Luxury Mortgage Blog

Luxury Mortgage Group is one of the most positive lenders in the country.  Do a Google search for “positive mortgage news” and you’ll see us highly ranked.  However, the importance of the following cold hard economic data and further analysis is of such great importance that I feel it must be seen and understood by our clients.

Aurora Loan Servicing, one of America’s largest wholesale mortgage lenders, just shut their doors, today 1/17/2008.  This is a huge tell tale sign of things to come; not that the other 216 mortgage lenders of 2007 that shut their doors weren’t newsworthy, but this particular institution’s closure deeply concerns me.  A.L.S. is owned by Lehman Brothers Bank.  Lehman Brothers indirectly owns a substantial portion of our Federal Reserve Banking System in this country.  They have direct access to borrow money from the FED.  Lehman Brothers was a huge section of the wholesale mortgage market in America and their closure is a strong indicator that mortgage money is going to reach credit crunch levels not seen in over 25 years. 

If you need to refinance a property or have clients that need to, the time is now. 

I would not risk waiting at this point.  This is not a sales pitch but instead excellent common sense advice.  Whether or not you utilize Luxury Mortgage Group’s services or the services of another lender, I highly recommend you act on this advice right away.  The protection of a 30 year fixed mortgage can offset the potential devastating rate increases you or your clients may experience as the FED is forced to curb rampant inflation in the next 12-60 months. 

I strongly feel we are in a tailspin when it comes to our short-term economic outlook.  For those interested, here is a primer course to understand the basis of my opinion:

The Federal Reserve is the organization who regulates our economy.  Currently run by Ben Bernanke , the FED, controls the amount of newly issued currency in circulation and also regulates the economy by adjusting the Federal Funds Rate.  To prop up the economy, the FED makes money easier to borrow by pushing the Federal Funds Rate down.  When times are better and investors become exuberant or inflation begins to rise, the Fed makes borrowing money harder by increasing the Federal Funds Rate which in turn slows the rate of growth.  The FED has allowed the economy and the country as a whole to grow at a relatively steady pace since the systems inception in 1913.

In 2001 we went through a stock market bubble primarily in the tech industries.  The economy began to stall and the FED choose to lower interest rates to 1961 levels, from over 6% down all the way to 1% from 2001-2004.  This created a total reversal of a pending recession and helped keep our economy going strong.  It also created the perfect storm for a housing run of massive proportions.  In 2005, the all knowing FED saw investors overleveraging themselves coupled with inflation increasing and began to ratchet the rate upwards, in fact doing so 17 times in a row taking the rate up to just under 6%.  The housing market then began to stall and the FED decided to once again take the rate lower to correct the credit crunch that began in early 2007 due to the sub-prime mortgage loan failures.  The rate is currently at 4.25% and expected to drop to 3.50% at the FED’s next monthly meeting.

This brings us to current day.  We are now in a precarious economic stance.  The fact is that un-employment is rising, single family home prices in most markets continue to sag, the inflation in this country is rampant (the price of gold is now just under $900/ounce), our currency is being devalued (Canadian dollars are now more valuable than our own) and the stock market has seen a 12% free fall in the past 30 days.

The Federal Reserve is regarded by many economists as the only institution that can impose measures that will truly help the economy at this point.  Their current policy seems to be one of decreasing the Federal Funds Rate to stimulate the economy.  The only problem is that this promotes great inflation and further devaluation of our currency.  The economy is likely to continue to significantly slow in the next few months, dragged down primarily by the weight of the housing bust.

So what are the FED’s options?  If the FED continues decreasing the Federal Funds Rate we may be able to stave off a recession but at the expense of massive inflation (Think back to the Jimmy Carter days of 1970’s.)  If the FED keeps the Federal Funds Rate stable, we will still experience increasing inflation and likely end up in a recession anyways.  Finally, if the FED increases the Federal Funds Rate to stop our rampant inflation we will plunge into a full blown multi year economic recession or worse.

So therein lays the dilemma.  The FED has no easy decision to make.  None of the options ends with a happy or healthy economic outlook.  I believe the FED will prop up the economy by decreasing the Federal Funds Rate at all costs, ignoring inflation that will bitterly cripple fixed income earners in the future.  For the affluent, this is the hopeful decision of the FED but ultimately, this economic cycle for better or worse is going to deeply impact all of us.

Going forward from this outlook, there are ways to hedge your investments and actually profit from the impeding cyclical downturn.  Look for a future article on investing capital in severely undervalued real estate and the massive positive cash flow streams that can be created without any ownership.  By properly hedging your portfolio, at the end of this cycle we hope you will amass considerable wealth that otherwise could not of been created.
Your comments are welcome below.

This entire article is Copyright 2008 by Jason M. Fox, President of Luxury Mortgage Group.  Any un-authorized reproduction, plagiarism or infringement will be automatically monitored, detected and dealt with by CopyScape.

Tags: · ALS implodes · Aurora Loan Services · federal reserve · latest mortgage companies to close · Lehman Brothers Bank · US economy ·
Posted in Federal Reserve (FED) · Mortgage Industry News1 Comment