact that mortgage rates did not move down as quickly as Treasuries, widening the spread. ►Also, though the Treasuries have provided a flight to quality during this crisis, it is interesting to note that our debt levels are not so significantly below the levels of countries such as Greece. Could the markets be thinking not that the European crisis may stall our recovery, but that our debt could be next? Again, quite illogical thinking because of the flight to quality, but where else was the money going to go? ►Let us not forget that the stock market had rallied substantially in the past year. For many, stocks were due for a correction for quite some time. Actually, overdue for such a correction. We cannot really label stocks as a bubble because the highs reached this year are still substantially below where they were just a few years ago. However, let us not forget that stocks were still up well over 50 percent from their bottom reached not long ago. What does our resident secondary expert, Eric Holloman, chief executive officer of RateLink, have to say about all of this? Eric’s insight on the “Wild Ride” and “Scary Thursday:” As we have been saying for months, the situation in Europe is not going away any time soon. Greece is just the beginning, as Spain, Portugal and Ireland are also under pressure and may be facing defaults as well. Of interest is the size of the economies in question, Spain is much larger than Greece. If you take a look at all the turmoil surrounding both the dollar and interest rates in the United States on the Greek crisis, a larger economy such as Spain could cause the volatility seen in late April and early May look tame. The real concern here is how quickly the news affects rates. A loan officer must let borrowers know the potential for volatility is VERY HIGH and take steps to protect themselves. Yes, this all sounds scary, but we also think there is good news to be found here. If the focus is Europe, it means that the focus has been taken away from our economy. Could it be that the markets are now satisfied as to where the recovery is headed? They seemed to be more concerned that Europe could derail our recovery, as opposed to the real estate marketplace. Indeed, in the past 30 days, we have had good news with regard to the first quarter economic growth, jobs growth, factory orders, inflation, personal spending and more. The first economic report of May showed jobs being added at the highest rate in four years in April. The employment rate increased because more workers “returned” to the workforce and even that is considered a good sign. If the markets don’t have our economy to worry about, then those who are perpetual “sky is falling” characters must find another focus. Does that mean we are out of the woods yet? It is a stretch to argue that the markets’ wild ride is really a vote of confidence with regard to our economy. I will go back to what I said at the beginning of this column. Expect more volatility as a residual effect from the fiscal crisis. We will not recover in a straight line and the curves are potentially steep. Our own debt levels are a burden we will carry for a long time. It may take two to four years for the shadow inventory of homes to go away, but it will take many, many more years for the shadow of the debt we have run up to disappear. Not that I am not optimistic. A stronger economy will cause tax receipts to go up and will also cause the need for stimulus to go away. But we have several deep holes to dig out from. They are so deep that they are best described as huge craters. Another word of caution … consider the fact that our economic recovery was forcing rates and oil prices up before the markets became fixated on the European Debt Crisis. That means we are subject to big swings in the opposite direction if and when the panic quiets down. These moods can turn so fast that it is likely we may see such a swing or two back between the time I finish this column and you read this article. It will interesting to see if I get feedback ([email protected]) on exactly this issue...? 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 www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial or e-mail [email protected]  
Published
Jul 07, 2010
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