QuarterlyBasis: Back To Basics Banking, Two Sides Of Fed Policy, Economic Caution vs. Optimism

Banking is stabilizing but strict loan approvals continue in this back-to-basics era. Nimble monetary policy helps navigate volatile markets and sets the precedent going forward. After two years of turmoil, how do you act on cautious optimism? It’s all covered in this QuarterlyBasis report. If you’d like to discuss anything, I’m at your service.

Bank To Basics Banking
As we move through the worst of the financial crisis, banks and lawmakers are back to basics. This means strict home loan approvals. Borrowers can expect to provide two years of tax returns and all asset statements to get a loan approval, and should expect that their loan consultant can analyze and advise on even the most complex financial profile. It also means lawmakers continually tighten rules for valuing property, loan fee disclosure, and loan consultant licensing. Borrowers can expect a more complex loan process, and should expect their loan consultant to be properly credentialed and able to explain market and regulatory issues clearly.

Two Sides of Nimble Fed Policy
Last year the Fed realized rate cuts weren’t bringing mortgage rates down so they committed to buying $1.25t of mortgage bonds throughout 2009. When bond prices rise on buying rallies, rates drop. They’re $751b (or 60%) into this budget, and these purchases account for 28% of the entire mortgage bond market. This is why rates are at record lows this year. The Fed said late-July they’d start selling bonds to push rates up when economic data show improvement. It’s likely the Fed won’t engage in such rate hike activities for the rest of 2009, at least. But they’re likely to hike as quickly as they cut when the economy turns.

Economic Caution vs. Optimism
Inflation and rates are low, and these factors will eventually lead to economic stabilization, then rising rates and home prices. Home finance transactions involve both housing and rate markets, and if there is a period when the bottoms of these two markets most closely meet, it will likely be 2009. Way back in May 1932, Dean Witter said “Some people say they want to wait for a clearer view of the future. But when the future is clear, the present bargains will have vanished. In fact, does anyone think that today’s prices will prevail once full confidence has been restored?” Worth consideration while analyzing home prices and rates.