Back in the 1980’s, did REO Speedwagon predict the mortgage market turmoil of this year? We were at "Take It on the Run", and then it was "Roll With the Changes", now we’re just "Ridin' the Storm Out".

I remember how hung over I was on the day of my final exam in Statistics. It was a True/False test, so I decided to flip a coin for the answers.  The stats professor watched me the entire two hours as I was flipping the coin... writing the answer...flipping the coin...writing the answer. At the end of the two hours, everyone else had left the final except for the one student: me. 

The professor walked up to my desk and interrupted me, saying: “Listen, I have seen that you did not study for this statistics test, you didn't even open the exam.  If you are just flipping a coin for your answer, what is taking you so long?”

I replied (bitterly, since I was still flipping the coin): "Shhh! I am checking my answers!"

(This also works when one is predicting where interest rates are going.)

Non-conforming (jumbo) fixed rates are coming back slightly as some investors have decided to originate with more competitive rates and hold jumbo product in their portfolio on speculation of further improvement. Last week jumbo loan prices (both adjustable and fixed) did very well. The spread between conforming and jumbo rates has shrunk, and although no one expects them to go back to where they were 4 months ago, they’re doing well. AAA-rated pieces of securities are doing well price-wise, and Wells Fargo, CitiMortgage, CW, and Chase have all improved. This wasn’t enough to save Santa Cruz Mortgage, which shut down after 26 years in the business here in California.

Remember Michael Milken, who was sentenced in 1990 to a 10-year prison sentence and paid $1.1 billion in criminal and civil fines after pleading guilty to securities violations? For the past decade, Milken has focused on philanthropy and running a research institute which seeks ways to generate capital for people around the world. According to him, the U.S. housing market is unlikely to recover soon from the worst slump in 16 years. It will be “quite a while before we have a robust housing market again,'' Milken said in an interview. “The idea that any loan against real estate is a good loan has never been a rational thought.” The “basic assumption” that home prices will continually increase is wrong, said Milken, chairman of the Milken Institute, an independent economic think tank based in Santa Monica, California. Even Fannie Mae Chief Executive Officer Daniel Mudd said last week that the housing slump will last beyond next year. However, most agree that the US economy will withstand the slide in housing.

The market will be looking to today’s release of the FOMC meeting minutes for insight into the 50bps rate cut that surprised many investors. With the 10-yr at 4.63%, was the Fed’s main motivation to try to ease the credit crunch or are the more worried about a future US economic downturn? Stay tuned.

At a time when the US housing market is contracting, the job market is deteriorating and consumer spending is at risk, does the US economy need a weaker dollar? Probably, and this is why the US government and the Federal Reserve may not stand in the way of further dollar weakness. How does a weak dollar actually help us? It gives us a) increased exports, since it increases the competitiveness of US goods & boosts foreign demand while keeping US consumer demand domestic, b) increased foreign investment (buying US real estate, US stocks, and US companies in general), and c) increased tourism which helps generates almost $600 billion in annual revenue and employs over 5 million people. What is the downside of a weak dollar? Well, a) foreign goods, from shoes to sports cars, cost more, b) these higher costs for foreign goods lead to inflation here in the US, and the threat of inflationary pressures could prevent the Fed from lowering rates as much as they would have otherwise wanted or needed, and c) yes, foreign travel becomes more expensive.