My Dad Talks About the Financial Markets in the Paper

by gradycarter

In my family I am generally considered to be the “liberal one” but living in Oklahoma being “liberal” doesn’t necessarily say much. My dad (who I don’t ever call dad – We call him Pop) is quite conservative, and over the past few years we’ve really gotten a chance to get to know one another as grown men, and it’s been a blast for me.

I love politics, and staying current on the drama series that is our political system, but my father is much more knowledgable about the financial markets, and I really just can’t hang when he starts talking about it. Recently he decided to be a good citizen and he wrote in to the Norman Transcript about some of his feelings about the financial markets. I just decided that I am proud enough of my dad to talk about him in my imaginary blog world. So, here is what he wrote to the paper (enjoy):

1. Late last month, the Federal Reserve decided to spend another $600 billion, in $75 billion monthly increments, to buy long-term bonds in an effort to keep mortgage rates lows — yet rates, after an initial dip, have risen. What happened?
 The capital markets are struggling to find direction right now.  We have had an incredible run of continually lower interest rates over the past couple of years.  Money has flowed into U.S. treasuries based on a number of factors:  the global economy is in an horrific downward spiral, high unemployment domestically is stifling to recovery, and the lack of earnings and trust of the stock market for individual investors and the large pension plans who dominate those markets. 
Government bonds have traditionally been a safe haven of investment funds for the U.S. and foreign investors.  Those investments remain a bastion of some comfort during uncertain times. 
The purchase of the $600 billion in treasuries is intended to accomplish two things:  (1) to add stimulus funds to the economy to support the hiring of new employees and lessen the unemployment rates, and (2) to fight the real possible of deflation.  Japan has been in a deflationary economy for 18 months and the Administration is extremely fearful of that economic calamity coming here.
The recent rise in interest rates following the first installment of new government bond purchases is, in my opinion, a technical correction.  No markets go one direction for long periods of time without corrections along the way.  Interest rates for mortgages were at the absolute low for this cycle.  The move of lower rates and correspondingly higher bond prices left the market vulnerable to any positive economic news that the economy was starting to recover.  Since that news did not occur, I am led to believe bond prices dipped with slightly higher interest rates on trading of those securities on Wall Street and by worldwide investors including foreign governments.
2. What effect are tightening loan underwriting, and now changes to the way credit scores are calculated, having here? What do you anticipate?
The tightening of credit has had a huge effect on the mortgage industry.  Underwriting is being performed like we experienced fifteen years ago.  Beginning in the early 1990’s several Administrations determined that home ownership is a preferred goal for our country.  FNMA and Freddie Mac were encouraged to open up the credit markets to more people who had not been able to enjoy the benefits of home ownership.  HUD followed suit and more Americans than at any time in our history bought homes. 
With the loosening of credit and the eagerness to provide financing by the mortgage, home building, and real estate industries, came the lack of controls and oversight to insure good decisions were being made.  The direct result of that system promoted the collapse of centuries old Wall Street firms, many companies involved in the housing industry, and extreme angst among our citizens.
Our industry has had a major contraction in participants.  Companies without financial strength and the ability to affectively adapt to stricter rules and higher capital requirements have closed.  New federal and state licensing along with background checks of loan originators has cleansed our industry of those that should not be trusted to advise those who are trying to borrow money for mortgages.  I am told that over 600 loan originators in Florida did not pass the background check.  Only about 1/3 of the originators in California are now licensed.  That is also the result of the downturn in the housing industry and not enough loans to support most loan officers.
Loan files are 3-4 times as thick as they were two years ago.  This is uncomfortable for our customers who have borrowed before and feel they are being unduly discriminated against with the new rules.  Our increased attention to income, credit, and collateral has provided superior loans for the marketplace.  Customers are reaping the benefits of low interest rates and our industry is furnishing the type of solid service that will bring long term stability to the economy.
3.You attended the Mortgage Bankers Association’s annual meeting recently in Atlanta. What are some of the things you heard from industry and government speakers?
Government involvement in the mortgage industry will not decrease in the foreseeable future.  FNMA and Freddie Mac are competing for their lives.  With the political winds blowing out of Washington, many mortgage professionals believe there will be a new version of those agencies in the future.  Companies that can meet the increased capital and funding requirements will be audited and scrutinized as never before.  Others will be pushed out of the industry.
With the Federal Reserve’s involvement in monetary policy, the general feeling is that interest rates will remain low through most of 2011 with an increase in 2012 as the economy begins a true recovery.  The recent spike in interest rates reminds us that mortgage rates can increase ¼ of a percent in 2-3 days time.  Caution remains important as the risk for higher rates is stronger than for lower rates at this junction in the cycle.
Historically, the housing industry has led every recovery since WWII.  With 7.5-8 million houses in some form of default, housing will not be situated to lead until that inventory is reduced.  This creates a dilemma for the policy makers.  It is my opinion that the credit markets will remain tight and the economy will not have a robust recovery.  The commercial real estate markets have not seen foreclosures that are surely coming.  The tax credit stimulus last spring did not really help, but pushed those thinking of buying a home up by several months at a very high cost to the American taxpayer.  Interestingly, the automobile stimulus package did work.
4. Oklahoma has taken some hits in mortgage lending and home sales, but nothing like most of the rest of the country. What is setting the state apart?
There are two major factors which have contributed to the Oklahoma economy not being as adversely affected as much of the country.  First, many senior lenders were around during the debacle of the 1980’s when we had the Oil Bust.  We were overextended like California, Nevada, Florida and others were in this economy.  We had third and fourth generation banks fail.  Four of the five banks in Norman failed.  Many hard working Oklahomans lost their businesses, jobs, and hope.  They were forced to relocate or retrain and lowered their standard of living and financial dreams.  Those memories prevented lenders and established builders from repeating those mistakes.
In addition to the culture of lending in Oklahoma, we have been blessed with low unemployment rates.  The energy industry has certainly been a huge part of that prosperity by providing steady, well paying jobs.  Our diverse economy has also contributed to the stability of our state relative to others.  We have an inordinate number of government jobs in Oklahoma.  That factor is huge in that government is the only sector that has actually grown jobs nationally. 
Oklahomans that remain in the housing industry have prospered in this economy with strong borrowers, fewer competitors, and a sense that we are doing things in the correct manner for the right reasons.  It is an honor and rewarding to provide housing for our neighbors.

-Kent Carter