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The Secondary Market Overview: From Bonds to Production ... The Soft Patch

Dave Hershman
Aug 12, 2011

There is no doubt that the recovery has hit a "soft patch" this spring. We have presented many of the reasons for this slowdown even before the slowdown occurred as they were inevitable. What are these main reasons? Factor number one … The first factor is the winding down of government stimulus, including the end of the homebuyer tax credit. The public sector is shrinking, especially at the state and local levels, which was bolstered by federal stimulus dollars in the past few years. According to a report released by outplacement consulting firm Challenger, Gray & Christmas, approximately 40 percent of all planned layoffs last month were in the government sector even though only eight percent of Americans are employed by the government. The news is not likely to get much better, according to a recent CNN/Money article: Don't look to state and local governments to prop up the job market. To the contrary, this cash-strapped sector is set to go on a record-breaking layoff binge when the new fiscal year starts on July 1. State and local governments are forecast to shed up to 110,000 jobs in the third quarter, the first time the blood-letting has risen into the triple digits, according to IHS Global Insight. "We're on a downward path," said Greg Daco, principal U.S. economist at IHS. "It's not looking good." State and local government employment has been a drag on the economy all year, averaging a loss of 23,000 jobs a month over the past three months. All told, the sector has lost 510,000 positions since its peak in August 2008. The bad news is that local governments are in even worse shape. Not only are they losing state aid, but they are finally feeling the fallout from the mortgage meltdown. I know that it has been “politically correct” to rail against the deficits we have racked up during this severe recession. However, as Congress circles like a vulture over the budget with the debt limit negotiations coming to a head by late July or early August, we must remember that it was the stimulus efforts that helped avoid a complete meltdown when the financial crisis hit. And by far, the largest contributor to the deficit has been the lower tax revenues caused by the recession. Thus far, state and local governments have been able to survive, but only with federal money. That is now gone. The government will be a drag on the recovery, no matter how we play the cards from here. Even the wars we are fighting will be winding down, hopefully. The bottom line … the recovery will take longer without this stimulus, even if it will be better for the economy in the long run in the form of lower long-term deficits. And the deficits will not really shrink until tax revenue rises through the recovery. Sound like a Catch-22? It is! Factor number two … The second factor is the rise of oil prices. There is no doubt about the fact that higher gas prices are constricting spending elsewhere. Last month, we reported that the average American household is now using close to five percent more of their monthly budget on gas compared to just two years prior. More importantly, rising gas prices also hurt the confidence of a consumer. The slow economic recovery has been significantly influenced by a lack of consumer confidence. Consumers have to be confident in their future in order to purchase homes. Factor number three … Finally, the most unforeseen factor has been the spate of natural disasters which have befallen the United States and the world. Each has delivered a blow to localized areas, the effects of which have been felt around the world. From the tsunami in Japan, to the flooding in the middle of the United States, we have experienced a series of shocks. For example, manufacturing is being affected by part shortages emanating from Japan. Of all the factors, this one is the wild card. Another disaster could strike tomorrow. What these events remind us is that this is a global crisis. Debt issues in Europe threaten our economy as well. The world needs to heal, not just the U.S. So this is why we have a soft patch. This is why the credit crisis is not over and banks have not loosened their standards, and the housing slump does not end until the credit crisis is over. I sincerely believe that we have enough latent demand to absorb the foreclosures coming to market in short order, but if only consumer and lender confidence returns. Without that confidence, we will be struggling to absorb the supply for a few more years. Sound pretty negative? Well, there is some good news in all of this. Rates started moving down a few months ago and they are not likely to rise until the soft patch is over. That means two things for your production. First, more refinances. Second, the lower rates will be gone in a flash when the recovery gains steam again. That could be two weeks from when I wrote this article (mid-June) or it could be six months. From a loan officer’s perspective, you better act quickly and instill a sense of urgency in your refinance and purchase prospects. Remember how quickly rates rose last year? Is it likely to happen that fast again? Dave Hershman is a leading author for the mortgage industry, with eight books and several hundred articles to his credit. He is also a top industry speaker. If you would like to stay ahead of what is happening in the markets, visit www.ratelink.originationpro.com for a free trial. Dave’s NewsletterPro Marketing System can be found at www.webinars.originationpro.com and he may be contacted by e-mail at [email protected]
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Aug 12, 2011
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