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Tuesday, May 13, 2008

Bernanke States the Obvious

Ben Bernanke made this statement about the economy today.

Turmoil in financial markets has eased somewhat, but the situation is still "far from normal," Federal Reserve Chairman Ben Bernanke said Tuesday.

The central bank has taken a number of unconventional steps — especially since
March, when the credit crisis intensified — to help squeezed banks and big investment firms overcome problems and try to get credit flowing more freely

Those efforts appear to be paying off and "have contributed to some improvement in financing markets," the Fed chief said in prepared remarks delivered via satellite to a financial markets conference sponsored by the Federal Reserve Bank of Atlanta in Sea Island, Ga.

Now, there is the not so subtle self congratulations in his statement as he touts his own moves in calming the market. The reality is that the financial markets are far from settled and frankly their future is outside of the control of any entity, the Fed included.

At the end of April, one of the biggest lenders I work with announced that they would be discontinuing so called stated programs entirely. (Keep that in mind when a politician proclaims that they are going to outlaw stated loans. The market is much more effective than any pandering politician) Well, on Thursday April 24th, after business hours, they sent out a blast email announcing that on all stated loans they would pull tax returns. Any loan in which the difference between the return and what was state was more than 10% would immediately and summarily be denied. keep in mind that the point of a stated loan is that the bank wouldn't actually look at the return. Also, keep in mind that this bank initially said that these loans would continue until the end of April. By decree, they moved that date up nearly a week and summarily began to deny loans not in compliance.

What followed was nothing short of a nightmare. For instance, one purchase was at the closing table and money was even wired to the title company. All that was left was for the bank to approve the wire. Instead of approving the wire, the bank denied the loan and the borrowers couldn't buy the property. This story gets even worse. This particular property was the first of six units sold in a new condo building. The other five loans were predicated on not being first in line. That's right this action lead to the denial of six loans.

Yes, this is an anecdotal story however don't think for one second that the credit markets have recovered. At this point, the only loans that are getting done are those approved by the large insurers that ultimately take on these loans, Fannie Mae, Freddie Mac, and FHA. Of course, each of those groups have been changing their rules about as much as the weather changes over the last several months. Fannie Mae, for instance, recently instituted break points for credit scores. It used to be that Fannie Mae loans were simply pass fail. You either qualified or you didn't. Know, they break themselves up based on credit score. Scores 720 and higher get the best rates, and they step down from there.

Don't get me wrong. Fannie Mae, Freddie Mac, and FHA routinely change their rules. What's different now is the intensity and the amount of changes. It is one thing for Fannie Mae to change the rules on classifying condos for instance. It is quite another when they suddenly introduce break points on credit scores. These new breakpoints can cost folks up to a full percentage point in their rate.

Those folks that say the market is bottoming out and turning a corner simply don't see the market everyday like I do. The market is in a constant state of chaos. As foreclosures pile up, banks continue to be even more reluctant to approve new loans. Fannie Mae and Freddie Mac are both going through their own turmoil. The market is a long way from being out of the woods, and frankly, it is entirely possible that it will get even worse before it gets better. Nothing the Fed can do can change that.

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